It is clear that every country in Southern Africa has its own particular set of conditions that affect the ways in which impact investing is handled. Impact investors must therefore take their time to carefully learn about the conditions in each individual country. While a country-specific approach is obviously needed, GIIN researchers, in their report entitled Landscape for Impact Investing in Southern Africa, have compiled four key considerations that apply to Southern Africa, which are:
1) Leverage technical assistance (TA) facilities to build the pre-investment pipeline:
More pre-investment support is required in order to to develop a strong pipeline of investable opportunities for businesses; TA funders like USAID and DFID are recognising the importance of getting companies to the point where they can successfully raise capital.
The report says: “Targeted, tailored support requires an upfront commitment of resources but has proven effective in preparing potential targets for investment and in building high-quality deal flow. This process can also dramatically reduce diligence timelines if the investor is able, before investment, to increase familiarity with and visibility into a business.”
2) Develop sector specialisation:
Impact investors can also drive growth, impact and solid returns by narrowing down their focus on sector-specific portfolios. This has enabled some to use their existing knowledge to target some less well-known opportunities earlier and also to reduce diligence timelines.
The report expands: “Sectors such as agriculture, energy, and financial services present large opportunities where different companies often face similar challenges; learnings can be shared across portfolio companies.”
3) Expand investment instruments:
There is a rich variety of early-stage businesses in the Southern African ecosystem – structured investments (for example: milestone-based conversion and profit-sharing debt) can fulfil a significant need for financing that more conventional equity and debt deals cannot.
The report says: “Such creative structures can help entrepreneurs meet their ongoing cash-flow requirements while delivering long-term returns in line with investor expectations.”
4) Establish local presence:
Locally-situated impact investors across Southern Africa have reported gaining a markedly significant advantage in their ability to source investment opportunities, in an environment that typically lacks investable businesses.
“Currently, only a handful of impact investors have staff in the region outside of South Africa, and limited impact capital is available there. Locally-based impact investors will be able to identify opportunities more easily and will incur fewer costs than investors operating with a fly-in, fly-out model that may require multiple trips in order to perform due diligence and manage the portfolio.”
By Nye Longman