The World Economic Forum’s Regional Action Group for Africa recently published an important report examining the impact of digital transformation in Africa and the role of policymakers and investors. Titled “Attracting Investment and Accelerating Fourth Industrial Revolution Adoption in Africa,” the report aims to stimulate a more considered approach by policymakers and investors for accelerating the region’s digital transformation and spurring investment that aligns with environmental, social and governance (ESG) aspirations.
The report includes contributions from Vital Capital Managing Partner Nimrod Gerber, who discusses how strong access to financing can assist African businesses in rising to the challenge of the Fourth Industrial Revolution. In particular, Gerber states that the lack of an investment regulatory framework can be prohibitive to funding projects and can lead to uneven competition between investors who are ESG compliant and those who lack ESG credentials.
The full report is available on the World Economic Forum website, here.
By 2050, one in four people in the world will live in Africa. The continent is set for “the great doubling” of its population to 2.5 billion people in 2050 from 1.3 billion in 2020, marking the most significant demographic transition in history. The working-age population of sub-Saharan Africa alone is projected to double to become the largest in the world, offering unprecedented opportunity for economic growth but also the potential for major economic instability and risk for the nations that are not ready to reap the benefits.
For the last few weeks, conversations have been dominated by climate change – and rightly so, but that is only one of the two great issues of our time that will determine what world our children and grandchildren will live in. The one that has not received anywhere near the level of attention it needs is Africa.
Climate and Africa: The stick and the carrot
There’s one significant difference between the two issues: In the climate context, the main question is ‘What can we do today so tomorrow is not catastrophic?’ We know we have to seriously adjust our production and consumption habits. Our global transition to a greener and more climate-resilient economy will be expensive and disruptive, but inertia or lackluster approaches will be much more so.
Postponing immediate gratification in favor of future returns is not something we always excel at, although it often pays off. Studies have shown that children who managed to delay instant gratification in the famous marshmallow test turn out to be more successful adults than the children who choose instant gratification. But ours – the adult version of the test – is much harder. We have to give up our marshmallows – whether that means sacrificing air travel or changing our diet – for other children, some of whom have not yet been born. It’s not just a matter of avoiding something pleasant now to gain something pleasant in the future – we must act now to prevent future negative outcomes. Trying to motivate action with a threat is rarely effective.
In the African context, however, the discourse can and should be completely different as it involves motivating primarily with a carrot rather than a stick, and there is no marshmallow to turn down – with Africa’s current trajectory of growth, investing in the continent promises returns both in the immediate future and well beyond.
An obligation and an opportunity
Over a billion people in Africa are becoming, in an accelerated process, consumers of basic goods and services such as healthcare, clean drinking water, food, housing and in time, more advanced services. The continent has the world’s youngest population and a rapidly rising middle class, which has tripled over the last 30 years to 313 million people, making up over 34% of the continent’s population, according to a report from the African Development Bank (AfDB). So while there may be great risk, there is even greater opportunity.
The opportunities to sustain Africa’s future populations, and enable them to thrive, rest heavily on the development of the continent’s critical infrastructure; to meet the basic needs of these communities; and serve as a platform for transition towards modern technology, connectivity, health and wealth. The AfDB estimates that the continent’s infrastructure financing needs will be as much as $170 billion a year by 2025, with a gap of around $100 billion per year – a gap that will only widen as the population burgeons.
Africa’s population growth permeates every part of its countries’ physical, economic and societal infrastructure. What will those millions do when they are no longer able to sustain themselves through agriculture, when they lose access to water resources and the ability to make a living? Many will emigrate. And a quarter of the world’s population is a mass that we cannot, and must not, try to stop. No wall or maritime patrol will stop people driven to the edge of desperation who are trying to save their children. In fact, Africa’s demographic growth alone, if not met with suitable infrastructure, could lead to similar outcomes even if we manage to avoid extreme climate scenarios.
Several noteworthy Africa-focused development finance initiatives are underway but the pace of progress needs to be stepped up. African multilaterals and banks like the AfDB and Afreximbank are focused on this mission. In the US, the Development Finance Corporation (DFC) has invested around $8 billion – roughly a quarter of its total portfolio – across over 300 projects in Africa.
Meanwhile, under China’s Belt and Road Initiative (BRI), Chinese banks and companies seek to fund infrastructure projects around the world, while advancing Beijing’s geopolitical interests. In such initiatives, all stakeholders must be wary of debt dependence, which could lead to long-term damage. Even good intentions are sometimes not enough, as explained in the book ‘Aid Is Dead’ by Zambian economist Dr. Dambissa Moyo. She attributed Africa’s poverty partly to aid from governments of developed countries that had made leaders and populations dependent, in some cases to the extent of halting their own agricultural production, while spurring corruption and unemployment. The EU’s Global Gateway strategy, an international investment plan for transport and infrastructure, counters the BRI “to create links and not dependencies”.
But governments and public institutions cannot bridge Africa’s infrastructure gap alone. Water and wastewater, food production and agro-processing, healthcare services and other sustainable infrastructures can all be led by the private sector, some through public-private partnerships (PPPs) and others as pure private operations. Recent IMF research shows that the private sector could, by the end of the decade, bring additional annual financing equivalent to 3% of sub-Saharan Africa’s GDP for physical and social infrastructure. This amounts to $50 billion per year.
The levels of investment and innovation brought by the private sector will be key to improving accessibility and quality of services with a direct effect on economic productivity and job creation. This will in turn create transformative impact at scale and help to unlock the continent’s full potential.
A win-win or a corporate fig leaf?
There may be significant synergies in which everyone can win. Adequate private, institutional and national investment can both reduce risk and generate profits. This insight is now led by impact investors. Some fund managers investing in Africa and the developing world have proven clearly that meaningful positive social outcome can be created in improving the lives of tens of millions of people while generating significant returns to the investor. Funds like Leapfrog, DPI, Helios Fairfax Partners and Vital Capital are not philanthropic – they have promised, and delivered, return on investment alongside a significant social impact.
In the past year some of these funds have jumped to the next level and moved into the ‘Big Boy’s League’ in terms of the capital they manage with over $1 billion in assets under management. It is very possible that in the next decade we will see the emergence of the ‘Blackstones’ and ‘BlackRocks’ of Africa, hopefully adjusted to local realities and needs.
The issue of impact raises legitimate concerns that need to be addressed: is it a corporate fig leaf?
The good news is that the ones who are most concerned about these issues are those who are leading the impact investment industry. The latest Global Impact Investing Network (GIIN) survey found that 60% of impact investors are concerned about ‘impact washing’. Why are they worried? Because in order to measure and monitor impact, you have to invest a lot of thought, work, time and money. You have to learn and become experts in assessment and analysis, practice clear standards and full transparency for regular audits and verification.
What bothers those who do all of this seriously and professionally are the ones who hitch a ride on the concept. The investors that wave the ‘impact flag’’ but don’t actually commit to standards, don’t use comprehensive impact management and measurement frameworks, and don’t open for audit and checks by external parties. These are the investors whose ‘impact’ is found mainly in presentations and websites but in reality, they maintain total freedom to decide when to apply it and when not to. The term ‘impact’ has unfortunately become a marketing tool. One thing is clear: if this concept is too broad and not clearly defined, it will become meaningless. And those who stand to lose the most will be those who have taken on commitments, and have dedicated their mission and resources to it.
A major shift is underway
It is encouraging to observe how the impact industry is evolving and maturing rapidly, fueled by shifting consumer values and technological innovation. Clear and uniform standards such as the IFC-led Operating Principles for Impact Management have been developed, while measurement and monitoring tools such as the Impact Management Project (IMP) have taken root.
Disclosure documents, verification practices by third parties and evolving regulation are some other tools embraced by those who want to show seriousness. Most recently, the IFRS Foundation announced the creation of the International Sustainability Standards Board, a new standard-setting board to deliver a global baseline of sustainability-focused disclosure standards. In the vision of Sir Ronald Cohen, the ‘Father of Impact Investing,’ ESG and impact reports will eventually become a corporate obligation, just like financial statements.
Until that happens, you can use a relatively simple test: the next time you meet an ‘impact’ investor, ask them what standard they committed to, what they’re signed on, and whether there is periodical external audit of their impact and ESG reports. This will give you a relatively immediate picture of how seriously and professionally committed they are, helping to separate the talkers from the doers and achievers. If beyond this, they also have independent measurement and monitoring tools and are an integral part of leading the impact industry – even better.
A true impact investor should be proud of the formal commitments and standards he has subscribed to. A true impact investor should also not be ashamed of earning and generating good investment returns. On the contrary, the more handsome the returns, the greater the attraction for investors, and the greater the potential to achieve impact at scale in a self-nourishing circle.
[This article was originally published in Funds Europe]
At the recent SuperReturn Africa event, which saw private equity and venture capital professionals gather to discuss all aspects of investing in the continent, there was one key takeaway – summarized succinctly, by author and Africa advocate Deanne De Vries in her keynote speech: “Africa is open for business.” Deanne urged the private capital community to step up their investments in this vast, vibrant and diverse continent with a wealth of human and natural resources that translate into business opportunities. A continent with a population of 1.3 billion people across 55 countries which, by 2050, 2.5 billion people will call home.
Secrets to success from post-Covid “winners”
Africa, like other emerging markets, was hit hard by Covid-19-induced lockdowns. Still, many businesses managed to turn the crisis into an opportunity, improving their services and resilience to create more value for their clients and grow further. Our Managing Partner Nimrod Gerber joined George Odo, Senior Partner at AfricInvest, Luc Rigouzzo, Managing Partner at Amethis, Paul Boynton, joint CEO at Old Mutual Alternative Investments and Danladi Verheijen, co-founder and CEO at Verod Capital Management, on a panel to discuss the recipe for success. Here are the main ingredients:
1 Operational expertise
Companies – particularly in the retail sector – were faced with a flurry of Covid-19 adversities, including reduced consumer confidence, new spending behaviours and a dispersed workforce. Panellists agreed that the resilience and success of the private equity firms investing in these businesses – namely the GPs that have structured their deals in a way to exert greater influence over their portfolio companies – have been largely down to their expert operating teams who have been able to efficiently and swiftly adapt supply, cash management and operations, and upgrade digital capabilities.
Nimrod said: “Operational value is the single most important factor that has enabled us to deliver on our promises over the last decade.”
On the topic of investing for resilience, Nimrod went on to highlight the enduring value of essential services – such as in critical sectors of food, water, healthcare and sustainable infrastructure – that we look to convert into high-return opportunities here at Vital. Companies in these sectors, with the right team and operational expertise behind them, are well-cushioned to weather economic shocks.
2 ESG and Impact = Resilience and Returns
In a similar vein, the panel agreed that those that take a long-term look ahead to future-proof their portfolios with a focus on sustainability and ESG are at an advantage during turbulent times.
When it comes to investing for impact, you go one step further – generating risk-adjusted returns is part and parcel of the process. “If we want to scale up impact, we have to accelerate financial returns,” Nimrod noted. Impact investing should generate significant enhancing synergies that create a strong positive correlation between an investment’s impact and its financial performance.
It is this correlation, strengthened by improved tools for impact management, enhancement and measurement – with the goal of achieving an industry consensus for assessing and quantifying positive impact potential – that will engage more investors and propel this asset class further into the mainstream.
3 Digital and technology drive
The pandemic’s acceleration of the digitalization trend was a recurring theme during the event. Africa continues to attract unprecedented levels of investment in digital infrastructure and technology, fuelled by increased demand for connectivity and data in the post-Covid environment. Just last month, Google announced plans to plans to invest $1bn in Africa’s tech infrastructure and talent over the next five years.
Private equity managers have had to step up their tech game to stay competitive, leveraging tech and digital strategies and helping to instill an innovation-led mindset across their portfolio.
Vital Capital has been listed as one of the Real Deal’s “Future 40: Impact Investment Fund.” The Real Deal’s Future 40 list features leading funds that “align profit and purpose” and demonstrate clear impact agendas, measurable results, and fascinating stories behind their investments.
This recognition is a testament to Vital Capital’s mission as a firm that is committed to turning critical challenges into high-return opportunities that deliver impact at scale. Vital is applauded for its no-compromise approach to impact investing and our seeking to enhance synergies between and investment’s impact and its financial performance.
We are proud to be among the top firms making a measurable difference in our world.
The World Economic Forum’s Regional Action Group for Africa recently published an important report examining the impact of digital transformation in Africa and the role of policymakers and investors. Titled “Attracting Investment and Accelerating Fourth Industrial Revolution Adoption in Africa,” the report aims to stimulate a more considered approach by policymakers and investors for accelerating the region’s digital transformation and spurring investment that aligns with environmental, social and governance (ESG) aspirations.
LARNACA, Cyprus & NAIROBI, Kenya – Vital Capital, a pioneering impact investor that has been working with companies in sub-Saharan Africa for more than a decade, is pleased to announce the approval of two new loans from its Vital Impact Relief Facility (VIRF), which was launched last year to help fundamentally sound African businesses navigate short-term challenges.
The two loans were made to Sollatek, a leading manufacturer of solar and voltage control products, and Privamnuts, a macadamia nut processor and exporter which is leading the modernization of the macadamia industry in Kenya. Both companies are examples of promising and successful private enterprises that are bringing about positive economic and social impact to the communities in which they operate.
The solar and power control products that Sollatek distributes, for example, provide essential services to rural and peri-urban households and businesses in East Africa that are without access to the grid or stable energy sources. Sollatek’s photovoltaic systems represent the most affordable option for electrifying homes in many rural, sparsely populated areas.
Privamnuts, which sources its nuts from the slopes of Mount Kenya, provides a key link between the more than 10,000 smallholder farmers who represent its exclusive suppliers and the export markets, where Kenya is the third-largest macadamia nut producer in the world. Privamnuts’ strategic goals include improving smallholders’ access to agricultural training, the financial health of farmers, and opportunities for women, who make up the majority of Privamnuts’ smallholder suppliers and employees.
“We are excited to be partnering with Vital Capital, with whom our goals are aligned,” said Privamnuts Managing Director, Patrick Mukundi Mbogo. “Privamnuts and Vital believe in creating high quality jobs that can improve the economic and social well-being of workers and uplift communities without sacrificing performance.”
Vital launched the debt facility last year amid the global pandemic, when it was clear that economic shocks caused by the spread of Covid-19 threatened the ability of even financially strong African businesses to continue providing essential jobs and essential services to communities in need.
Though some economies in Africa are emerging from the worst of the pandemic, what remains clear is that even under normal circumstances, promising small- and medium-sized enterprises (SMEs) require occasional support to navigate short-term challenges. This is why Vital Capital remains committed to utilizing its debt facility to safeguard the positive financial, social, and environmental impact that successful SMEs are bringing to their communities.
“While the global economy may be emerging from the pandemic, many impactful small and medium sized businesses in Africa face ongoing challenges at the same time that foreign direct investments in African are falling,” said Nimrod Gerber, Managing Partner, Vital Capital. “TheVital Impact Relief Facilitywas designed to give these SMEs a chance to fight through these short-term challenges and realize their visions of becoming prosperous companies benefiting African workers and communities.”
When VIRF was created in April 2020, Vital indicated it would initially launch in East Africa but is committed to expanding that focus to West Africa, including Ghana, Côte d’Ivoire, and Senegal.
Vital Capital has been making targeted investments in sub-Saharan Africa since 2011, with the aim of improving the economic, personal and social well-being for people in low and middle-income communities throughout sub-Saharan Africa. Every year, Vital’s investments touch the lives of more than five million people who receive essential products or services through Vital’s portfolio companies.
Vital Capital is proud to have become a signatory to the International Finance Corporation-led Operating Principles for Impact Management. The Impact Principles are an important milestone in moving the dial forward towards greater accountability, transparency, and standardization in impact investing management practices. Vital is committed to contributing our partnership to this industrywide collaboration.
Introduced in 2019, the Operating Principles for Impact Management is a leading impact framework that provides nine principles for investors to purposefully and reliably report on their impact management systems, enabling collective industry measurement and alignment. Within a year of becoming signatories to the Impact Principles, investors must publish annual public disclosure statements demonstrating how their practices align with the Principles. These documents are independently verified at regular intervals.
“Impact-focused decision-making has always been at the core of Vital’s investments, and we strongly support the Operating Principles of Impact Management’s framework for consensus in our impact management practices.” said Head of ESG and Impact Tamar Pashtan. “We look forward to this partnership and sharing our expertise in impact investing in Sub-Saharan Africa.”
Vital Capital is amember of the GIIN, WEF, and was recently identified as an Emeritus Manager in the ImpactAssets 50, reflecting its longstanding impact investing industry leadership.
Vital manages Vital Capital Fund as well as the Vital Impact Relief Facilitythat was initiated to help Sub-Saharan African businesses weather the Covid-19 pandemic.
Vital Capital has been recognized as an Emeritus Manager by ImpactAssets’ IA 50 2021. Now in its 10th year, the IA 50 is the industry’s first publicly available searchable resource of impact investing fund managers. Vital was included in the category of IA 50 Emeritus Managers which specifically spotlights veteran impact fund managers.
The recognition as an Emeritus Manager reflects Vital Capital’s longstanding leadership in the impact investing industry. This is the 7th year that Vital Capital has been included to the IA 50. As the impact investing industry continues to grow rapidly, both in AUM and in number of investors, we are proud of our pioneering role and remain committed to leading the way.
Find the full IA 50 list on the ImpactAssets website.
Learn more about our smart, targeted investments here.
The Vital Impact Relief Facility (VIRF) has been recognized as one of the “30 Big Ideas Shaping ESG”, by Private Equity International. In a year when investor commitment to impact and ESG has grown and innovated in the face of the COVID-19 global hardship, the VIRF was identified as “a trailblazing fund that seeks to bridge the gap between local need and multilateral/government focus in a time of crisis” as part of the publication’s Responsible Investing supplement.
The VIRF is a $10 million emergency debt facility established to help impactful Sub-Saharan African businesses weather the economic crisis resulting from the COVID-19 pandemic. As a fast-acting fund, Vital took our responsibility as an impact investor to quickly pivot and meet the most pressing local needs. True to our impact and investment mission, we have been at the forefront of creating targeted, on-the-ground, and impactful solutions through the VIRF.
The recognition underscores our commitment to innovation, backing the businesses, entrepreneurs and ideas with the potential to create impact when and where it is needed in the region.
The Private Equity International Responsible Investing Supplement can be foundhere(available to PEI subscribers only).
You can find out more about the Vital Impact Relief Facility here.
Vital Capital is honored to have participated in the in the World Peace Bell Inauguration at The Palace of Justice in Luanda, Angola. The event took place on November 27, 2020, making Angola the first Southern African nation to receive a World Peace Bell.
The World Peace Bell Association was established in Japan and the first bell was built in 1954 and resides at the U.N. headquarters in New York. The World Peace Bell initiative recognizes and celebrates peace-making actions that transcend borders, cultures, and ideologies around the world.
This Peace Bell was presented to the Angolan people to commemorate their efforts in establishing peace and solidarity between peoples and nations after the civil war. These tremendous ongoing initiatives are evident in their strengthening of democracy, striving to establish a strong economy, and gaining international recognition for these achievements.
Given the challenges that the world faces today, Vital Capital believes that a meaningful quest for peace must be considered from a more comprehensive perspective – not only the absence of war – but more concretely establishing the foundations for growth and prosperity. By improving communities’ quality of life, their people can cultivate hope, and sustain lasting peace.
2020’s events of the pandemic and continued global hardship shed light on the fact that although we may come from different places and are of differing heritage, we are connected through our shared global community. And as the world recovers, rebuilds, and moves forward, we must work side-by-side towards our shared goals of peace and prosperity.
Vital Capital would like to express our sincere gratitude toward the Angolan people, to the World Peace Bell Initiative, and to the artist Guilherme Mampuya for this beautiful artwork.
