Over the last decade, impact investment in Africa has emerged as one of the go to play for investors who want to make money while doing good.
Despite growing economies and an emerging middle class, the continent is still struggling to meet its people’s demand for better public services. Some of that gap is being plugged by impact investors.
West Africa, a region of over 300 million people, is attracting its share of these investors. Between 2005-2015, $6 billion worth of capital was injected into the region dominated by Ghana and Nigeria, a new report by the Global Impact Investing Network (GIIN) says. That compares with East Africa, which has seen over $9 billion worth of investments in healthcare, infrastructure, energy and consumer goods.
Ghana, with an economy less than 10% the size of West African neighbor Nigeria, attracts almost a quarter of this capital. This is even more impressive when you consider that it makes up only 5% of the region’s total GDP. The reason for this “relates to Ghana’s significantly lower costs of doing business and more stable political climate,” the report says.
But Ghana’s strong run as an attractive capital destination might soon come to an end, cautions the researchers. The country’s real GDP growth “has been in steady decline since 2012, dropping from a peak of 14% in 2011 to 4% in 2014, largely owing to sharp currency depreciation, rising inflation, high levels of government debt, and slowing growth in key sectors. As a result, its position as one of the leading African investment destinations is under threat.”
Energy attracts the highest share of investment, largely because its an area of opportunity. In Nigeria alone, the estimate is 80 million people lack access to electricity, while 75% of the country live without reliable supply of power.
Capital intensive sectors, like energy, infrastructure and manufacturing have attracted the most investment dollars of any area of the continent’s economies—$4.2 billion worth over the last decade. That is over 65% of all investments in the region. Growth areas, particularly in the telecom space, are also attractive making ICT big as well.
Most of the capital from the West Africa investors is not from the private sector directly but from development finance institutions (DFIs), organizations such as the International Finance Corporation (IFC) and African Development Bank (AfDB).
But others in the private sector are also showing interest in impact investment. JPMorgan is active in this space, investing $5 million in Novastar, for example, a venture-capital fund that supports East African start-ups working on social enterprises.
But the DFIs are the dominant players in this space. ”Since 2005, DFI investment has increased at a compound annual growth rate of 18%, from $190 million in 2005 to $852 million in 2014,” the GIIN report points out.
A significant chunk of this investment comes from the likes of IFC, African Development Bank and foundations funded by wealthy individuals. This is partly because the nature of the markets they operate in are perceived as high-risk. But the social good component attracts such players, as that may be the core driver of the investment.