Tag Archives: Investment returns

Social Impact Investing Creates Value

Impact investing can mean a diverse range of investments, ranging from housing development in the US, to renewable energy in BRIC countries, and agricultural cooperatives in Africa. Investment can be crowded fund or private equity.  The table below shows the spectrum of different impact investment business models and traditional investments.

Impact investment

Social impact investing is not a new trend; it has been around for several decades through philanthropic investments, in areas like community and social development, infrastructure and gender equality. However, a fairly new type of bond to finance social wellness is the Social Impact Bond, which the Social Finance UK describes as a “public-private partnership which funds effective social services through a performance-based contract.” Unlike social impact bonds, however, social impact investing is a large field that include any social benefit from the underlying business model. The combination of social impact investing and bonds is the new form of business model that is emerging in many developing countries around the world. The HBR wrote several articles about how social entrepreneurs are typically held back by traditional financing processes and structures, but in new markets where risk and opportunity are intertwined, innovative business models are capable of driving new areas of returns for investors with an open mind. This is currently the case with green bonds and has been with impact bonds.

Impact Investing in Different Markets

In the world if impact investing, The impact sector is growing, in a study conducted by the Global Impact Investment network, respondents in impact investing reported they grew their impact assets from USD 25.4 billion to 35.5 billion from 2013 to 2015. The report, found here, shows many trends in the sector by respondent types and tracks the growth of the sector. Some American examples include Goldman Sachs’ investments in community and urban development across the US including New Orleans , Chicago, and NYC.

While globally, Africa is seeing many similar impact investments. One being The Just Shea Program , a program that helps women shea harvesters of Ghana with several areas from providing safety gear that can be repaid through harvest shea nuts, to providing equipment to protect form poisonous snakes, and finally and importantly for economic reasons,  the creation of cooperative silos to increase the price per kilo paid to the harvesters.

In Africa, one of the value creation tools that African private equity can contribute to social impact businesses is the ability to bring their portfolio companies up to above-market standards of compliance and transparency, which in turn raises their value at exit. Investors can also help influence the political climate by investing in areas with strong legal standards and compliance thus creating reasons for government to create more favorable investment climates.

It seems that while impact investing may be difficult for traditional investment, there is a space in portfolios for this type of model, and as data emerges on the results, the potential for ROI is very viable as well as the potential to create positive socially responsible returns.

KKR to invest $US200m in Ethiopian rose business

Kohlberg Kravis Roberts (KKR) is the latest large firm to recently announce a sizeable investment into an African enterprise, Afriflora, a rose business based in Ethiopia. The $US200m investment marks the private equity firms first ever deal on the continent.

The macro story behind Africa is certainly an appealing one; the current milieu is likely to see dramatic growth over the next decade. Moreover, it appears now to be uncommon to encounter a private equity LP that hasn’t contemplated a new Africa fund, there is definite scope for potential high growth on returns.

However, Swiss asset manager and academic, Cyril Demaria, argues that there is no indication that LPs can earn the sort of upside most of them anticipate from African markets. Demaria denotes how there are gross overestimations of returns; similarly Goldmans Sachs warns investors ought to be conscious of the possibility for underperformance in the market.

Ultimately, some may argue that those who invest in African enterprises need to reconsider the inherent risks of the markets and lower their return expectations. However, a focus on returns alone and their latent capacity for volatility and the unknown does not depict the GCP story. GCP and GCP Solar’s basic focus towards Africa and African investment identifies that investments are long-term opportunities, with the early move advantage as well as a socially responsible and ethical investment.

For more information about Afriflora please press here.

Should investors head to Africa or Asia in the hunt for returns?

Sub-Saharan Africa is set to grow at around 6 per cent a year, faster than India. Asia, excluding Japan, is projected to grow at 7 per cent, but these rates are regularly revised down.

Fifteen of the world’s 29 fastest growing economies in the world are in Africa.

Africa is now where the Brics were a decade ago, signalling huge growth potential.

Ten of Africa’s 54 countries have a GDP per capita greater than China, while 17 are greater than India.

Africa is at an earlier stage of its development than Asia. As Asia shows, returns come in the early years. £1000 (€1193) invested in Asia in 1988 was worth £4016 five years later – equivalent to 27 per cent annualised growth. The same sum invested in 2008 is worth just £1517 today – a more pedestrian 7.5 per cent.

Africa’s growth today is investment-led, not sparked by a surge in mineral prices, as happened in the 1970s. Foreign direct investment into Africa increased fivefold since 2000 and 5 per cent in the last year. Growth includes countries like Ethiopia which do not have significant mineral wealth. Rwanda, without natural resources, has been able to sustain a growth rate of 8 per cent thanks to sensible economics. Africa’s resource-rich states are better managing their wealth: Botswana used its diamond wealth to develop quickly, growing from one of Africa’s poorest countries at independence in 1966 to become a democratic, stable, and upper middle-income country.

Africa’s total stockmarket capitalisation grew from $245bn (€180bn) in 2002 to more than $1tn in 2010. According to African economic expert Paul Collier, returns on investment in Africa are higher than in other regions: the average return on capital for companies was two-thirds higher than that of comparable companies in China, India, Indonesia, and Vietnam.

Africa has a median age of 20 years compared to 30 in Asia, and the number of working age people will double to 1.1bn by 2040. With rising costs, Asia is no longer the low-wage factory of the world. And entrepreneurial Africans are returning to establish businesses on the continent. Africa has more cities of over 1m population than Europe and has more $20,000+ earners than India. All this is powering consumer facing service sectors, sectors where growth is not correlated with the rest of the world – a tempting combination.

Agriculture is a key sector for growth. Africa has 60 per cent of the world’s uncultivated arable land. Food distribution is improving as transport infrastructure develops and agricultural policies improve. The agriculture sector can diversify into processing. Africa is a big exporter of raw agricultural products.

With its richness of resources, young and growing populations and a greater commitment to political and economic reforms, it would be a brave and likely foolhardy choice to ignore the growth potential of Africa in the decade ahead.