Global financiers seek to make social impact with investments in E. Africa despite low returns
Posted Tuesday, October 29 2013 at 16:01
- Social enterprises in East Africa are operating in a challenging context with poor infrastructure, underdeveloped value chains, inadequate skilled labour to fill managerial positions, and a customer base with very limited purchasing power.
- Operating costs for western funds can quickly add up, especially if they don’t have a regional office and operate from the US or Europe. Ironically, the challenge for fund managers isn’t so much to find capital as to disperse that money into investments and do it at a reasonable cost.
- There must certainly be a way for Kenyan banks and funds to play a bigger role in the creation of socially-minded SMEs, and rip the benefits of market development.
Three years ago, Honey Care, the small company that helps rural farmers generate additional income by taking part in beekeeping activities, managed to boost its growth significantly by opening its capital to foreign investors.
Why a Western investment fund would seek to partner up with a Kenyan SME whose client base is on the lower end of the wealth pyramid might seem counter-productive at first, yet Honey Care has become a highly sought after investment for a small branch of the global financial sector interested in socially responsible business opportunities.
Impact investing refers to a specific type of investments for companies and non-profits whose core mission is to address social or environmental issues, usually via specific investment funds.
In recent years, the promise of generating profits while “doing good” and use market forces to spur development has generated an incredible amount of attention, not unlike the enthusiasm micro-credit elicited in its early days.
In 2009, Monitor Institute estimated the market could reach $500 billion by 2020, and a year later, JP Morgan and Rockefeller Foundation released together their own estimate, at between $400 billion and $1 trillion. Now multiple players are involved, from major banks to private funds to development agencies and nonprofits that dedicate themselves entirely to this type of activity, each with their own set of priorities – finance or impact first.
And a whole ecosystem of business incubators, accelerators, technical assistants and consultants trying to help new ventures get launched has grown around a sector largely dominated by the developed world.
A few years into the craze, the enthusiasm is still growing and many NGOs in East Africa and elsewhere are finding themselves being asked to consider making the move to a for-profit business model and open up to investors.
Yet the industry still hasn’t yielded any concrete results to confirm that impact investments are indeed viable, for a very simple reason – most investments of this nature would take years before they can bear fruit and feed a pool of reliable data.
However, early signs indicate that the sector’s potential has been at best largely overestimated. In a recent report, the World Economic Forum estimated the current market size to be around $25 billion; it would therefore need to achieve significant, if not impossible growth in order to reach the $500 billion promised by 2020.
The reasons behind this disconnect could be summed up this way: impact investing has revealed itself to be a whole different game than what players expected, a game for which they need not only to learn new rules, but establish these rules altogether.
To begin with, there is no consensus on what impact investing is, because the concept of impact hasn’t been clearly defined yet.
When it came up with the $1 trillion figure, JP Morgan encompassed large deals in the real estate, energy or infrastructure sectors, such as the ongoing Lake Turkana wind farm project, deals that will certainly help the economy grow through job creation and infrastructure development, but will have an indirect impact on poverty.
Others choose to concentrate exclusively on SMEs that address social and environmental issues up front and in an innovative way, and hold the potential to later bring their solutions to scale – these companies are called social enterprises.
“Many businesses in the world could be classified as social enterprises,” says Alexei Bezborodov, head of field operations at Honey Care. “What sets it apart is taking a critical role at your social impact on all the stakeholders you’re working with.”
But how to measure impact is no simple feat. In fact, the science of impact measurement is itself so young that there is still much debate as to what tools and indicators should be universally used, whether impact can really be measured at all and over what period of time.