Investing in Sub-Saharan Africa

Market Overview

AfricaSix of the world’s ten fastest-growing economies over the past decade were in sub-Saharan Africa, and seven African countries are forecast to be among the 10 fastest growing economies in the world between 2010-2015. Foreign direct investments in the region have grown at a compound rate of 20% since 2007. However, the region still has the highest overall percentage of the population living in poverty. Starting a business also remains difficult, especially in terms of capital expenses. For example, the cost of all fees to start a business averages 67.3% of regional income per capita—the highest of all regions measured. While the impact investing landscape is generally strongest in South Africa and Eastern Africa, the entire region is in great need of capital support and capacity-building for entrepreneurs. We recommend the April 2013 Omidyar Network report: Accelerating Entrepreneurship in Africa, which provides a detailed view of investment conditions in the region.

Opportunities

  • Potential for impact. Although there are areas where significant impact investing infrastructure has begun to take hold, most of the impact space is very under-developed, meaning that experienced, hands-on investors can add real value. They can also encourage other impact investors who have an appetite to invest in the region and don’t know how to jump in.
  • Culture of community investment. Similar to the classic foundation model of making as much money as possible through business and then giving some away philanthropically, the culture of profit feeding community philanthropy is strong; however the term “impact investing” is still new for African investors.
  • A wealth of natural resources. Africa boasts 10% of the world’s oil reserves, 40% of its gold ore, 80% of its chromium and platinum reserves, and 60% of its uncultivated and arable land. As development and political stability increase in the region, these resources will increasingly become great opportunities for growth, investment, and positive impact.
  • Hybrid structures and partnerships. Active investors strongly recommend working with local organizations in partnership or with hybrid organizations. Some investors have found success utilizing a partnership model as a four company approach: local for-profit, local non-profit, Western for-profit, and Western non-profit. Liberty and Justice has a similar setup. Investors should choose partners who are final decision-makers, as engaging with intermediaries can often be a time sink rather than a value-add.

Challenges

  • Cost of capital. The high cost of capital in Africa makes it difficult to find co-investors willing to collaborate on deals offering less than 15% returns, whereas foundations utilizing programrelated investments in the United States are often satisfied with returns at 5% or lower.
  • Timeliness of doing business. Expect to spend time in transit (transportation break-downs, poor road conditions) and time waiting for meetings. Investors should practice patience and plan on scaling timetables for activities by at least 1.5 times.
  • Foreign investment regulations. Regulations vary greatly by country, with some countries actively encouraging foreign investment and others with more burdensome regulation. Kenya, for example, has very few restrictions on foreign investment and has suspended the capital gains tax for foreign investors. In South Africa, on the other hand, foreign investors must receive special share certificate endorsements or they may encounter difficulties withdrawing money over time. In some countries in Africa, governments may cap the percentage a foreign investor can own of a local company.
  • Finding entrepreneurs. Because “impact investing” is new, entrepreneurs may not define themselves as such; South Africa has called this type of funding “charitable investment”. Also, appetite for entrepreneurship may be low in some areas. For example, in South Africa, there is little incentive for entrepreneurs to take the risk of investing their own money due to the lack of tax benefits or loss write-off opportunities, especially in the face of other more attractive grant and Black Economic Empowerment funding opportunities.
  • Corruption. Nine of the twenty lowest ranked countries on the Corruption Perceptions Index are in Africa, though investors interviewed feel that these challenges are surmountable.
  • Investors’ comfort with ambiguity. Investors need to be comfortable with ambiguous market norms. Be honest and realistic with your risk tolerance and with not knowing projected financial returns. Focus on supporting the entrepreneurs’ mission. Entrepreneurs are often pressed for time and staff to service investors’ questions; be respectful, especially when considering relatively small investments.
  • Lack of legal recourse. It should be assumed that recourse to legal contracts, if required, does not lead to compensation for non-local investors. Most often the main incentive for the entrepreneur to maintain compliance with your investment agreements will be maintaining face rather than the threat of financial loss as a result of an action. Legal action should be used only as a deterrent. The best security against requiring recourse to legal remedy is to work with local co-investors.

From protoype to Series A. Eleos first learned about Sanergy in a Toniic meeting in early 2011, when Sean Foote put the deal on the Gust platform. At the time, the co-founders were finishing up business school at MIT, and had two test toilets in use in the Nairobi slums. While the consumer-facing sanitation side of the business plan was well developed, the conversion of waste to organic fertilizer was less developed. In June 2011 Eleos invested an initial $20,000 to hire an agro-chemist to run tests to prove that Sanergy could produce fertilizer at a price point and with quality characteristics that the Kenyan market would adopt. The results were positive, and so in February 2012 Eleos created an LLC to aggregate $410,000 in convertible debt to fund a 60 toilet pilot program. This LLC included several Toniic members. Eleos took a board seat to further assist the company’s growth. The pilot exceeded expectations, and in March 2013 Eleos led a $1.25 million Series A equity round. Eleos converted its convertible debt, and put together another LLC to invest $425,000 in the Series A round. Several Toniic members, Acumen Fund, and Spring Hill Equity Partners also participated in the Series A round. Acumen and Spring Hill Equity Partners are also now participating at the board level.

Resources

  • The Liberia Philanthropy Secretariat (LPS). Encourages information sharing and collaboration between the Government of Liberia, foundations, and the civil society while expanding philanthropic support in Liberia. LPS makes it easier for foreigners to deploy capital in the country. http://www.supportliberia.com
  • NEXII. Nexii worked to support the development of market infrastructure for impact investing. However, in 2012, they came to the conclusion that they were too early to market. Follow this link to learn more about their business transition and the lessons learned.
  • Open Capital Advisors (OCA), Kenya. Open Capital is a financial services and strategy consulting firm based in Nairobi that supports high-impact businesses, investors, and innovative solutions throughout East Africa. OCA’s work enables sustainable businesses to grow and raise capital while helping markets to allocate capital efficiently. http://opencapitaladvisors.com
  • South African Social Investment Exchange (SASIX). South Africa’s first online social investment stock exchange is a place where anybody can invest in social development projects. http://www.sasix.co.za
  • Toniic Africa. Toniic is a global network of action-oriented impact investors. http://www. toniic.com
  • Venture Capital 4 Africa (VC4A) – The leading online platform that links African entrepreneurs with investors. https://vc4africa.biz

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