Understanding Impact Investment

Muhammadu Buhari

Ugo Aliogo writes on the importance of impact investment in improving the business climate in the country

Impact investment refers to investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.

The 2015 Global Impact Investing Network (GIIN) study, noted that in the landscape for ‘Impact Investing in West Africa,’ Nigeria and Ghana, represented more than half (54%) of impact investing capital in the region.

A breakdown of this showed that Nigeria received 29 per cent, while Ghana received per cent of the capital deployed.
The study explained that the remaining impact investing capital in the sub-region were found to be highly fragmented, and there are indications that this remains the case.

The study primarily focused on the dominant two countries.
Also, a recent report by Impact Investors Foundation (IIF) on Nigeria and Ghana impact investing and policy landscape noted that despite a deteriorating economic climate, the volume of impact capital deployed increased. And this reflected the fact that where investors had already raised funds to be deployed in the region, they remained committed and continued to deploy capital.
The report stated that investors realised that it had become more difficult to source quality deals, while on the demand-side business growth was often stifled by a tougher economy.

The report argued that on the supply-side, investors accepted many of the deterioration in the macroeconomic environment as a given when operating in the region. It further maintained that once investors had raised funds and made a commitment to deploy capital in the region, they continued to do so (although the environment has at times made additional fundraising more difficult).
According to the report, “Although the ease of doing business index performance improved for both countries, investors continued to note significant challenges, particularly in Nigeria.

“That said there was often a sense that, given the size and materiality of the market, the difficulties of doing business were simply a cost of accessing a sizeable ‘must-reach’ market in West Africa.

“Despite a worsening economic climate, the number of impact investors active in Ghana and Nigeria increased markedly. This reflected a significant increase in non-DFI (development finance institution) investors pursuing impact oriented deals and courting impact capital in their fundraising activities.”

It added: “Many of these investors focus on commercially viable deals that also have an impact narrative as opposed to providing concessional capital and accepting below market rate returns. For this reason, truly patient impact capital-that accepts below market returns in an attempt to invest in riskier or higher impact deals-remains in short supply.
“Nigeria continues to experience growth in deal flow, but Ghana has yet to replicate its 2010 peak. This likely reflects the greater focus placed on Nigeria by development institutions, as well as the opportunities offered by the sheer size of the Nigerian economy (outweighing other challenges such as barriers to ease of doing business).

“This disparity can also be seen in the relative growth of the Nigerian and Ghanaian impact investing markets. While they were comparable in the 2015 report (29% and 25% of the overall West African market respectively), impact investing transactions in Nigeria since 2015 have been 3.9 times greater in value than those in Ghana (with $4.7 billion in transactions in Nigeria and just $1.2 billion in transactions in Ghana).”

It noted that across Ghana and Nigeria, agriculture, infrastructure, energy and public-to-public lending11 was 58 per cent of the total impact capital deployed, which it stated was in alignment with the dominant sectors in the economy.
“In Nigeria, agriculture, public-to-public lending and energy reflect the top 3 sectors and total 56 per cent of impact capital deployed. In Ghana, ICT, infrastructure, and financial services reflect the top three sectors, totaling 58 per cent of impact capital deployed.

“The non-DFI space shows a more diversified transaction mix overall. In this domain, Nigeria sees a greater focus on ICT and manufacturing compared to Ghana, while Ghana sees an outsized focus on financial services.
“By value, where the instrument was known, 95 per cent of DFI transactions were debt-based13. This reflects the lower risk tolerance of DFIs and the easy route to exit offered by debt.

“That said 67 per cent of non-DFI transactions by overall value were equity-based. This increasing deployment of non-DFI equity since 2015 reflects the realities of the economic environment. Entrepreneurs became more willing to give up equity during difficult economic times (often in response to increasingly crippling US dollar denominated debts or weakening market demand). On the positive side, this shift could sensitize a wider audience to the benefits of equity investment.”

Policy Recommendations
One of the policy recommendations in the report was the need to recognise and regulate impact capital as an investment strategy which can enable other recommended policy responses, thereby ensure impact investors operate at high standards, “while also providing impact investors with the assurance that they can benefit from wider investor protections.”
The report also recommended that there was need for support local fundraising by building awareness through institutional reforms that engender greater allocation towards impact investing strategies and by socialising impact investing opportunities and leveraging successful transactions for market signaling purposes.

According to the report, “Incentivise impact capital to attract additional capital, to ensure impact capital plays its optimal role, and to encourage layering, through decreased restrictions on institutional capital allocations to impact investing strategies; potential tax incentives for concessional capital providers; and the encouragement of governments to use impact investing as a means of financing public projects.

“Drive demand-side competitiveness and attractiveness through policy reforms including fiscal incentives by prioritizing and targeting high potential sectors for sector specific policy reforms and by creating sandbox environments (akin to the sandbox created by the Central Bank of Nigeria for financial inclusion) in other sectors that provide sufficient flexibility for new innovations and businesses to grow while building appropriate regulations.

“Improve the ecosystem of accelerators, hubs, and incubators by engaging with funders and convening ecosystem actors to ensure that business development service providers increase the relevance of their services and avoid clustering funds around only a few intervention areas.

“Improve the focus on systemic, institutional level capacity building by ensuring that regulators, enforcers, and potential institutional funders all have sufficient understanding of impact investing and can fully engage in the opportunities it presents.”

Experts’ Views
In his reaction to the report, the Chief Executive Officer, AllOn, Dr. Wiebe Boer, said the report explained how deep impact investment has spread, compared to 10years ago when there was no information about it.

He also stated that presently, the conversation is on billions of dollars of transactions yearly, adding that there is really need to define who is and who is not an impact investor.

Boer, further noted that there was also need to waive the conversations around the successful impact investor companies in Nigeria, especially those companies that are returning profits and creating social change in the country.

He added: “Impact investment covers many social sectors, such as health, education, agriculture and others. For us as group we focus on access to energy which is the Sustainable Development Goal (SDG 7). To fill the energy deficit in Nigeria, the total investment needed is $200 billion which is huge, but there is a lot more capital that needs to come into the energy sector.
“The funding to drive impact investments in many sectors requires contribution through private capital, government alone cannot do. On the part of government, they have to put in place the right regulatory framework to attract significantly more private capital to investments into the energy space.”

On his part, the Regional Director, Ford Foundation West Africa, Johnson Chukwu, said the report was part of the efforts of the foundation to build an effective ecosystem which are investments that have intentions of making social impacts, while delivering financial returns to the stakeholders in the business.

He explained that the report gave credence to the fact that even though the business environment continues to be challenging, more investors are coming to do business, “this implies that if government can do more in easing the business environment, it will attract more investment opportunities.”

Chukwu added that the report also expressed the need for more enterprises especially small enterprises need to open up for investments and also seek for technical support to make their enterprises ready for investments, therefore there is a whole lot more in the report that help the suppliers of impact capital and recipients of impact investments.

Also commenting on the report, the Academic Director, Lagos Business School (LBS) and Enterprise Development Centre (EDC), Pan-Atlantic University, Prof. Olayinka David-West, said the key focus of the report was to provide knowledge on what is going on the impact investment space and how impact capital is being deployed.

She hinted that: “The report focus is in three folds; the supply side- this primarily focuses on how you get more impact investments to come into the country. There is the demand side- here the concern is how do we prepare Nigeria companies to receive and attract that funding.

“There is the ecosystem side and it is concerned with how to ensure that these Nigerians companies can strive and deliver the impact they promised to deliver. There is the policy side which points to the fact of ensuring that we have the right policies within the environment to ensure that things work for good in general and the enabling environment is there, so that when investors are bringing in foreign capital, how do they ensure they can take their money back after couple of years.”
David-West, further explained that the report was an eye opener because it helps to identify the challenges and constraints in the ecosystem, adding that the next step should be what actions should be taken since there is awareness about the challenges and constraints.

She maintained that the report is a pointer on the need to build an advocacy campaign around the policy issues highlighted in the report, building the ecosystem on the supply side,

“While on the demand side- we examine how to begin to generate local investors as well, because we cannot strive on an economy that all the monies are coming as Foreign Direct Investment (FID) and closing the gap, rather than just sharing information and knowledge. I think the bright spot for me, is that there is diversity in the impact investments areas such as ICT and infrastructure that we see both in Nigeria and Ghana.

“So there is diversity across the ecosystem, so you don’t have to be head strong in one area. But you can grow in different area. The second area is the fact that the need for hubs, incubators and accelerators to work together. We also have to examine the support given to these smaller businesses to attract the funding and to use and deploy that funding effectively.”