IMPACT INVESTMENT: Editorials: Edition: March / May 2020

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Make a difference

Opportunities abound. Find them. The will and the money should become a stronger match. Enough with the lethargy.

When the fiscus is drained and government is paralysed, the need for social investment doesn’t diminish. There are two possibilities. One is submission to a regime of prescribed assets, representing a state seizure from individuals’ savings and forcing lower returns (without which prescription would be unnecessary) by allocations to enterprises that mandarins deem “developmental”. Like expropriation without compensation, sale of the concept starts reasonably before grinding ominously. The other is for private-sector financial institutions, significantly those which are custodians for the assets of retirement funds, to step up. Their involvement is the only way for risk and reward to be correlated. There’s no shortage of either will or money. But there is a paucity of government-presented opportunities that offer a line of sight from initial risk to ultimate reward; in other words, projects that pass muster as “investable”. The consequence is that institutions, as fiduciary stewards, will have to find and develop the opportunities themselves. Several do. Many don’t. The former tend to have resource advantages in terms of research and scale. The latter might merely be unenthusiastic. They’re about to be prodded. Later this year in Johannesburg, SA will be the first African country to host the annual conference of the Global Steering Committee (GSC) for impact investment. In conjunction with the Impact Investing SA (IISA) taskforce, plans are underway for attendance by more than 900 delegates from over 50 countries.

The 15-member taskforce, chaired by Elias Masilela (tipped to become the next Sanlam chairman), comprises high-level personalities from the private and public sectors. The secretariat is provided by the Ford Foundation-funded UCT Bertha Centre, headed by Susan de Witt (see Cover Story). Calling on private resources to bridge the gap left by inadequate government and philanthropic capital to counter material risks from rising levels of poverty and unemployment, as well as global warming, IISA defines impact investment: “A strategy or tool where risk, return and impact are optimised to finance business that address the (UN-backed) Sustainable Development Goals.”

Objectives include:

Increase the supply of impact capital available for profit-with-purpose businesses and social enterprises;

Improve the match between impact capital and investable opportunities;

Create an enabling environment to increase the deployment of impact investment.

Of their own accord, notable initiatives are underway. In the debt market, Futuregrowth enjoys prominence. Often in partnerships, its record embraces affordable housing, renewable energy, shopping centres in townships and rural areas, security mechanisms for the cash of smaller businesses, and support for the taxi industry. In the equities market, asset managers are coming to the fore. Mergence is one deserving mention. Limited only to the extent by which it gathers support from asset managers, JSE-listed RH Bophelo is active nationwide in healthcare facilities for lower-income groups.

But the institutional leader is Old Mutual Alternative Investments. Concentrated in SA and broadening its interests across the continent, it has some R56,4bn under management in infrastructure assets, private equity and impact funding that aim to deliver higher returns and make a positive social impact. Under management is R11,3bn through a range of specialist impact funds. They offer investors commercially viable returns in investments that deliver large-scale impacts for the benefit of mainly lowerincome communities, particularly in affordable housing and quality education. “Returns are priced in line with risk,” explains OMAI chief executive Paul Boynton. This includes the risk of illiquidity in the unlisted space where, unlike the JSE-listed space, “we can be particularly useful by being hands-on”. When it funds 100 000 housing units, for example, a virtuous circle is created. After the construction jobs, the new houseowners buy furniture and white goods that further stimulate the economy as a whole. “This is the thinking that we need to mobilise across our client base,” he believes. For measurement, roughly 150 projects are aggregated through 90 different possible data points. They can range from infrastructure development and employment generation to water effluent and carbon footprint. He encourages trustees to report back on the progress of their funds in nation-building efforts.

“Africa has a yawning infrastructure gap that requires spending of between $130bn and $170bn a year just to keep up with growing demand,” Boynton estimates. “But the capacity of multilateral funds and national fiscal resources to finance it is no more than half that amount. There is clearly an opportunity for large global investors to play a part in bridging the gap by allocating to existing African infrastructure funds with a strong focus on ESG that are building impact outcomes across the continent.” Well into this gap is Sandton-based Harith. In a series of partnerships, it is one of the largest investors in African infrastructure. Managed respectively are the $630m and $435m Pan-African development funds. They’re in the core sectors of energy, transport, telecommunications, health and water.

It has initiated a pipeline of mega-projects and proudly claims to be the “first port of call” for sponsors and developers that need funding and expertise. Partners, it says, include some of the largest development-finance institutions and banks investing in

SA and the continent. And within SA itself, institutions are committed under the Financial Sector Code to substantial investments, as in socio-economic and enterprise development, that have impact implications. Retirement funds themselves have plenty of leeway, not fully used by their portfolio managers, to take up the extent of ‘alternatives’ that Regulation 28 allows. So how will the introduction of prescribeds help? Only by warning the foreigners and frightening the locals.

There is clearly an opportunity for large global investors to play a part in bridging the gap

NOT SO BRIGHT
 
Each year consultancy RisCura produces the Bright Africa Report. Some relevant extracts from its latest.
 
On private equity: In SA, limited growth opportunities – the consequence of policy uncertainty, mismanaged state-owned enterprises, corruption etc — are the catalyst for the downward trend in investment activity. In East Africa, the IMF predicts the region to have the highest gdp growth rates (above 6%) for the 2018-23 period. Kenya accounts for 69% of East Africa’s 2018 investment activity “because of the country’s large and diversified economy, pro-business government policies, and relatively low dependence on extractive commodities”.
 
On infrastructure: Development finance institutions, together with national governments, finance 70% of infrastructure development in Africa. China provided 24% of the funds raised in 2017.
 
Other than these investors, participants in this asset class in Africa are few and far between. The private sector made up less than 3%.
The infrastructure investment gap is substantial and African governments don’t have the budgets to support the investment levels required. Some barriers to private-sector involvement include currency risk and uncertain regulatory requirements.