Fund of funds and the new opportunities in impact investing in Africa

Top VC firms investing in Africa - Startup Lagos

With the African startup investment landscape growing exponentially, especially with the increased attractiveness of fintech and renewable energy startups, there has also been a growing focus on impact investment on the continent. In 2019, it was estimated that the impact market was at a whopping $502 billion, and set to increase further in the years following. The belief is that investments in more purpose-driven and meaningful ventures would not only critically accelerate development within emerging economies but also offer investors a stable and sustainable investment portfolio. Most of these interests in impact investing have focused on environmental, social, and governance (ESG) needs with interests around sustainability particularly. Institutional investors and high-net-worth individuals (HNIs) are interested in how tech startups are stewards of nature, avoiding harm to the environment with their innovations, how much in helping social networks and social development are these creative solutions offering, and whether they are accountable to audit requirements, internal control and shareholder rights.

In spite of the increase in funding size and completed deals within Africa, especially within 2021, there have still been a large number of startups excluded from the benefit of funding. While many blame the diversity gaps in funding and the difficulties that come with meeting up with investor preferences, the relative dearth of fund managers across Africa is also partly responsible. In the wake of the peak periods of the COVID-19 pandemic on the African continent, a number of new fund managers are emerging with specific impact assessment frameworks and sources of capital.

One emerging source of capital is the fund-of-funds investment vehicles that are becoming much more prominent. Kanini Mutooni highlights that this new source is growing as a new and broad frontier of African impact investing. Private equity fund of funds (FoFs) basically are private equity investment vehicles that invest in other private equity funds, rather than a direct investment in companies. Through investments in FoFs, investors have a broader opportunity of indirectly investing in more companies and across more geographies. A number of these FoFs are emerging across Africa with interests in impact investments: Allianz’s and KfW’s Africa Grow FoF, launched in 2019 with a target of about 170 million; Proparco and BPI France, launched in 2020, with a target of about 100 million, Oryx Impact, targeting about 250 million FoFs with interests on job creation, climate change mitigation, and gender equality advocacy; South Africa’s RisCura that aims at eight priority investment areas from quality education to sustainable agriculture.

With this new source of capital, investors are more at ease with investment decisions and are insulated better from the risks in investing directly in the markets. They are also able to spread across investments over more startups and geographical markets, than if they were engaged in direct investment in the African ecosystem. As Africa’s business environment is continually growing and expanding, startups on the continent are becoming more and more attractive for investment, and as a market for goods and services. To hedge risk better, and ensure greater returns, there will be likewise a growing emergence of FoFs across Africa’s landscape. Especially as these FoFs are concerned with impact investment, there will be consequently, an increase in social and economic development in various parts of Africa. A number of these investment vehicles are interested in furthering the UN Sustainable Development Goals in the creation of good and quality jobs, affordable housing, clean energy, sustainable agriculture, quality education, etc. With this, let us hope that as impact capital on the continent increases, there will be a commensurate impact on the quality of life of Africans across the continent.

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