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Asset managers poised for Africa’s “Great Doubling”

Nimrod Gerber Vital CapitalThe next decade could see the emergence of the ‘Blackstones’ and ‘BlackRocks’ of Africa due to the tremendous demographic change taking place there, says Nimrod Gerber, managing partner at Vital Capital. But there should also be greater scrutiny of impact investing. 

By 2050, one in four people in the world will live in Africa. The continent is set for “the great doubling” of its population to 2.5 billion people in 2050 from 1.3 billion in 2020, marking the most significant demographic transition in history. The working-age population of sub-Saharan Africa alone is projected to double to become the largest in the world, offering unprecedented opportunity for economic growth but also the potential for major economic instability and risk for the nations that are not ready to reap the benefits.

For the last few weeks, conversations have been dominated by climate change – and rightly so, but that is only one of the two great issues of our time that will determine what world our children and grandchildren will live in. The one that has not received anywhere near the level of attention it needs is Africa.

Climate and Africa: The stick and the carrot

There's one significant difference between the two issues: In the climate context, the main question is ‘What can we do today so tomorrow is not catastrophic?’ We know we have to seriously adjust our production and consumption habits. Our global transition to a greener and more climate-resilient economy will be expensive and disruptive, but inertia or lackluster approaches will be much more so.

Postponing immediate gratification in favor of future returns is not something we always excel at, although it often pays off. Studies have shown that children who managed to delay instant gratification in the famous marshmallow test turn out to be more successful adults than the children who choose instant gratification. But ours – the adult version of the test – is much harder. We have to give up our marshmallows – whether that means sacrificing air travel or changing our diet – for other children, some of whom have not yet been born. It’s not just a matter of avoiding something pleasant now to gain something pleasant in the future – we must act now to prevent future negative outcomes. Trying to motivate action with a threat is rarely effective.

In the African context, however, the discourse can and should be completely different as it involves motivating primarily with a carrot rather than a stick, and there is no marshmallow to turn down – with Africa’s current trajectory of growth, investing in the continent promises returns both in the immediate future and well beyond.

An obligation and an opportunity

Over a billion people in Africa are becoming, in an accelerated process, consumers of basic goods and services such as healthcare, clean drinking water, food, housing and in time, more advanced services. The continent has the world’s youngest population and a rapidly rising middle class, which has tripled over the last 30 years to 313 million people, making up over 34% of the continent’s population, according to a report from the African Development Bank (AfDB). So while there may be great risk, there is even greater opportunity.

The opportunities to sustain Africa’s future populations, and enable them to thrive, rest heavily on the development of the continent’s critical infrastructure; to meet the basic needs of these communities; and serve as a platform for transition towards modern technology, connectivity, health and wealth. The AfDB estimates that the continent’s infrastructure financing needs will be as much as $170 billion a year by 2025, with a gap of around $100 billion per year – a gap that will only widen as the population burgeons.

Africa’s population growth permeates every part of its countries’ physical, economic and societal infrastructure. What will those millions do when they are no longer able to sustain themselves through agriculture, when they lose access to water resources and the ability to make a living? Many will emigrate. And a quarter of the world's population is a mass that we cannot, and must not, try to stop. No wall or maritime patrol will stop people driven to the edge of desperation who are trying to save their children. In fact, Africa’s demographic growth alone, if not met with suitable infrastructure, could lead to similar outcomes even if we manage to avoid extreme climate scenarios.

Several noteworthy Africa-focused development finance initiatives are underway but the pace of progress needs to be stepped up. African multilaterals and banks like the AfDB and Afreximbank are focused on this mission. In the US, the Development Finance Corporation (DFC) has invested around $8 billion – roughly a quarter of its total portfolio – across over 300 projects in Africa.

Meanwhile, under China’s Belt and Road Initiative (BRI), Chinese banks and companies seek to fund infrastructure projects around the world, while advancing Beijing’s geopolitical interests. In such initiatives, all stakeholders must be wary of debt dependence, which could lead to long-term damage. Even good intentions are sometimes not enough, as explained in the book ‘Aid Is Dead’ by Zambian economist Dr. Dambissa Moyo. She attributed Africa’s poverty partly to aid from governments of developed countries that had made leaders and populations dependent, in some cases to the extent of halting their own agricultural production, while spurring corruption and unemployment. The EU’s Global Gateway strategy, an international investment plan for transport and infrastructure, counters the BRI “to create links and not dependencies”.

But governments and public institutions cannot bridge Africa’s infrastructure gap alone. Water and wastewater, food production and agro-processing, healthcare services and other sustainable infrastructures can all be led by the private sector, some through public-private partnerships (PPPs) and others as pure private operations. Recent IMF research shows that the private sector could, by the end of the decade, bring additional annual financing equivalent to 3% of sub-Saharan Africa’s GDP for physical and social infrastructure. This amounts to $50 billion per year.

The levels of investment and innovation brought by the private sector will be key to improving accessibility and quality of services with a direct effect on economic productivity and job creation. This will in turn create transformative impact at scale and help to unlock the continent’s full potential.

A win-win or a corporate fig leaf?

There may be significant synergies in which everyone can win. Adequate private, institutional and national investment can both reduce risk and generate profits. This insight is now led by impact investors. Some fund managers investing in Africa and the developing world have proven clearly that meaningful positive social outcome can be created in improving the lives of tens of millions of people while generating significant returns to the investor. Funds like Leapfrog, DPI, Helios Fairfax Partners and Vital Capital are not philanthropic – they have promised, and delivered, return on investment alongside a significant social impact.

In the past year some of these funds have jumped to the next level and moved into the ‘Big Boy’s League’ in terms of the capital they manage with over $1 billion in assets under management. It is very possible that in the next decade we will see the emergence of the ‘Blackstones’ and ‘BlackRocks’ of Africa, hopefully adjusted to local realities and needs.

The issue of impact raises legitimate concerns that need to be addressed: is it a corporate fig leaf?

The good news is that the ones who are most concerned about these issues are those who are leading the impact investment industry. The latest Global Impact Investing Network (GIIN) survey found that 60% of impact investors are concerned about ‘impact washing’.  Why are they worried? Because in order to measure and monitor impact, you have to invest a lot of thought, work, time and money. You have to learn and become experts in assessment and analysis, practice clear standards and full transparency for regular audits and verification. 

What bothers those who do all of this seriously and professionally are the ones who hitch a ride on the concept. The investors that wave the ‘impact flag’’ but don't actually commit to standards, don't use comprehensive impact management and measurement frameworks, and don’t open for audit and checks by external parties. These are the investors whose ‘impact’ is found mainly in presentations and websites but in reality, they maintain total freedom to decide when to apply it and when not to. The term ‘impact’ has unfortunately become a marketing tool. One thing is clear: if this concept is too broad and not clearly defined, it will become meaningless. And those who stand to lose the most will be those who have taken on commitments, and have dedicated their mission and resources to it.

A major shift is underway

It is encouraging to observe how the impact industry is evolving and maturing rapidly, fueled by shifting consumer values and technological innovation. Clear and uniform standards such as the IFC-led Operating Principles for Impact Management have been developed, while measurement and monitoring tools such as the Impact Management Project (IMP) have taken root.

Disclosure documents, verification practices by third parties and evolving regulation are some other tools embraced by those who want to show seriousness. Most recently, the IFRS Foundation announced the creation of the International Sustainability Standards Board, a new standard-setting board to deliver a global baseline of sustainability-focused disclosure standards. In the vision of Sir Ronald Cohen, the ‘Father of Impact Investing,’ ESG and impact reports will eventually become a corporate obligation, just like financial statements.

Until that happens, you can use a relatively simple test: the next time you meet an ‘impact’ investor, ask them what standard they committed to, what they're signed on, and whether there is periodical external audit of their impact and ESG reports. This will give you a relatively immediate picture of how seriously and professionally committed they are, helping to separate the talkers from the doers and achievers. If beyond this, they also have independent measurement and monitoring tools and are an integral part of leading the impact industry – even better.

A true impact investor should be proud of the formal commitments and standards he has subscribed to. A true impact investor should also not be ashamed of earning and generating good investment returns. On the contrary, the more handsome the returns, the greater the attraction for investors, and the greater the potential to achieve impact at scale in a self-nourishing circle.

 

*Nimrod Gerber is a managing partner at Vital Capital.

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