Addressing impact investment challenges in Africa

Africa's fund managers possess significant potential to address global social and environmental challenges, yet they often face obstacles in securing crucial funding due to the oversight of their proximity, lived experiences, networks, and leadership. Bernard Chidzero, Senior Advisor to Bridgespan, recently discussed the challenges and possible solutions for fund managers in Africa in an interview with CNBC Africa. The study initiated by Bridgespan Group aimed to identify constraints beyond traditional risks like foreign currency and political risks that hinder the flow of capital to African fund managers. One major finding was the disproportionately low funding that reaches Africa-based or African-led asset managers. This is attributed to the use of criteria typically favored by investors from the global north, such as the need for a track record in private equity, an experienced team, and fund size, which often excludes smaller funds from consideration. These challenges restrict the growth of African fund managers who possess vital market knowledge and proximity essential for identifying opportunities and risks effectively. Another issue highlighted in the study is the impact of offshore due diligence and compliance processes on African fund managers proposing attractive opportunities. European and North American investors often overlook opportunities in Africa due to preconceived notions, necessitating education to showcase the dual benefits of financial returns and social/environmental impact that investments in Africa can offer. Limited exit options in African markets are a concern for many LPs, emphasizing the need for patient capital willing to explore alternative exit strategies beyond the stock markets. The African Continental Free Trade Agreement (AFCFTA) presents a significant opportunity for the region by creating a larger and integrated market of 1.2 billion people. Investors need to shift their perspective from individual country markets to the collective growth potential of the continent through AFCFTA. Surprisingly, the label of 'impact' attached to projects is viewed as a deterrent by some, as it is often associated with compromising financial returns. This misconception hinders the adoption of impact investing practices by African fund managers who fear sub-commercial returns. Educating stakeholders on the compatibility of financial returns and impact is crucial to dispel these myths. The recent Africa Impact Summit showcased the ongoing conversation around the concept of impact investing, urging a deeper understanding and appreciation for its potential. This debate between financial returns and impact will likely continue as more funds flow into the region, driving economic growth and development. The journey to unlock the full potential of African fund managers is ongoing and requires a collective effort to address these challenges and misconceptions.