ImpactAlpha, July 27 – The landscape of private equity and private debt funds in Africa remains small compared to other parts of the world. But there is a growing number of new fund managers with innovative impact theses addressing complex challenges across the continent, including post-pandemic economic recovery.
Traditionally these funds have had to raise capital directly from international development finance institutions, or DFIs, and private investors. An emerging source of capital: fund-of-fund vehicles targeting African private equity.
A private equity fund of funds is an investment vehicle that invests in other private equity funds, rather than investing directly in companies. For investors, investing in a fund of funds allows them to diversify their private equity portfolios by indirectly investing in a large number of companies and geographies via a number of different funds. Investing in funds of funds is therefore a useful strategy to spread risk while gaining exposure to a broad number of countries and sectors.
There are a number of examples of funds of funds focusing on Africa. Allianz’s and KfW’s Africa Grow fund of funds launched in late 2019 with a target close of €170 million. Proparco and BPI France launched a third Africa-focused fund of funds vehicle with a target size of €100 million in 2020. The two previous funds channelled over €1.2 billion to 20 African private equity vehicles.
A third example is Oryx Impact, a fund manager that is currently raising a targeted €250 million fund of funds to invest in African impact funds driving job creation, supporting climate change mitigation, and advancing gender equality.
All three examples conduct impact measurement and have an impact thesis focused on deploying capital to increase local incomes and boost job creation. The funds address DFIs’ development objectives while mobilizing private capital to investment sectors and geographies many private investors would otherwise consider too risky to invest in directly.
Indeed, Africa Grow and the Proparco-BPI fund have leveraged both DFI and private capital to reach more African companies and countries than either investor could have reached by investing directly.
Investing in Africa
Oryx Impact has been analyzing the impact investment landscape for more than a year and identified between 150 and 200 private equity and private debt impact funds (managed by more than 100 fund managers) operating in Africa. These funds have raised $33 billion since 2002 and many are actively fundraising for new funds. While the average fund size is $220 million, 60% manage funds of $200 million or less.
Oryx Impact’s focus is investing in first-time fund managers, with a goal of helping them generate sustainable economic development and mobilize private capital to the African continent. Oryx believes that many of the continent’s smaller, emerging fund managers offer interesting investment opportunities that combine attractive financial returns with targeted social and environmental impacts. The firm recognizes, however, that it is not sufficient to invest money in these funds; it therefore also offers technical assistance to help with fundraising and impact measurement and management in order to build stronger ecosystems of African-based impact fund managers.
The overriding purpose of Oryx and other fund of funds is to catalyze private capital for Africa and move the needle in solving complex issues on the continent. For private investors concerned about the risk of investing directly in first-time fund managers or frontier markets, fund of funds may provide an ideal way to select and invest in them.
Kanini Mutooni is the managing director of the Draper Richards Kaplan Foundation. She is based in Nairobi.