Out of the gate, 2020 is being hailed as a comeback year for emerging-markets investing. In sub-Saharan Africa, the World Bank forecasts economic growth to pick up to 2.9% (from an estimated 2.5% in 2019.
But global investors watching indicators like oil and commodity exports may be missing the real story, according to local and regional impact investors.
“There are so many more investment opportunities in Africa than people will see from afar. If you only fly in and out, you won’t find them,” Goodwell Investments’ Wim van der Beek tells ImpactAlpha. “What we find most exciting are opportunities investors often misunderstand.”
For example? Financial inclusion, logistics and agriculture. Goodwell, with offices in Amsterdam, Nairobi and Cape Town, is raising a series of funds for its pan-African uMunthu impact initiative. Goodwell has recently invested in Nigeria’s MAX.NG, a motorcycle taxi hailing and finance startup, and South Africa’s Nomanini, which designed a digital payments platform for informal business owners.
Small and growing
Van der Beek is bullish on opportunities for financial inclusion on a continent where as many as 350 million adults are still unbanked. The explosion of mobile money across the continent has created infrastructure to support a raft of new services. In agriculture, unlocking the productive capacities of nearly millions of smallholder farmers, he says, could fuel a “bottom-up agricultural revolution.” Efficient logistics has a knock-on effect on every other sector, from healthcare delivery to education.
The different approaches in different sectors, “all add up to the same thing, which is improving small business infrastructure,” the key to inclusive economic growth, van der Beek explains.
Other local and regional investors agree small and growing businesses represent the biggest impact opportunities on the continent.
“This segment of the market is the bread and butter of the African economy,” Nigeria-based Aruwa Capital’s Adesuwa Okunbo Rhodes told ImpactAlpha. Investing in these businesses’ growth is impact investing, she argues. That’s not something outside investors readily see. The gender-focused impact investor is targeting West African individuals and family offices to raise its first fund in order to show what’s possible
“Fundraising from them was intentional. They understand the ecosystem and know the companies in our pipeline,” Rhodes says. “We can take that portfolio and track record to institutional investors.”
A handful of high profile, big-ticket deals last year put Africa back on the radar of global investors, and stirred concerns about an Africa “bubble.” Medical drone delivery company Zipline scored a whopping $190 million from TPG Growth’s Rise Fund, Temasek, Goldman Sachs and others. Andela, an African tech training and job placement venture, took in $100 million. Off-grid solar companies in Africa raised hundreds of millions of dollars.
Digital financial services companies have set new records in both revenues and valuations. LeapFrog’s Andrew Kuper told ImpactAlpha that JUMO’s $70 million capital raise, led by Goldman Sachs in December 2018, was the first sign of maturing digital lending, followed by Tala’s $110 million Series D round last August. Digital remittance company WorldRemit raised $175 million in a Series D funding round. LeapFrog is an investor in both JUMO and WorldRemit.
LeapFrog raised $700 million for its third fund last year on the strength of its tally of exits and successes in under-capitalized segments of the African market. Kuper says access to basic services for tens of millions of people across the continent represents a major positive shift. “Impact investors have the rare opportunity to expand and accelerate that destiny,” says Kuper.
Kuper said LeapFrog “sees excellent deal flow continuing in consumer-led healthcare and financial services in 2020. He also expects to see more “buy-and-build deals,” such as Goodlife Pharmacy in Kenya.
Goodlife, a local chain of pharmacies, grew from six to 19 stores under its first private equity owner, then to 60 stores under its second owner. Many of its pharmacies have expanded into broader health hubs that provide nutrition advice and telemedicine consultations with doctors. “This is the future of healthcare, in resource-constrained environments, not just for Africa but for emerging and developed markets too,” Kuper said.
Proceed with caution
Fintech is one sector with both enormous impact potential and where impact investors should proceed with caution. In Kenya, for example, a proliferation of alternative credit-scoring services are providing first-time borrowers with near-instant access to mobile credit – at the same time usage of gambling apps is soaring among individuals who have secured quick and easy digital credit.
“Impact investors need to be careful” to scrutinize the fintechs’ underwriting models, van der Beek says. Goodwell and other investors last year collaborated via the Responsible Finance Forum on Guidelines for Responsible Investing in Digital Financial Services. “If services aren’t being offered in a responsible way, they can actually perpetuate financial exclusion.”
Pressure to deploy ever-larger volumes of capital, coupled with questionable due diligence practices and minimal to no local presence or expertise create the conditions for a correction or market shakeout.
“There’s a lot of herd behavior throwing money at a few initiatives,” cautions van der Beek. “It’s a scenario we’ve seen in emerging markets investing before. There will be some train smashes in the next few years.”