As part of our market research to identify top impact fund managers globally, we studied key trends across three categories: impact investment activity, investment ecosystem readiness and entrepreneurial activity. We are now highlighting trends by region.
This blog will showcase themes across West Africa, specifically the similarities and differences between the two countries covered in our study: Ghana and Nigeria. If you are interested in other countries covered in our research, you can read more about East Africa and India as well. As a reminder, keep an eye out for our full report to be released shortly.
- DFIs alone cannot meet the needs of social entrepreneurs: In West Africa, a noticeable trend was that DFIs typically focus on large deal sizes and make investments mostly in infrastructure, leaving a large gap in early stage funding. DFI funding priorities usually focus on older and larger organizations that can absorb larger amounts of capital, with typical investments in the range of $50 million to $60 million. Additionally, some ecosystem professionals in Nigeria point to the higher transaction costs of early-stage investments compared to later-stage investments as one of the main reasons for a lack of early-stage investment. According to a recent report, the average impact investment deal size in Nigeria (non-DFI) is $1 million, which is far above the amounts that seed-stage entrepreneurs are looking to raise. Entrepreneurs in Ghana also find it difficult to attract money outside of foundation and donor support, which still represent almost half of the current financial support for social enterprises in Ghana. Capria’s applicant data supports this research with most applicants from West Africa targeting DFIs and foundations for their fundraising efforts. The downside to predominantly DFI funding is that it often leads to issues in how ventures are valued and can discourages follow-on capital from mainstream investors, according to both NGO professionals and investors at DFIs.
- Increasing interest in the region is leading to a growing support ecosystem: Nigeria is “developing a large consumer class who by 2030 are projected to number 160 million, and triple their discretionary spending to almost $1.4 trillion.” This represents a huge opportunity for investors all over the world. An indicator of increasing interest in the country is organizations such as the CcHub, a co-working space that provides mentoring and seed-funding connections. The space is a promising sign as the CcHub’s founders chose a central location for the hub close to the University of Lagos, a design school and multiple tech startups. Most entrepreneurs we spoke with believe that the opening of Impact HUB Accra in 2012 has strengthened the support system for entrepreneurs in Ghana.
- There are huge opportunities in agriculture: Investors and consultants in Nigeria see huge potential in the agricultural sector as did almost half of fund managers from Ghana who applied to Capria. Some are calling agriculture “the new oil” in Nigeria. An example of a successful collaboration between DFIs and private investors is Sahel Capital’s investment in AACE Foods, alongside technical assistance support from USAID and DFID. Several DFI professionals in Ghana felt investors should focus on cooperatives such as Kuapa Kokoo, which has 80,000 members. Given that cocoa represents 20% of Ghana’s total merchandised exports, this appears to be a worthwhile consideration. In Nigeria, on the other hand, a scheme to invite and provide infrastructure for white Zimbabwean farmers displaced by Mugabe’s policies has not been as successful as imagined. One farmer cites a seemingly endless list of issues: “no mains electricity, no piped water, no land-line, no trained labour force.”
- Public policy initiatives are encouraging entrepreneurship: DFI and NGO professionals that we spoke to state that the Ghanaian government is doing a better job than other African nations working with external DFIs and investors. As a result, Ghana has become a more favorable environment to test products, services and programs in Sub-Saharan Africa. The UNDP places Ghana as one of the top performers in achievement of a wide variety of Millennium Development Goals, which can be credited in part to the coordination of government programs. However, government treasury bonds in Ghana pay around 24% per annum, which our interviewees cited as a challenge for attracting investors. Many local investors in Ghana are unwilling to direct their money into new enterprises that are riskier and do not offer consistent returns. Many investors in Nigeria agreed. They also pointed out that government funds for entrepreneurs sometimes create a disincentive for mainstream investors because they cannot beat the terms the government is providing.
- Infrastructure gaps hamper entrepreneurial activity: While the region has promising public policy initiatives, the reality for entrepreneurs in West Africa is slightly different. Many investors we spoke to in Nigeria believe that there is a serious lack of entrepreneurial education. For example, they believe that entrepreneurs skepticism about giving up equity and preference for debt instruments reflects their lack of business training. In Ghana, the majority of our sources believe that more practical challenges hamper Ghanaian entrepreneurs such as poor energy distribution and access to power. Frequent blackouts hurt small and medium sized businesses and hinder supply chains. According to the World Bank, 30% of the population in Ghana, or around 5 million people, are living in inaccessible areas without reliable power.
Overall, West Africa is one of the most promising regions for impact investing because of a large range of sectors ready for innovation, increasing global interest and a generation of entrepreneurs willing to take on challenges. Capria applications reflect this optimism about West Africa as well. Approximately 22% of Capria’s fund manager applicants are targeting Ghana for investment, and 13% are targeting Nigeria, though most are also targeting other countries in the region as well.
Stay tuned for more regional insights from our research and be sure to check out our other posts on global trends in impacting investing.