Developing Africa Through Effective, Socially Responsible Investing

Issam speaking on Impact Investing at the Africa CEO Round-table & Conference on CSR in Calabar, Nigeria. June 2014

The SME space is seeing tremendous growth in Africa, with easier access to funds from financial institutions and government policies encouraging sector growth.

However there still exists a ‘missing middle’, which finds it hard to access funds due to the category of funding they belong to; people that require between $50,000 and one-two million dollars. A new strategy of investing; impact investing, which started in 2008 after the global financial crisis, has been addressing the needs of this ‘missing middle’.

Impact investing is enjoying rapid growth in the US, with a 2009 report from research firm the Monitor Group estimating an industry growth of $50 billion to $500 billion in assets within the next decade. Now Africa is joining the global trend and trailblazers like Issam Chleuh are helping Africa understand and enjoy the benefits of Impact Investing.

Passionate about Africa’s development, Issam founded the Africa Impact Group in 2012 and has been working towards helping Africa benefit from socially responsible investing through the activities of his organization.

In a chat with Ventures Africa, Issam spoke about the activities of Africa Impact Group and how it is using impact investing to enrich lives.

 

VA: Can you introduce yourself?

My name is Issam Chleuh. I’m the founder and CEO of the Africa Impact group which is a pioneer organization that operates within the impact investing sector. We have four service lines; first advisory; second, data; third, incubation and fourth research.

 

VA: Impact investing is relatively new in Africa. Can you shed light on it?

Issam: Like in every business, it’s important to break down the supply and the demand. Impact investing is just any financial product or financial means to obtain an end, therefore on the supply side you have the investors and on the demand side, you have people that need money for their respective businesses.

To give you an overview of the capital markets, at the very bottom of the pyramid, you have micro-finance institutions who loan to very small businesses like the mother selling her fruits at the market. Those loans could go up to $50,000+. Then, we have the commercial banks and the bigger banks that serve clients above one or two million annual revenue generally or net income. However, for the clients, entrepreneurs, businesses, NGOs , foundations who need between $50,000 and $2 million dollars in funding, it is hard for them to get bank loans or investor money. Indeed, they cannot go to micro finance institutions because they will tell them they are too big. They cannot go to commercial banks, they will tell them they don’t have collateral or are too risky and that they prefer investing in small real estate projects, working with the government or with bigger institutions. Hence the name “missing middle” for this segment of the population.

 

Issam speaking on Impact Investing at the Africa CEO Round-table & Conference on CSR in Calabar, Nigeria. June 2014

Issam speaking on Impact Investing at the Africa CEO Round-table & Conference on CSR in Calabar, Nigeria. June 2014

The businesses and enterprises that fall in the “Missing Middle” don’t have service providers that give them access to finance to develop their businesses. This is what impact investing in Africa is primarily focused on. That being said, impact investing cover other areas of the capital markets, which I will discuss later.

The definition of “Impact investments are investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances.”

To my opinion, a good amount of SMEs in Africa will be able to solve their financing needs through impact investing. Also, impact investing financing will help increase the number of SMEs in Africa, and consequently decrease unemployment substantially.

In fact, in the developed world, SMEs make up more than 80 percent of the companies and hire around 80% of the workforce. These SMEs receive a lot of support because they are the ones who drive growth and employment. However, in Africa, the small and medium enterprises are not in big number and they only employ 30% or less of the workforce. For Africa to get developed, a big focus will have to be made in supporting and provide access to capital to those SMEs, addressing the missing middle.

 

VA: How far have you gone as a group to help the ‘missing middle?’

Issam: I started the Africa impact group in the summer of 2012. At that time, impact investing was slowly picking up but people were not really familiar with it. However today, there is a lot more knowledge and awareness about the concept of investing for an impact.

Over the past two years of operation, we – at the Africa Impact Group – have been able to develop a big network with a lot of stakeholders, from foundations that will give grants to impact investing funds that will invest equity to help young entrepreneurs start and grow their businesses. In fact, in the early stage of most ventures, losses will occur. To address the problem of loss capital in the early stages, the concept of “Venture Philanthropy” has been implemented by foundations and investors. Venture Philanthropy is the investment process of supporting start-ups and early stages companies that have a good business model but do not generate revenue yet. These early stage ventures are actually losing money and the investors supporting them knows these early capital will be lost; hence the term, “loss capital”. They believe it is fine to lose money; as long as in the future months or years, the start-up will start making money. Once the start-ups and SMEs will traverse this “valley of death” to use the technical term, impact investing funds and other financiers could get into the capital or give loans and start generating financial returns.

Over the years, we have worked on various projects. We are currently working with players like the World Bank, International Finance Corporation (IFC) on setting up bio-waste recycling facilities in West Africa. The idea is to launch – with various stakeholders – recycling plant that will collect waste and transform it into organic fertilizer. The waste will be used as an input to create fertilizer and the final products – organic fertilizers – will be sold to farmers through government subsidies or directly to the private sector. These types of companies are good ways to have a social impact, and environmental impact and a financial profit. We will be addressing youth unemployment, sanitation and pollutions issues and socio-economic development, all in one project.

 

VA: Can governments and big organizations be impact investors?

Issam: Yes.

 

VA: Have they been receptive when you discuss the concept of Impact Investing?

Issam: You have to agree that big organizations are impact investors because when you have a company that gives jobs to thousands of people who in turn get an income, this organization is clearly having some sort of impact.

Regarding governments, the fact that they manage the health, education, agriculture and environment agendas and respective budgets, to cite a few, make them impact investors. However, are they having the impact they are supposed to have? This is another question.

The definition of impact investing is very broad. It is really about investments that have social and environmental impact. Thus, identifying “impact investors” could be relative.

At the Africa Impact Group, we believe that the true impact investors are the ones which at the core of their businesses, there is this mission to solve socio-environmental issues and to track the impact very precisely along the way. Indeed, is the primary mission of a commercial bank, a telecom or an oil company to have a social impact? No.

Issam with Mike Finlay, Chief Executive at RiskBusiness International

Issam with Mike Finlay, Chief Executive at RiskBusiness International

Their mission is to make maximize profits for the stakeholders. Having a social impact may be important to them but this will come after their mandate which is making profit. On the other side, you take investments in industries like agribusiness, you have a direct social impact because you are helping farmers sell their crops at a premium and income from their fields instead of just barely making through life. Similarly, when you take investments in private hospitals or private schools, you are teaching the youths or curing diseases. Consequently, at the core of the respective missions is providing education or health services. Thus, there is a huge potential for impact that is measurable and achievable. Again, impact investing has a very broad definition but I believe the key sectors for impact investing in Africa are: technology, agriculture, housing, financial services, education, health, environment, energy and water.

 

VA: What is the place of returns on investment in impact investing?

Issam: The spectrum of returns for impact investments is very broad. You could have an investor that will expect more money than traditional banks or traditional investors and will expect 20-30% returns on their investments. I believe it is possible to structure high impact investments, generate these returns and still have a social and environmental impact.

On the other hand, you could have investors – it could philanthropists like the Rockefeller Foundation or Lundin Foundation that would say: “We are into impact investors. We know you are a young entrepreneur, studying business, and have a great idea and business model. We will invest in your business even if you generate losses in the early stages”. These investors will not necessarily expect returns; they are going to be “okay” with loss because its grant money, its philanthropy. But that money will be given to you on the condition that after those losses are done, there will be profit that will come down the road. Then, investors expecting returns from day 1 – or at least no losses – would come in. Lastly, within those two spectrums, you will have people that will accept anywhere from zero – or even negative returns – to hundred percent return or more.

 

VA: Do you think that some organizations would rather not do impact investing since they are not sure of returns?

Issam: True. I mean, it’s a very innovative concept. We started after the financial crisis. Before 2008, if you wanted to make money, you would go into business. If you wanted to help socio-economic development, you go into international development, NGOs, philanthropy or volunteerism. Today, it has become a gray area and there is more and more synergy between both making a profit and making an impact.

Since it’s a new field, people have a tough time understanding it, but the pioneers who are entering the business are really the ones taking the lead and within the next few years to come, they are the ones who are going to show the way to the other people. I personally believe that there is a big business case and there is a lot of financial profit to be made through impact investing, in addition to the required impact.

 

VA: Would it be right to say the best way to measure the progress of impact investing is through social benefits and not necessarily financial returns?

Issam: Well, impact investing can be looked at from three angles. You have the financial profits, which require you to measure your profit like any business. You will have an accountant, you will use accounting standards like IFRS and you will account for income or losses. In addition to the financial profit, you track the social and environmental impact on society and or the environment.

Today, there is a globally standardized way to measure social and environmental impact. For instance, if I receive $1 million from investors to invest in a private school in Nigeria and my colleague, let’s say in India is receiving the same amount. At the end of the three year term, these investors are going to ask us “What was your financial profit?” This information will tell who has made the most profit. At the same time, for the social benefit, these investors will ask who have had the bigger impact at educating the youth in Nigeria or in India. This will be easy to say because we are going to follow the same accounting for social impact. Indeed, that’s exactly what’s interesting about impact investing, because with the new accounting standards everyone are following globally, you can compare both the financial return of different investment but also the social impact. This will be able to find out who the real impact investors and impact entrepreneurs are. These investors or entrepreneurs will be the leaders with the best practices and the business models and advices will set the standard of the industry.

 

VA: Is there a meeting point between micro finance and impact investing?

Issam: Yes. Microfinance is, with no doubt the father of impact investing. Microfinance is now an asset class and when you talk about impact investing, you first talk about microfinance. Then, you talk about investment technology, education, health, renewable energy, etc. Technology is a very big sector for impact investing, especially with investors backing up the youth who develop innovative technology to address social issues by creating mobiles applications or using ICT in general.

 

VA: What is the difference between impact investing and crowd funding?

Issam: Crowd funding is a way to raise money. Crowd funding does not necessarily mean that that project will go to a social or environmental impact project. The fund raised could be used for anything: open a gas station for example. Crowd funding is really an online way to fund raise whereby impact investing is investing to have a social and environmental impact.

 

VA: Based on the benefits so far, how would you rate the value of impact investing in Africa?

Issam: The value of impact investing in Africa has the most potential globally, more than any continent and this is for very obvious reasons. Africa is a continent that has the biggest social and environmental issues. In consequence, there are a lot of opportunities for businesses and entrepreneurs to create SMEs or businesses that will try to address societal issues.

At the beginning, it is going to be hard for them to get money and raise funds, because the traditional investors like banks and microfinance will not finance that. But, it is crucial for these entrepreneurs to believe in their ideas and business models. Their business models should solve social or environmental issues, be innovative and profitable. Once the idea is found, the goal is test the idea on a small. If you can show that your business model can, on a small scale (could be in one city or one area in Lagos or any other city in Africa), work, then investors will be willing to invest to make it grow and assist the entrepreneur in scaling it up in a country or a region.

In summary, when you want to be involved in impact investing, especially the youth, don’t think about doing something big in the early stage. Instead, think about doing something that has a very good business model and can be tested on a small scale. If it works, you will try to find partners to expand and scale it up.

 

VA: With the commitment of the Africa Impact Group to impact investment, where do you see impact investing in the next five years in Africa?

Issam: Today, we have microfinance institutions that address people with less than $50,000 needs and have banks. I think the future of impact investing is having institutions that will address the ‘missing middle’ of people with more than $50,000 to less than $2 million in needs. I am not sure if this is going to be actual impact investing banks or it is going to be windows within commercial or microfinance banks that focus on impact investing, or just like private equity, launch more impact investing funds.

 

VA: I would say, with what impact investing is doing in Africa, by addressing this ‘missing middle’, you are already helping to address the issue of financial inclusion.

Issam: Yes, totally.