RENEW Strategies

Impact Investing: Where are They Now?

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Matthew Davis, CFA
| September 12, 2012

A New Strategy for Africa and other Emerging Economies (Part 7): Where are they now?

In March of this year, we hosted a group of “impact angel” investors in Ethiopia. Our goal was to show them that Africa is changing, that Africa’s private sector is growing, and that in order for the U.S. to keep pace with the influence of countries like China, we need to adapt.

Thankfully, impact investing is on the rise in many Western nations, giving people a reason to pursue social motives using profit making solutions. We believe (as do many development and private sector professionals) that local businesses in Africa, or “SMEs”, are great impact investment opportunities because they have the potential to provide good financial returns, and create jobs, pay taxes and support local economic growth. Philosophically, we believe investing in Africa’s private sector is more effective than giving, and by doing so, we will address the challenges that charity and aid are trying to solve, but in sustainable ways. However, there are very few investment vehicles available to the larger Western population that provides the satisfaction that comes from giving to a charity. So most people continue to give. Also, our government financed development programs (e.g. aid) cannot make equity investments into local businesses. So most aid money is used to support training. As a result, most Westerners don’t know about Africa’s growing private sector, nor do they have a way to engage it. The Westerners that do have the fortune of traveling to Africa on mission trips may not realize that the Chinese, Indians, Russians and Brazilians they see at the airports are actually happy we continue to give: it’s less competition for them (Read CNN: Is the West losing out to China in Africa?). So, at RENEW we are changing that story.

All of this falls under what we call A New Strategy for Africa and other Emerging Economies. Our Government is working on this as well. They are asking executives from large multinational companies to go on trips with Secretary Clinton to see what’s happening in Africa (Read: Clinton Promotes U.S. Investment in Africa). We’re taking a similar, but slightly different approach to encourage Western investing in Africa. Let’s continue our case study to see what our impact angels have been up to since their March trip to Ethiopia.

First, a Quick Recap of the March ‘Econ-Tourism’ Trip to Ethiopia
Leading up to the trip: RENEW spent seven weeks with a small group of U.S. investors, preparing them for an econ-tourism trip to Ethiopia designed to focus on looking for investment opportunities in Africa. We hosted dinners with the group; ran conference calls; provided reports containing information on specific business opportunities, Ethiopia’s economy, high-growth sectors, and investment laws; and provided guidelines to ensure the group was prepared to have business conversations in Ethiopia’s cultural context. Our goal was to get them ready to look for opportunities in Ethiopia.

The trip: Then we got on a plane and brought them to Ethiopia. We spent a week bustling around Addis, meeting with Government leaders, dining with the U.S. Ambassador, conducting site-visits to local businesses, having countless formal and informal meetings with entrepreneurs, and experiencing the culture, tastes and smells of Ethiopia. See pictures here (March Econ-tourism Trip to Ethiopia).

What we observed: RENEW made some observations of the investor group during the trip. Specifically, the investors were surprised by Ethiopia’s growth; they were excited that their skills and experiences applied; they were eager to understand the business environment; they were respectful and curious of the culture; they were first drawn to the entrepreneur, and then their business; they were focused on building relationships; most understood the need to ‘go slow to go fast’; and they enjoyed connecting with each other.

Now Where are They?
Five months later we have exciting news. Of the five investors that went on the March trip, three are working with us on an investment in a local business. This is not microfinance – this is expansion capital in a local mid-size company. The investment provides an attractive IRR, and will create over 20 jobs while providing a critical service to the people of Ethiopia. Goal accomplished? Yes, and it gets better. One of the investors that went on the trip was playing golf with some friends a few months ago, and brought up his trip to Ethiopia and the pending new venture. Their conversations led to an idea. This idea materialized into a plan for a larger investment in Ethiopia, which has now led to plans for another trip to Ethiopia in September.

Other investors from the March trip are organizing their friends, and having us come and share our approach for impact investing in Africa.

The Take Away
We believe this is the beginning of a shift in how the West engages Africa and other developing countries. Charity and aid will not stop – they shouldn’t. However, a tipping point will occur when impact investing will become an attractive platform for churches, NGOs, HNWIs, foundations, family offices, and others to create good financial returns and sustainable impact, with the added benefit of getting the U.S. in the game of growing with Africa’s expanding private sector. Impact investing is more than ‘doing well by doing good’, it is a gateway for the West to do what we do best – business – in developing countries. And, as more impact investments are made, they will lead to larger business ventures as we have seen from the example above.

Truth be told, I believe Africa is too risky not to invest in. If the West continues to implement 20th century tactics in the continent we risk losing our influence in the last investment frontier. Our team is at the front-line of Africa’s growth, and from what we are seeing, Western nations need to catch up.

So, to summarize: Impact investing is a gateway for Westerners to use investing as a form of creating social and financial returns in Africa. SMEs (or local businesses) are excellent impact investments; we meet with them every day and find the best to introduce to investors. Angel investing, or making direct investments into a business (vs. a fund) creates a way for churches, angel groups, and family offices, to choose how they are making an impact, all while helping the U.S. retain our role as the leader of free markets. And, if you didn’t make it on Secretary Clinton’s pan-Africa trip, feel free to join us. The opportunities are out there. We help you find them.

If you would like to join RENEW on an upcoming investment trip or if you just have questions about what we do, we encourage you to contact us at renew@renewstrategies.com or follow us on Twitter @RENEWLLC.