South Africa remains beset by socio-economic challenges ranging from inequality and unemployment, to poverty and a lack of access to education and healthcare.
At an event hosted by Nedbank Private Wealth and Moneyweb, a number of investment professionals sat round the table to discuss the state of impact investing in the country and how investors can contribute to solutions by investing in companies or projects that deliver both financial returns and social and environmental impact.
According to Noxolo Hlongwane, head of Philanthropy for Nedbank Private Wealth, while the concept of impact investing is still relatively new to SA investors, the sector is gaining a lot of attention and many high-net-worth individuals are recognising the opportunities it presents to do good while still earning a decent return.
“While there are certainly fewer financial resources available than there is need in our country, South Africans recognise the urgent need to address the social issues and challenges that face us,” Hlongwane said, “and Nedbank Private Wealth has noticed a growing interest in the impact investment space, especially within philanthropy and development circles, with a gradual shift towards favouring these types of opportunities.”
Janade du Plessis, founder and CEO of Abrazo Capital agreed, and highlighted the appeal that impact investing offers by merging two mindsets, namely growing capital for investors while at the same time delivering social benefits to strategic beneficiaries.
This dual benefit means that, unlike traditional investing where investors use negative screening to identify investments they prefer to avoid, impact investors actually proactively look for positive investment opportunities in areas like healthcare and education infrastructure, explained Anthea Gardner, Cartesian Capital managing partner. South Africa currently offers many such opportunities.”
Despite this, however, the participants in the discussion agreed that uptake of impact investment in South Africa has been somewhat slow.
Du Plessis attributes this reticence amongst private investors to concerns about the real potential for success of businesses that operate in social and environmental development sectors. “The operational requirements to run a successful social enterprise are often a lot more involved [and complex than other businesses],” Du Plessis pointed out. This means that viable exit strategies need to be in place in order to make these opportunities attractive to investors.
He also pointed to the lingering misperception that impact investment delivers low returns as another potential reason why investors seem hesitant to dive into this important sector. Very few investments are delivering the types of returns that investors became accustomed to in previous years. “Some of the top impact investments in the US are [currently] returning around 9%,” he explained, which puts them well on par with many traditional private equity funds.
Gardner concurred with Du Plessis and pointed out that, in addition to their ability to deliver these competitive financial returns, investors need to become more aware of the other, non-financial returns their impact investments also deliver.
“Impact investing is a proven, sustainable means of bringing about transformation in South Africa,” she explained, “and when you invest in this way, you are in fact creating a stronger investment market in the long term by contributing to supplier development, job creation, and infrastructure growth.”
Another aspect on which all the participants agreed was that waiting for government to develop policies that are effective in bringing together public sector programmes and private sector impact investors is not a viable approach.
South Africa can’t afford to wait for government to sort out the gaps between policy and what private capital wants to achieve in society, said Du Plessis. “We have to [focus] now on where we can use private capital in the most efficient way to return capital to investors, while at the same time [delivering a social impact].”
Susan de Witt, Bertha Centre Innovative Finance Programme coordinator, supported this sentiment, but also pointed out that some impact investment-friendly policies have already been set out. “In 2011 changes to Regulation 28 of the Pension Fund Act increased the proportion of a pension fund’s portfolio that could be invested in alternative asset classes to 10%,” she explained, a good example “of how policy can be used to encourage more investment towards social outcomes”.
“We have a huge amount of savings sitting in pension funds, banks, and insurance companies,” she continued. This creates the opportunity to leverage massive economies of scale to drive social transformation, rather than trying to do so one impact investor at a time.
David Harrison, CEO of DG Murray Trust, emphasised that in order to attract more impact investors, clarity is required around where the need for positive impacts is most needed. He added that there needs to be a clear understanding of what impacts are really good for all South Africans, so that investors can see the positive transformation that their investment delivers. This is where discernment is vital, as there are opportunities being touted as impact investments, that are, in fact, primarily focused on financial returns.
De Witt agreed that this is where investment into enterprise development is key. There are currently great opportunities in terms of making low-cost debt available to SMEs, she said. One of the best ways that any impact investor can deliver positive future outcomes for SA is by investing in early-stage businesses.
To this end, Harrison urged prospective impact investors to have a long-term view and consider, especially, how they can invest today to help to create the type of business environment that will contribute to economic growth and productivity in South Africa 20 years from now.