Africa’s great economic potential is beginning to intrigue more global investors. When its population reaches an expected 1.5 billion by 2030, half of that population will be under 25 and digitally native. The continent is also rich in untapped natural resources, home to a burgeoning digital commerce sector, and a frontier of sustainable agriculture and renewable energy. Africa’s economies are integrating, helped by the promise of the Africa Continental Trade Area Agreement, creating large consumer markets for goods and services across multiple sectors. New policies to expand women’s rights are also poised to create even more economic potential on the continent.
Financial investment in Africa can create great social impact as well. Africa is a region where the capital gap for achieving the United Nations Sustainable Development Goals (SDGs) targets by 2030 amounts to $200 billion per year. Take climate action, for example. Africa is “the most vulnerable continent” on the planet under all scenarios in which global temperatures rise more than 1.5° C above pre-industrial levels. Climate-related disasters including droughts, tropical cyclones, and floods are affecting Africa all out of proportion to its small share of global greenhouse gas emissions. Addressing climate change in Africa offers investors an enormous opportunity to impact the most critical issue the world is facing.
Multiple of Impact (MOI): A breakthrough metric from Africa
However, institutional investors need to know that the opportunity for impact is not just a notional concept. Using different approaches to impact, measurement, and management (IMM), they expect to be able to measure the difference they’re making in the world. And Africa is at the forefront of advances that have given IMM the depth and rigor of financial metrics.
Bridgespan’s recent work with AfricInvest, a leading private equity firm on the continent, showcases one such breakthrough approach to IMM. To clarify impact relative to financial investment on the continent, Bridgespan and AfricInvest developed a rigorous metric—multiple of impact (MOI)—that captures the monetary value of environmental and social effects in a single dollar figure. As such, MOI represents an advance over other approaches to IMM, such as the Impact Multiple of Money.
In any given investment, there are paths to quantifying material impact in dollar terms that MOI can be used to measure. For example, prior to its investment in Turaco (a financial services company that provides access to health, life, and auto insurance for over a million people in Kenya, Uganda, and Nigeria), AfricInvest determined that the company had an MOI of 82x—meaning that for every $1 invested, there was an $82 social return on investment. This return, calculated mainly on the impact of Turaco’s health insurance business, reflects the value of guaranteeing that insured individuals in Africa can seek necessary medical care without the risk of catastrophic financial shocks.
Overall, through using the MOI approach, we have found that relatively small private equity investments in Africa can have an outsized impact on employment, disposable incomes, health, education, gender equity, and climate resilience and adaptation. This is especially the case where such investments affect the lower end of the income pyramid and support the growth and competitiveness of small and medium-sized enterprises in areas the public sector cannot fund.
The MOI tool, meanwhile, is an exciting development for fund managers in Africa that have struggled to raise capital for impact investing due to the persisting perceptions of Africa’s high risk and low performance. While challenges related to lack of data, an uncertain regulatory environment, and firm capacity are still legitimate constraints on the continent, we have learned that, with MOI, it is possible to identify and rigorously assess investment opportunities that promise both very high impact and financial returns that are not concessionary.
A call to action
In a recent survey of impact investors, 56 percent reported plans to increase impact investments in sub-Saharan Africa over the next five years. North American and European institutional investors should act on such intentions while the current window of opportunity for impact—with asset prices low, there is generally more impact per dollar invested in Africa than in most other regions of the world—remains open.
Institutional impact investors, in fact, hold the key to reducing that $200 billion capital gap in Africa. One effective approach involves establishing funds explicitly designed for impact investments in the region (e.g., Mastercard’s Africa Growth Fund), directing capital toward initiatives that address critical needs like climate resilience and gender equity. Alternatively, institutional investors can emphasize Africa in funds (e.g., The Catalyst Fund) dedicated to developing markets or specifically targeting small- and medium-sized enterprises. They can also invest in a wide array of funds on the continent that have already done the work of sifting through the varied risks and opportunities across Africa’s diverse countries.
Moreover, for North American and European institutional investors seeking to safeguard their portfolios, investments in Africa offer an advantage: portfolio diversification. African companies have been leapfrogging into the digital and service economies, creating attractive investment opportunities that Global North investors may have overlooked.
There are myriad growth opportunities. Only half the population of sub-Saharan Africa has access to electricity, according to the World Bank, for example, and the region is well aware of its vulnerability to climate change. The opportunity for investors is clear: the International Renewable Energy Agency has estimated that the continent’s renewable energy capacity could reach 310 GW by 2030. According to the CFA Institute, “[T]his would not only satisfy local power needs but also position Africa as a global leader in clean energy production, setting it up for investments in related infrastructure, climate-smart agriculture, and sustainable natural resources management.” And MOI can help investors understand how they can work with portfolio companies to raise their impact.
For the reasons we have outlined here, Africa is a smart bet for impact investors. We have a companion guide to help investors find investment funds and opportunities in Africa and learn effective practices in the region. Global North investors who have been on the sidelines so far would be well-advised to get in the game.
Stephanie Kater is a partner at The Bridgespan Group, based in Washington, DC. Naomi Senbet is a senior manager at Bridgespan, also in Washington. Elias Rosenfeld is a consultant and Nomkhosi Nkambule a senior associate consultant based in Washington and Johannesburg, respectively. Briana Guerrero is an associate consultant at Bridgespan based in New York.