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African-based investment fund managers face an uphill battle to secure the capital they need to invest in home-grown enterprises. The task is especially difficult for those fund managers who prioritise social impact as a key part of their investment strategies.

“It’s hurdle, after hurdle, after hurdle, after hurdle,” says Polo Leteka, founder and chairman of IDF Capital, a Johannesburg-based investment and advisory firm. “And that’s what makes it prohibitive for a lot of fund managers, or potential fund managers, to get into this (impact investing) space.”

Leteka’s experience is painfully familiar to other Africa-based and -led fund managers (stakeholders commonly known in the industry as general partners or GPs). GPs’ struggles are reflected in the annual $200 billion gap in SDG financing, and the fact that out of some $1.2 trillion in impact assets under management worldwide in 2022, fund managers in sub-Saharan Africa accounted for just 2%.

For their part, African fund managers are eager to help close the gap. They have the proximity, lived experience, networks and leadership to steer impact capital to promising local enterprises. What they need is more investors — both foreign and domestic — to back their efforts.

To bring their views to light, the Bridgespan Group interviewed 25 stakeholders, including African GPs like Leteka, private investors in limited partner (LP) roles, philanthropists, development finance institution professionals, field experts and other impact investing intermediaries. We shared their perspectives in “Closing the Capital Gap on Impact Investment in Africa,” a recent report that aims to highlight the obstacles GPs face, given the clear need for more development-focused funding on the continent. We’ll explore some of their key insights in this article.

The Obstacles Facing African Fund Managers

Our interviewees cited three obstacles that stand in the way of more money flowing to African GPs:

• The traditional “rules” of due diligence work against African fund managers receiving capital. Those criteria, designed to identify strong fund managers, include a track record of successful investments, an experienced and motivated team, and an attractively sized fund target.
• The impact label deters, rather than spurs, investor engagement with African investment funds. Impact investors on the continent often face the perception among traditional investors that they are do-gooders who are willing to sacrifice the performance of their funds.
• Even impact-first capital is not reaching the African investment funds that need it. This is patient, risk-tolerant capital that supports social enterprises that are otherwise shut out of the market, and it is largely being directed to other regions.

There’s no quick fix for these obstacles. But several types of investors, including philanthropists, family offices and high-net-worth individuals, have the decision-making flexibility to do more. We call them “first movers,” because their investments could catalyse investment from other funders. Asset managers and owners with longer investment horizons and more flexible mandates might also fit in this “first-mover” category.

These investors have an opportunity to help narrow the capital gap facing African funds if they are willing to try new investment approaches. The African fund managers we talked with proposed three such approaches: seeding African investment funds, building African funds’ track records and re-evaluating due diligence approaches. Let’s take a look at each of these in more detail.

Seeding African Funds

Seeding African funds is an emerging approach most prominently illustrated by the $200 million Africa Growth Fund, launched by the Mastercard Foundation with a consortium of partners in late 2022. The fund seeks to invest in African-owned and -led investment fund managers, particularly those focused on youth and women’s employment. It has developed a pipeline of 180 African funds, including early-stage, growth, debt and seed venture capital funds. In addition to providing capital, the MasterCard Foundation’s significant presence as an impact investor on the continent helps to reinforce the legitimacy of impact investment amongst prudent investors. The fund also offers business development services for fund managers and their respective portfolio companies.

Building African Funds’ Track Records

Larger, more established investors can help African fund managers to develop their track records in two ways: by enabling these funds to “warehouse” deals, and by giving them the ability to manage a portion of the larger fund’s investment pool.

Warehousing is an innovative practice some funds are testing, in which they invest in a handful of deals while still raising money for their fundraising goal. To take one example, the U.S.-based Lemelson Foundation is exploring ways to support the efforts of first-time fund managers in Africa to line up these deals, in one instance by offering a fund manager a low-interest loan during the fundraising period. The loan provides access to liquidity to cover administrative expenses as the fund works to attract more investors. “Warehousing gives GPs the ability to have tangible companies, to demonstrate their investment ‘thesis in motion,’” says Maggie Flanagan, a Lemelson Foundation program officer.

Barka Fund, an African investment holding company supporting and investing in climate-focused enterprises, is an example of an investor that’s leveraging the warehousing approach. It’s building its investment track record by managing a $3 million fund allocation on behalf of philanthropic investors, part of the Terrafund for AFR100. “We didn’t raise the funding. Our partner at the World Resources Institute did,” explains Rekia Foudel, Barka Fund’s founder and managing partner. “But this has allowed us to build our credibility and our track record, and be able to demonstrate to LPs that we can do this work.”

Re-evaluating Traditional Due Diligence

First-mover investors can also re-evaluate standard diligence criteria. For example, Oryx Impact, a fund-of-funds with a focus on women-led, emerging fund managers in Africa, has developed proxies for evaluating these fund managers’ track records that take their previous individual experience into account.

“Given that 70% of our pipeline is first-time and second-time fund managers, they do not have a realised track record,” says Eva Abel, head of investments at Oryx. “So, as LPs, we have to be creative about how we look at the track record. … If the team is new [or] the fund is a first-time fund, we’ll look at the previous track records of individual team members. … We want to see that there has been a lot of traction and upwards valuations with reputable and well-performing companies.”

Investors justifiably worry about the investment environment across the African continent, whether their concerns involve currency risks, fragmentation in the market or difficulty with deal exits. Yet African fund managers speak with confidence about the opportunities ahead. By rethinking their investment approaches, forward-thinking investors who aim to support these fund managers can increase needed capital flows through the promising approaches discussed above. But more investors will need to try these new approaches for them to make a difference.

Bernard Chidzero is a Senior Advisor at The Bridgespan Group, where Nkanyiso Hlongwa is a Partner and Serena Fu is a Senior Manager. The Bridgespan Group is a global nonprofit advisory firm that works with philanthropists, NGOs and intermediary organisations to create long-term social impact. 

Photo courtesy of Desola Lanre-Ologun.