Global Trends in Impact Investing: Countries in East Africa

As part of our market research to identify top impact fund managers globally, we studied key trends across three categories: impact investment activity, investment ecosystem readiness and entrepreneurial activity. We are now highlighting trends by region.

This article will showcase themes across two countries in East Africa: Rwanda and Kenya.

Keep an eye out for our full report to be released in the near future.

• Kenya is an emerging hub for investment across the region: Impact investment activities in the East Africa region have long centered in Kenya, where Nairobi is the central hub. This is where active impact investors such as Abraaj and Global Partnerships have local offices, and is the first point of reference for impact investors looking at the region. Primary sources note that the Kenyan ecosystem has a Pan-African focus and is particularly strong. Kenya-based investment groups, including a growing group of impact funds, are starting to expand operations into Rwanda and other East African countries. GES 2015 also took place in Nairobi, marking Kenya as the hub for both mainstream & impact investment. This was validated in our application process, where we saw more than a quarter of Capria applicants targeting Kenya for investment.
• Rwandan entrepreneurs need to look beyond its borders: Investors & ecosystem professionals say that Rwandan entrepreneurs face a significant barrier to scale because of its relatively small population. Furthermore, other contributing factors such as high input costs, a relatively weak culture of entrepreneurship compared to countries like Kenya and Nigeria, and government interference have traditionally created obstacles for businesses. This means that many entrepreneurs must plan seek to scale beyond Rwandan borders in countries like the DRC and Burundi. According to a recent GIIN report, this challenging ecosystem offers opportunities for investors who are able to carry this risk. This is supported by Capria’s application data, where all funds targeting Rwanda list either Burundi or Uganda as target geographies as well. The untapped opportunities in Rwanda’s neighboring countries mean that entrepreneurs who are able to scale their businesses will find returns from these regions. This will require investors taking a more active role in their investments in order to help them with resources beyond the capital investment.
• DFIs and NGOs are still the dominant investors: The size of DFIs’ portfolios and the amounts of capital disbursed make them a critical player in the impact investment space in East Africa. In Rwanda, for example, the business climate and strong governance track record have made it an attractive destination for impact investors. The country has consistently been cited by The World Bank, local entrepreneurs and investors as one of the easiest places to conduct business. In spite of this, only around 3% of all non-DFI impact capital disbursed in East Africa has been placed in Rwanda. Kenya, on the other hand, has the largest impact-oriented deal flow in the region, with approximately $3.6 billion of the nearly $9 billion in impact capital disbursed in East Africa going to Kenya between 2009 and 2015. However, DFI investments comprised 82% of total investments made in the country. All Capria applicants from listed at least one DFI as a potential investor in their fund.
• Support ecosystems are still developing: DFI professionals and consultants we spoke with in Rwanda note the relatively large amount of incubators and accelerators in the country, but most are doubtful of how effective these organizations are at identifying and scaling up entrepreneurial ventures. Our sources brought up questions around the sustainability of the incubator and accelerator business models across Africa, which is supported by recent publications questioning if these ecosystem support systems can actually scale and show profits. The Government of Rwanda is also helping by supporting entrepreneurs through the Rwanda Development Board, whose mission is to “fast-track economic development…by enabling private sector growth.” The Kenyan government too is working to strengthen the entrepreneurial ecosystem. One example of a public initiative is Enterprise Kenya, which aims to promote innovation, research and development in the IT sector. The initiative will also help entrepreneurs gain access to capital and provide support to existing incubators.

• There are huge opportunities in energy and agriculture: Entrepreneurs and investors in Rwanda cite agriculture and financial services as two important sectors, with opportunities also emerging in renewable energy. A significant number of investors have also expressed interest in investing across the agricultural value chain in Rwanda, but only 15% of applicants to Capria who are targeting Rwanda cited agriculture as a sector focus. From current investors, 65% of non-DFI capital has been put into agriculture. Our primary sources’ optimism is supported by public policy. Rwanda’s government plans to spend $5 billion to increase electrification from 20% today to 70% in 2017, which may create distributed energy opportunities for impact entrepreneurs. In Kenya, the agriculture and financial services sectors are reported to account for nearly 40% of impact investments. A well-known example of innovation in the financial services industry is M-Pesa. In less than 10 years, M-Pesa has reshaped the Kenyan banking and telecom industries and made business in rural areas easier to conduct. Ozinbopay and Zoona are just two examples of similar financial services companies that emerged in M-Pesa’s wake.

Overall, investors remain cautiously optimistic about East Africa as a target region for investment. Nearly 50 impact fund managers are active in Kenya, which is more than 3x as many as any other country in East Africa, but investors express concerns around the lack of exit potential for impact ventures and doubt around public policy initiatives. The Rule of Law Index ranks Kenya 12/18 in its region.

Similarly, while many global funds and investors are expressing interest in investing in Rwanda, there is currently not very much actual activity, with few impact investors having a real local presence and a lack of completed investments. This is supported by Capria’s applicant data, which shows that 50% of Capria applicant investors interested in Rwanda are actually based in other countries in Africa, 30% in Europe, 20% in the USA and none in Rwanda.