5 Lessons Learned in Mobilizing Institutional Investment in African Economies
By Dipika Chawla, Strategic Investment Advisor, and Natalie Alm, Communications Advisor
Less than one percent of U.S. pension funds’ estimated $22.6 trillion assets under management are invested in Africa, though the continent is home to some of the fastest growing economies in the world. Unlocking long-term, patient capital from pension funds and other institutional investors is a critical piece of financing the Sustainable Development Goals (SDGs) and climate objectives in Africa. In support of the U.S. government’s Prosper Africa initiative, USAID INVEST is working to mobilize capital from U.S. institutional investors into African economies and to deepen linkages between the U.S. and African capital markets. Since 2019, INVEST has mobilized $83.75 million from U.S. institutional investors into African funds.
Pension funds are just part of a larger category of investors known as institutional investors — entities that pool, manage, and invest capital on behalf of other people or organizations, such as insurance companies, investment funds, and foundations. Institutional investors can be a great match for certain types of investments in emerging markets, including many African countries. They possess long-term patient capital and are not dependent on immediate returns, which fits well with the longer timelines in infrastructure investments, for instance.
However, institutional investors do bring other challenges to the table. They prefer stable, predictable investments with demonstrated cash flows, which has meant they have historically been less likely to invest in emerging markets with higher perceived and actual risk. Further, their minimum ticket sizes are often quite high, ranging from $10 million for some types of institutional investors and up to $100 million for a single transaction among the bigger pension funds, making it challenging to match them with smaller investment opportunities that abound in emerging markets. This also excludes typical impact investments, which tend to have smaller ticket sizes and often less robust data on outcomes than other investment types; institutional investors account for only about 41% of impact investing capital.
INVEST’s work with institutional investors focuses primarily on pension funds, which constitute about one third of the global institutional investor landscape. The United States is the country with the largest pension market by far, comprising about 60% of the global total. To increase institutional investment in regions like Africa, we are working to educate investors about investment opportunities on the ground, build relationships among asset owners to facilitate those investments, mitigate risk through transaction advisory support and technical assistance, and establish new investment vehicles and models to close deals.
So, what has INVEST learned about mobilizing institutional investment over the last three years, when we began work in this portfolio?
1. Mobilizing institutional investment requires INVEST to work at scale, amid complexity, and through innovation. Institutional investors are interested in relatively large and longer-term investments, making them well suited to drive development impact in certain sectors like infrastructure.
INVEST is working with MiDA Advisors across Africa on innovative approaches to working with institutional investors. For example, INVEST supported South African investment firm RisCura in establishing a U.S. entity and an emerging market fund of funds investment vehicle to address challenges U.S. institutional investors encounter when evaluating investment opportunities across Africa. The fund will seek to mobilize up to $500 million in investments from US pension funds and others over the next 3–4 years.
INVEST also designed and launched a consortium of South African institutional investors called the Asset Owners Forum South Africa (AOFSA) in November 2021, aiming to mobilize South African retirement funds to invest in infrastructure, real assets and other alternatives. At its one year anniversary celebration this month, AOFSA announced $336 million (5.7 billion rand) in initial commitments by members into funds committed to sustainable infrastructure, more than seven times the magnitude of its initial target.
Finally, in West Africa, INVEST is supporting a regional mortgage refinancing company to issue a first-time CRRH West Africa Impact Affordable Housing bond on the U.S. market to raise $256 million, as well as $64 million in local currency bonds, which will ultimately enable local banks to provide affordable, longer-term mortgages to West African households. To help mitigate risk, the bond will have a credit guarantee from the DFC that ensures that, if CRRH defaults on its debt, the DFC would make payments owed to U.S. investors. A guarantee from a U.S. institution increases the bond’s appeal — a powerful risk mitigation tool for a first-time issuer in U.S. capital markets like CRRH.
2. Expect longer transaction timelines. Many transactions will take years to come to fruition, with timelines often running well beyond what was initially targeted by transaction advisors. For first time funds especially, the process of closing investment typically takes two or more years. We have learned to build buffers into timelines and manage expectations around how long USAID support (through INVEST and other new mechanisms) will be required, emphasizing the importance of flexibility. We have had to balance pushing our partners to deliver milestones on time with adapting to the unpredictability that comes with mobilizing capital from the private sector — particularly in the current macroeconomic environment where surging global inflation, slowing growth, and food and energy shortages, exacerbated by the war in Ukraine, are all making investors more cautious across the board.
As timelines fluctuate, working with our partners to maintain visibility into transaction progress is key. INVEST can play a critical role in working with partners to gain more visibility into due diligence processes. Despite the slower timelines and unexpected delays, our focus is always on the overall impact and scale of the transaction, so we can bring these learnings back to the Agency.
3. Don’t discount emerging market and first-time fund managers. Some might think that these fund managers aren’t well suited to the institutional investment environment due to their lack of track record, but working with them has been a crucial piece of our work.
For instance, INVEST supported the inaugural Women Empowerment Mentoring and Incubation Fund Manager Program (“WE>MI”), which provided technical assistance and fundraising support to emerging women-owned and women-led fund managers in Southern Africa. From June 2021 to July 2022, we trained over 30 women in soft and hard skills, prepared 12 investible women-led fund managers for the fundraising process, facilitated at least 30 pitch presentations and introductions with potential investors, and ultimately mobilized more than $20 million in investments towards participants’ funds.
The WE>MI program is just one example of how INVEST is supporting greater diversity, equity, and inclusion in the investment space. Achieving this goal will require support to first-time and emerging fund managers led by professionals from historically disadvantaged groups.
4. It’s not just about closing deals, it’s about long-term relationship building. Closing individual deals is important, but we’re also focused on the bigger picture work around building the financial ecosystem and long-term relationships between U.S. institutional investors and African financial markets.
For example, with partner MiDA Advisors we’re leading delegations and road shows to get U.S. investors on the ground in Kenya, Senegal, South Africa, and elsewhere, so they can meet African fund managers, learn more about investment opportunities, and see the impacts of those investments firsthand. To date, delegations like these, supported by Prosper Africa, have resulted in the successful mobilization of over $1 billion in total investments into Africa.
5. Mobilizing African institutional investors is critical. The U.S. government’s goal through the Prosper Africa initiative is to increase two-way investment between the U.S. and African countries and transform the relationship between the U.S. and Africa. That means that in addition to mobilizing U.S. institutional investors to invest in African economies, we’re also trying to tap into the billions of dollars of potential African institutional capital on the ground — as much as $1.8 trillion in assets under management as of 2020.
This year, as a result of the delegations organized through MiDA Advisors, three U.S. pension funds invested alongside one South African and three Kenyan pension funds, committing $85 million in equity into one of the largest investment funds focused on Africa. The fund recently announced a $64 million investment into Cote d’Ivoirian financial services business Groupe Cofina, which is bridging the financing gap for entrepreneurs in West Africa, particularly women and youth who often don’t have the track record to attract traditional investment.
Sometimes it even means paving the way for local institutional capital to invest in new asset classes in their own countries that are entirely new for them. USAID support also brought together a consortium of Kenyan pension funds to invest in Kenyan infrastructure collaboratively for the first time. One of their first transactions was a groundbreaking financial instrument to finance a Kenyan road project, with a $17 million project bond that ended up 157% oversubscribed by Kenyan pensions, indicating substantial appetite for similar instruments of its kind. In addition to meeting a critical infrastructure need, it will deepen local capital markets and increase investor confidence in developing world opportunities
INVEST is excited to scale the blended finance approaches we’ve been testing through our institutional investment portfolio to the entire development finance ecosystem. Just this month at the COP27 conference in Egypt, USAID in partnership with Sida, Norad, and the Ministries of Foreign Affairs for Finland and Denmark profiled the new Action Plan for Climate and SDG Investment Mobilization, which was developed with partner Convergence and in consultation with over 100 public, philanthropic, and private stakeholders. The Action Plan explores how just a small portion of existing development resources can be a catalyst for systemic change in emerging markets and developing economies — and we hope more organizations will join this call to action.
We’re also gearing up for the U.S. African Business Summit, coming up in December. We’re eager to reconvene many of the investors who have participated in USAID’s delegations to Africa at the event’s Business Forum, helping facilitate dialogue and connections among the investors and showcasing the important commitments being made by U.S. and African governments and investors.
Most importantly, we hope all of this work creates a demonstration effect. By building a track record for institutional investments in African markets, we can direct more institutional capital to these economies and ultimately scale its impact — and hopefully continue to replicate those results across the continent.