Impact investing in South Africa: setting the eco-system up for success

Introduction to Impact Investing

By Adam Boros, Head of Social Impact

If you are a philanthropist, grantmaker, financial advisor or involved in private equity, you have probably come across the term “impact investing” in the past few years. It’s a relatively new concept all over the world, but a particularly nascent one in South Africa.

Defining Impact Investing and Its Purpose

According to the Global Impact Investing Network, impact investing refers to investments made into companies, organisations and funds with the intention to generate social and/or environmental impact alongside a financial return. At its core, it aims to bring the usually disparate worlds of driving profits and driving social impact – which have traditionally been treated as entirely different activities – together. Investing in commercial models that actively drive and measure social change while delivering financial return to investors is not only possible, but represents a critical strategy to increase and maximise the amount of capital dedicated to impact.

Growth of the Impact Investing Ecosystem in South Africa

The impact investing sector in South Africa is new, but it is gaining traction fast. Within the last year, an Impact Investing National Task Force with high-level representation from government, business and civil society has been established; the Public Investment Corporation has expressed interest in putting some of its assets towards impact; and President Ramaphosa’s recent Investment Conference featured an entire day focused on how impact investing can help drive inclusive growth in the country. There is a growing number of players in the space – including fund managers, academics and advisors – all of whom have a role to play in building a strong impact investing ecosystem in the country.

Regulatory Constraints and Ecosystem Challenges

All of these developments are encouraging and they signal we are on the right track. But for the impact investing industry to truly thrive in South Africa, the regulatory environment must be conducive as well. Given our unique position in the market, Tshikululu interacts with both social investors and social enterprises on a regular basis. What we find for both groups – those with funding they want to deploy to drive social change and those who seek funding to make that change happen – is not an empowering environment, but a constrained one. We’ve recently completed an in-depth analysis, and it’s clear that there is a lack of appropriate legal frameworks for both social enterprises and impact investors.

Limitations of Existing Investment Vehicles

For impact investors, there are numerous vehicles that might be utilised, including Special Purpose Vehicles, Small Business Funding Entities (SBFE), Venture Capital Companies, Public Benefit Organisation (PBO) Trusts and non-profit companies to name a few. Each of these has distinct advantages and disadvantages, but none of them are ideal. Whether it is restrictions in terms of what type of investing can be undertaken, ineffective tax incentives or a lack of flexibility in terms of structure and duration, all these investment vehicles leave an innovative impact investor wanting more.

Challenges Facing Social Enterprises and Hybrid Models

For social enterprises looking to employ commercial (and sometimes untested) business models to solve entrenched social challenges, the options are even more limited. If an enterprise is registered as a non-profit company, it may be able to access grant funding but will struggle to secure other types of investment. If it chooses to go the for-profit route, it may attract debt or equity investment, but almost all foundations and trusts will be unwilling (or unable) to provide financial support. As a result, many organisations adopt hybrid models combining non-profit and for-profit entities, which adds complexity and administrative burden.

Creating an Enabling Environment for Impact Investing

At the best of times, driving social change is a difficult and complex task. Similarly, establishing and running a successful business is hard work. Doing both at the same time is especially challenging. For impact investing to take off in South Africa – and unlock greater capital to address poverty, unemployment and inequality – it is essential to create a more enabling regulatory and operational environment. Tshikululu aims to continue contributing to this evolving ecosystem to ensure meaningful and sustainable impact.