There are more and more people doing impact investing in Africa, seeking both to be of help to the people there and to take advantage of the rapidly growing economies there. Matt Davis of RENEW LLC is one of this breed of impact investors.
Davis says, “There is both a development challenge and a market challenge in Africa that we are addressing.”
“The development challenge is that the financial systems in many countries in Africa are fragmented, and little to no capital is available to finance the growth of small and mid-size businesses (SMEs),” he explains. “At the top of the economic pyramid, bank and institutional financiers tend to back large multinationals. At the bottom, microfinance institutions lend only small amounts at high rates to micro-enterprises. But there is nothing to finance small and growing businesses. Thus, we have what is called the ‘missing middle’ in these economies, and SMEs are inhibited from growing into large companies, creating jobs, generating tax revenue, and stabilizing the economy along the way.”
Moving to the second challenge, Davis says, “The market challenge is related to supply and demand. The supply of private equity is growing across Africa, as international investors move in seeking higher risk adjusted returns. Yet these investors are not able to find enough companies able absorb the minimum investments they are willing or able to make. Addressing both challenges requires a new financial actor and intermediary to stimulate financing and growth for SMEs.”
Davis led the creation of the Impact Angel Network (IAN) to invest in Africa, with an initial focus on Ethiopia. “The IAN addresses the problem of the ‘missing middle’ by being a source of financing for SMEs. The IAN invests in professionally vetted and managed companies in Africa that are led by strong management teams looking to scale. RENEW manages the IAN’s portfolio in-country and addresses a trust and skill gap that has kept many U.S. investors from being active on the continent of Africa.”
RENEW is operating at a relatively small scale, filling the gap in the missing middle. This space is thinly populated in part because the administrative and logistical costs of running a small fund making six-figure investments overwhelms returns. Grants from development agencies make the economics work for RENEW.
Davis sees their role in Africa as a catalyst to help struggling countries there gain greater independence from multi-lateral and other aid organizations. “RENEW intends to scale our model and implement it in other countries across the continent. Over time we would like to see offices in 20 countries, and professional teams in each country managing hundreds of companies that are creating thousands of jobs. As the companies that the IAN invests in grow, they will provide jobs and taxable revenue to the government, which can then finance the programs that are currently being covered by international aid organizations,” Davis concludes.
On Thursday, January 14, 2016 at 4:00 Eastern, Davis will join me here for a live discussion about their work in Africa. Tune in here then to watch the interview live. Post questions in the comments below or tweet questions before the interview to @devindthorpe.