THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA
KENYATHE LANDSCAPE FORIMPACT INVESTINGIN EAST AFRICAWITH SUPPORT FROM
ACKNOWLEDGMENTSThis project was funded with UK aid from the UK Government though theDepartment for International Development’s Impact Programme. The ImpactProgramme aims to catalyse the market for impact investment in sub-SaharanAfrica and South Asia. www.theimpactprogramme.org.ukThe Bertha Center at the University of Cape Town contributed to this report byproviding their database of active impact investors operating across sub-SaharanAfrica.We would further like to thank the tireless Open Capital Advisors (OCA) researchteam—Nicole DeMarsh, Rodney Carew, Getrude Okoth, Christine Njuguna, CharlesNjugunah, Jerioth Mwaura, and Ann Munyua—for interviewing impact investors,eco-system players, and entrepreneurs, and for conducting rigorous data collectionunder tight timelines.We would especially like to thank our interview participants–without their key insightsthis report would not have been possible. We include a full list of interviewees in theAppendix.GIIN Advisory TeamAmit Bouri, abouri@thegiin.orgAbhilash Mudaliar, amudaliar@thegiin.orgHannah Schiff, hschiff@thegiin.orgLaura Gustafson, lgustafson@thegiin.orgOpen Capital AdvisorsAnnie Roberts, aroberts@opencapitaladvisors.comDavid Loew, dloew@opencapitaladvisors.comNeal Desai, ndesai@opencapitaladvisors.comAUGUST 2015
LIST OF COMMON TERMS AND ACRONYMSAFD Agence Française de Développement(French Development Agency)GIIRS Global Impact Investing RatingsSystemAfDB African Development BankGIZ Gesellschaft für InternationaleZusammenarbeit (German Agency forInternational Cooperation)BIF Burundian FrancBIO Belgian Investment Company forDeveloping CountriesBoP Base of the PyramidCEPGL Communauté Économiquedes Pays des Grand Lacs (EconomicCommunity of the Great Lakes Countries)COMESA The Common Market forEastern and Southern AfricaCSR Corporate Social ResponsibilityDFI Development Finance InstitutionDFID The Department for InternationalDevelopment (United Kingdom)DRC Democratic Republic of the CongoEAC East African CommunityGrowth-stage business Company hasa functioning business model and itscurrent focus is developing new products /services or expanding into new marketsPPP Public-Private PartnershipPTA Preferential Trade Area BankRDB Rwanda Development BoardRFP Request for ProposalRWF Rwandan FrancSACCO Savings and Credit Co-operativeHDI Human Development IndexSAGCOT Southern Agricultural Corridorof KenyaICC International Criminal CourtSDG Sudanese PoundICT Information and CommunicationTechnologySGB Small and Growing BusinessIFAD International Fund for AgriculturalDevelopmentIFC International Finance CorporationIMF International Monetary FundIRIS Impact Investing and ReportingStandardsSME Small and Medium-Sized EnterprisesSOE State-Owned EnterprisesSOS Somali ShillingSSP South Sudanese PoundTA Technical AssistanceTIC Kenya Investment CentreKES Kenyan ShillingTZS Kenyan ShillingLP Limited PartnerUGX Ugandan ShillingEIB European Investment BankMature business Profitable company with adeveloped and recognizable brandUN DESA United Nations - Department ofEconomic and Social AffairsESG Environmental, Social, andGovernanceMDG Millennium Development GoalUNCTAD United Nation’s Conference onTrade and DevelopmentEarly-stage business Business that hasbegun operations but has most likely notbegan commercial manufacture and salesETB Ethiopian BirrFDI Foreign Direct InvestmentFMCG Fast-Moving Consumer GoodsFMO Nederlandse FinancieringsMaatschappij voor OntwikkelingslandenN.V. (Netherlands Development FinanceCompany)Focus countries Countries under thestudy where non-DFI impact investors aremost active in. Namely Ethiopia, Kenya,Rwanda, Kenya, and UgandaMFI Microfinance InstitutionMSME Micro, Small and Medium EnterpriseNGO Non-Governmental OrganizationNon-focus countries Countries covered inthe study but have limited non-DFI impactinvestor activity. Namely Burundi, Djibouti,Eritrea, Somalia, South Sudan, and SudanOFID OPEC Fund for InternationalDevelopmentOPIC Overseas Private InvestmentCorporationGDP Gross Domestic ProductPE Private EquityGEMS Growth Enterprise Market SegmentPPA Power Purchasing AgreementPPP Purchasing Power ParityUSAID The United States Agency forInternational DevelopmentVAT Value-Added TaxVC Venture CapitalVenture-stage business Sales havebegun but cannot sustain the company’soperations. The business model is stillbeing aligned with the realities on thegroundWASH Water, Sanitation, and HygieneWHO World Health Organization
KENYATRADITIONAL LEADER,REGIONAL POWERHOUSEiv THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA
TABLE OF CONTENTSIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Country Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Gross Domestic Product. . . . . . . . . . . . . . . . . . . 3Foreign Direct Investment (FDI). . . . . . . . 5Inflation and Exchange Rates. . . . . . . . . . . . . . 7Supply of Impact Investing Capital . . . . . . . . . . . . 8Broader Investing Landscape . . . . . . . . . . . . . 9Impact Capital Disbursed. . . . . . . . . . . . . . . . . 10Investments over Time. . . . . . . . . . . . . . . . . . . . 11Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Deal Size. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Instrument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Local Presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Impact Tracking Standards . . . . . . . . . . . . . . . 16Demand and Need for Impact Investing Capital . 17Development Context . . . . . . . . . . . . . . . . . . . . . . 17Entrepreneurs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Enabling Impact Investing: The Ecosystem. . . 22Regulatory Environment. . . . . . . . . . . . . . . . . . . 22Ecosystem Players. . . . . . . . . . . . . . . . . . . . . . . . . 25Other Service Providers. . . . . . . . . . . . . . . . . . . . 26Challenges and Opportunities for Impact Investors . 27Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28KENYA 1
INTRODUCTIONKenya and its capital city Nairobi are the center of East African impact investing. As theeconomic and financial capital of East Africa, Kenya boasts the largest concentration ofimpact investors and the most impact capital disbursed. Nairobi is often the first portof call for both impact and conventional investors operating in the region, even if theylook for opportunities beyond Kenya. Indeed, when comparing the countries in theregion, Kenya comes out on top for virtually every metric measured for impact investingin this study.Beyond activities in impact investing, the Nairobi Stock Exchange launched the GrowthEnterprise Market Segment (GEMS), specifically designed to provide a way to publiclylist smaller companies. Though GEMS has seen limited uptake to date, the platformrepresents a broader market commitment to small and medium enterprise (SME)support.1 The Kenyan banking sector has also been expanding their SME lending.This includes expanded product ranges with new structures like trade financing aswell as extensive marketing and outreach efforts. While hurdles like high collateralrequirements remain, small and medium enterprises (SMEs) increasingly gain access tofinancing through both impact and conventional sources.The greatest threat to Kenya’s central role in East African impact investing relatesto ongoing concerns around the country’s security and political stability. Kenya hassuffered numerous terrorist attacks from the Somali terrorist group Al-Shabaab, themost visible of which was an attack the Westgate shopping mall attack in September2013. In addition to these attacks, Kenya’s overall political stability has been fragile sincethe dramatic post-election violence in 2007-2008. Nevertheless, concerns over thesecurity and political situations appear to have subsided as of this writing in early 2015.2FIGURE 1: MAP OF KENYAKENYA1Most of the non-DFI impact investors active in Kenya focus on early-stage businesses that have sometrack record and operational structures in place. For more detail on this early-stage focus, please see theEast Africa regional chapter of this report.2Information for this report was gathered prior to the April 2015 attack at Garissa University College.The insights presented here do not reflect possible changes in the perception of stability following thatevent.2 THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA
COUNTRY CONTEXTWith the exception of post-election violence in 2007-2008, Kenya is generallyconsidered to be one of the strongest and most stable countries in the region. Thisis reflected across economic indicators, though the country still requires support toimprove human development indicators and increase linkages between disadvantagedpopulations and the rapidly growing national economy.Gross Domestic ProductKenya has seen strong growth in recent years, averaging 6% GDP purchasing powerparity (PPP) growth year-on-year for the last ten years (see Figure 2). GDP currentlystands at approximately USD 87 billion in PPP terms, and USD 52 billion in currentprice terms, making it a strong regional player and the largest economy in the EastAfrican Community trading block, which includes Kenya, Uganda, Rwanda, Tanzania,and Burundi.3FIGURE 2: GDP (PPP), 2004–2013USD BILLIONS100Kenya averaged 6% annualGDP growth for last 10 2013Source: IMF World Bank Economic Outlook, April 2014Estimated GDP jumped 25% in September 2014, when Kenya re-based its GDPcurrency calculation by changing the base year from 2001 to 2009.4 The higher figureimproved Kenya’s debt-to-GDP ratio, which may help the government borrow moneyat more favorable rates in international markets. However, re-basing increased Kenya’sGDP per capita to just over USD 1,200 and moved it from “low-income” country3Farai Gundan, “Kenya Joins Africa’s Top 10 Economies After Rebasing of Its Gross Domestic Product(GDP),” Forbes (Oct. 1, 2014), available at ng-of-its-gross-domestic-product.4 Ibid.KENYA 3
status to “middle income,” which could reduce access to low-interest foreign debtavailable through the World Bank and International Monetary Fund.5Re-basing improved the 2013 GDP growth rate from an estimated 4.7% to 5.7%.6Regardless of re-basing, Kenya has enjoyed strong GDP growth over the last decade,interrupted only in 2008/2009 in response to both the post-election violence and theglobal financial crisis.7 This follows inconsistent growth in the 1990s, with GDP growthranging from negative figures to 4%.8In addition, the industrial sector is expected to grow in the next few years inresponse to Kenya’s strong push to expand power generation, which is ongoing.The government has committed USD 1.8 billion to add 5,000 MW in power supplycapacity by 2017, building on its 1,664 MW of current capacity in an attempt toreduce inconsistent supply and planned blackouts, which currently pose challenges forthe manufacturing and processing industries.95 Farai Gundan, “Kenya Joins Africa’s Top 10 Economies After Rebasing of Its Gross Domestic Product(GDP),” Forbes (Oct. 1, 2014), available at ng-of-its-gross-domestic-product; DavidMalingha, “Kenya Overtakes Ghana, Tunisia as Data Revision Boosts GDP,” Bloomberg Business(Sep. 30, 2014), available at imbs-by-25-.6 Ibid.7World Economic Outlook: Gross Domestic Product, International Monetary Fund (Apr. 2014),available at odata/download.aspx.8 “Economy,” Denmark in Kenya: Ministry of Foreign Affairs of Denmark, available at .9 George Obulutsa, “Kenya Power to Invest 1.8 B in % 5 years to Expand Network,” Reuters (Oct. 11,2013), available at wer-idUSL6N0I11RQ20131011.4 THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA
Foreign Direct Investment (FDI)Strong GDP growth has been accompanied by increasing FDI. In 2013, there weremore than USD 500 million in FDI inflows (see Figure 3).10 Despite these robustabsolute FDI inflows, a strong local economy means that Kenya has the second lowestFDI as a percentage of GDP of any country in the region.FIGURE 3: FDI FLOWS, 2004–2013USD MILLIONS800Spike in 2007 due toprivatization of Telkom Kenya& entry of new telcom provider60040020002004 200520062007200820092010201120122013Source: UNCTAD10 Inward and Outward Foreign Direct Investment Flows: Annual 1970-2013, United Nations Conferenceon Trade and Development, available at View.aspx?ReportId 88.KENYA 5
The single largest source of FDI remains the United Kingdom, of which Kenya wasformerly a colony. Together with Mauritius and the Netherlands, these three countriesoriginate more than 50% of all Kenyan FDI inflows, predominately through equityvehicles (see Figures 4 and 5).11 Strong FDI inflows are also expected in the future,given recent oil discoveries near Lake Turkana and continuing plans to develop theLamu corridor pipeline and port.FIGURE 4: FDI INFLOWS, BY COUNTRY OF ORIGIN, 2012100%Others80%France60%MauritiusSouth AfricaFIGURE 5: FDI INFLOWS, BY INSTRUMENT, 2012100%80%Debt instrumentsEquity positionsNetherlands60%UK40%3 countries accountedfor 50% of total inflows40%20%20%0%0%Source: US Department of StateSource: US Department of State11 After the UK, Mauritius and the Netherlands constitute the next two largest sources of FDI intoKenya. Despite these two countries’ relatively small size, they represent a large source of FDI becausemany private equity and venture capital funds base themselves in these jurisdictions to benefit fromfavorable tax regimes.6 THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA 75% of directinvestmentswere equity
Inflation and Exchange RatesKenyan inflation has been extremely volatile, fluctuating from around 4% to morethan 15% (Figure 6). In addition, concerns about foreign exchange rates complicateimpact investors’ ability to disburse local currency debt. The Kenyan Shilling hassteadily depreciated against the US dollar since 2008, reaching approximately 90to-1 in late 2014, reducing the hard currency value of any local currency debt thatinternational investors disburse in Kenya.FIGURE 6: INFLATION AND USD/KES EXCHANGE RATE, 2004 - 2013USD/KES16%14%12%USD/KES exchange 0620072008200920102011201220130Source: World Bank IndicatorsHowever, impact investors are most concerned by the sudden spike in foreignexchange rates in 2011, when the Kenyan Shilling depreciated sharply against thedollar and then rapidly returned to prior levels. In that year, the Kenyan Shilling wasone of the most volatile currencies in the world. Multiple potential reasons for thisvolatility have been given, including policy changes made by the Central Bank ofKenya in 2010 and the increasing macro-economic imbalance of Kenya’s economy.12Regardless of the cause, such rapid swings expose investors to potentially sudden andsignificant foreign exchange losses, which in turn limit their ability and interest to lendin local currency. Please see the East Africa regional chapter for additional discussionof local currency dynamics.12 Wolfgang Fengler, “Why has the Kenyan Shilling declined so sharply?” The World Bank Group(Oct. 17, 2011), available at enyan-shillingdeclined-so-sharply; AfDB, OECD, UNDP, UNECA, Kenya (2012), available at pdf.KENYA 7
SUPPLY OF IMPACTINVESTING CAPITALExcluding DFIs,13 at least 136 impact capital vehicles are active in Kenya, managedby some 95 impact investors. Most non-DFI impact investors in Kenya work inmultiple countries, but at least USD 240 million has been committed specificallyto investments in Kenya (Figure 7). Beyond these dedicated funds, there is nearlyUSD 2.5 billion in capital committed regionally that could be deployed in Kenya and,following historical deal flow, is more likely to be deployed in Kenya than in any othercountry.FIGURE 7: TOTAL CAPITAL COMMITTED BY NON-DFI IMPACT INVESTORSUSD MILLIONS2,5002,0001,5001,0005000MULTIPLE COUNTRIES,INCLUDING KENYAONLY KENYASource: Open Capital Research13 Due to the unique nature and large size of development finance institutions (DFIs), the authors ofthis report analyzed their activity separately from those of other types of impact investors (“nonDFI”), and present this separate analysis when appropriate. See the Introduction and Methodologysection of this report for more details.8 THE LANDSCAPE FOR IMPACT INVESTING IN EAST AFRICA
Broader Investing LandscapeDespite the volume of impact investing activity in Kenya, it represents a small part ofthe overall investment picture. For example, banks, SACCOs,14 and chamas15 togetherhave almost USD 39 billion in total assets under management and there are othersources of capital, such as commercial private equity funds, hedge funds, and others,that even further increase assets under management (Figure 8). Banks had morethan USD 17 billion in loans outstanding in 2013 alone, which is almost 27 times thedisbursements made by non-DFI impact investors and more than 4 times more thandisbursements made by all impact investors over the same period.16FIGURE 8: IMPACT CAPITAL RELATIVE TO OTHER FINANCIAL ASSETSUSD BILLIONS3531.530Banking sector total assets25SACCOs total assets20Chamas total assetsNon-DFI impact investors total capital committed1510503.93.52.7TOTAL ASSETSSource: Central Bank of Kenya, SACCO Societies Regulatory Authority, Kenya Association of Investment Groups, Open Capital ResearchImpact investing fills an important gap in the market for early-stage financing, eventhough it only represents a small portion of total investment activity to date. Thoughmore willing to lend than banks in much of the region, Kenyan banks remain riskaverse and are usually unwilling to invest in start-up or early-stage enterprises. Whenwilling to lend, banks typically require extremely high collateral ratios, occasionallyhigher than 100% of the loan amount. Many early stage businesses are unable tosatisfy these requirements. Kenyan banks are improving access, offering creativestructures like trade financing or crop c
INTRODUCTION Kenya and its capital city Nairobi are the center of East African impact investing. As the economic and financial capital of East Africa, Kenya boasts the largest concentration of impact investors and the most impact capital disbursed. Nairobi is often the first port
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