A collection of Futuregrowth thought leadership pieces, media articles and interviews.

More than just a financial return

18 Feb 2016



Impact funding can deliver so much more, so why isn’t it?


With South Africa’s economy at a virtual standstill, creating jobs for the 25.5% of the working population that is unemployed will be challenging in 2016 to say the least. Yet it is a goal that should be occupying the finest minds in the country – from government to civil society to the private sector.

With R4 trillion in assets under management, roughly half of it in local collective investment schemes, it is a challenge South Africa’s asset management industry is tentatively engaging with. “South Africa is endowed with a rich savings base which can be responsibly invested for more positive returns,” says Heather Jackson, CEO of Atlantic Asset Management.

Companies like Old Mutual, Mergence Investment Managers, Futuregrowth and Atlantic Asset Management are among the local firms actively investing in projects that have a social impact – notably renewable energy, housing, education, transport, agriculture and small and medium enterprise development.

Atlantic, which has recently been acquired by Ashburton Investments, is one of the few asset managers in South Africa to actively target job creation as an investment outcome through its Atlantic Credit Enhanced Guaranteed Fund. The fund focuses on investment grade unlisted credit opportunities, and targets a stable return of CPI plus 3%.

While the R700 million fund does not set specific job creation targets, projects are selected on their ability to generate jobs. This is measured and will be reported when the fund releases its results for the first year in March. Early reports suggest that it has achieved its financial and social benchmarks.

For investors who are still nervous about investing in so-called Impact funds, this fund is interesting because it is guaranteed by government’s Jobs Fund (overseen by National Treasury).

“We are looking to catalyse new models of job creation,” says Najwah Allie-Edries, deputy DG for Corporate Services at National Treasury. “Changes to Regulation 28 mean that pension funds can invest more money in unlisted companies and projects – yet they are slow to do so. By providing a guarantee, we hope to change the perception that these are risky projects.”

“Impact” is a label that Jackson is wary of because it carries with it the stigma of lower returns in exchange for social benefit. “If the financial side doesn’t stack up it doesn’t matter what the impact is, we won’t back the project,” she says.

The fund is fully committed and Jackson is hoping to raise fund II later this year. With no defaults, it is expected that the Jobs Fund guarantee will simply roll over to the next fund.

Impact is becoming an in-word. Research from the Bertha Centre for Social Innovation & Entrepreneurship, a unit at the UCT Graduate School of Business shows that almost half of all assets under investment in South Africa, Kenya and Nigeria (47% of US$721 billion) are being invested for good in some way.

According to the 2015 African Investing for Impact Barometer this extends from Islamic finance to clean technology and building affordable housing.

However, while many investment companies pay lip service to the practice, there are only a handful of industry leaders that are able to demonstrate that they do it consistently well, the researchers found.

Jason Lightfoot, portfolio manager of Futuregrowth’s flagship Infrastructure Development and Bond Fund acknowledges that managing an impact fund is complex. “We have 20 analysts on our fixed interest team. This isn’t traditional asset management – they have to get their boots dirty and get involved in the project and the management teams they are backing. After 20 years we have built up considerable sector knowledge.”

Futuregrowth, he says, assesses possible deals through a prism of low, medium or high impact. Every project that is financed must have some measure of impact. “Usually the closer an individual beneficiary is to a deal, the bigger the impact.”

For instance the fund has recently worked with Rainbow Chicken and provided funding to a number of black farmers and BEE consortia to acquire land and build chicken houses. This he says will have a bigger social impact than, say, the funding of a renewable energy project.

Despite the obvious social benefits, find funding for the ‘mega’ projects that will make a meaningful social impact – specifically job creation – is not that easy.

Yes, pension funds can now invest in unlisted assets, but within the alternative investment category there is a range of options. “If you were looking at private equity with returns of 27% or impact investing with returns of 14%, which would you choose?” says Christine Glover, head of development impact funds at Old Mutual.

Investors also need to be prepared to invest over the long term in assets that are relatively illiquid.

The R9 billion Housing Impact Fund South Africa (HIFSA) which finances the construction of affordable homes for sale and rent, as well as providing housing loans and rental accommodation for families and students, is a case in point. Its latest project is Savanna City, an 18 000 unit greenfield housing development 35km south of Johannesburg.

“It took us six years before we broke ground. It will take ten to 12 years to see a return,” Glover says. “Not all investors are that committed.”

While jobs are not specifically targeted as an outcome, Old Mutual measures the social impact of every project on behalf of itself and its HIFSA partners, the PIC and the Government Employees Pension Fund. “We measure the number of houses built and jobs created through that,” says Glover.

“I think once you set up a pure employment fund it becomes interpreted as funding small business, which can have a lower impact than big housing infrastructure projects. We don’t do dams and roads, but building houses is labour intensive and once a small town is built, it creates further employment.”

Although there seems to be increasing interest in impact funding in South Africa, it is clear that some challenges remain. For instance, understanding and assessing the social impact, liquidity concerns around unlisted investments and lingering concern about returns. Investors need to shift from chasing short-term gains to pursuing long term sustainable returns.

Only then will we see a shift in the allocation of capital.

Read the original article here.