Kenya: the country impact investors cannot afford to ignore

As the UK-Africa Investment Summit kicks off today in London – with 21 African countries in attendance and billions of pounds' worth of deals expected to be announced – we hear what's happening in one of the continent's most popular destinations for impact investors. Taking advantage of its pole position could help Kenya unlock $10bn for sustainable development, writes Krisztina Tora, market development director at the Global Steering Group for Impact Investment. Here's how.

Kenya is in the sweet spot now. It is still eligible for Official Development Assistance (ODA), as a lower middle-income country. Yet it has been progressing fast towards middle-income country status. It is vital that Kenya takes advantage of this to leverage more private sector investment.

 

The trendiest country for impact investors

One could say that Kenya is crowded with impact investors: it’s the first destination of impact investment flows in east Africa, and the second in Africa as a whole (after South Africa). More than 100 impact investors are operating in the country. Between 2005 and 2015, they invested more than US$4bn in Kenya (the equivalent of roughly half of foreign direct investment (FDI) in the same period).

The momentum in Kenya is strong. FDI flows increased by 27% to $1.6bn in Kenya (in a period when FDI fell by 13% globally). Investor preference towards impact also grew by 10% between 2016 and 2018. These are crucial signals at a time when more local and private capital are needed to help achieve the Sustainable Development Goals (SDGs) in the country. The stakes are high: 80% of the population is younger than 35 and 39% of the population lives in poverty.

Kenya is demonstrating leadership in social and environmental action. The country is well ahead in its energy transition towards renewables, with half of its electricity coming from geothermal sources and Africa’s largest wind farm. The rate of access to electricity in Kenya jumped considerably from 19% in 2010, to 75% by 2018, as a result of public and private investors, both commercial and impact. They focused their efforts on the energy sector, and invested heavily in off-grid energy and last-mile distribution projects, such as Sanergy (pictured above) or Sunculture (a 2018 GSG Millennial Honor Awardee).

At a social level, in 2018 the government announced an ambitious five-year development plan: the Big 4 Agenda. This agenda outlines Kenya’s four main priorities, aligned to the SDGs:

  • food security and agricultural productivity
  • affordable housing
  • manufacturing
  • and universal health coverage

The government has acknowledged the significance of entrepreneurs and investors as the key to achieving this agenda.

With the support of United Nations Development Programme (UNDP), and in collaboration with the government, the impact investment sector is working to set up a National Advisory Board. A NAB will support the country in achieving the SDGs. It will also help address market barriers to unlocking private capital for impact.

 

From foreign-led to locally-driven market development

Forty-seven percent of investments in Kenya originate from investors based in Europe and North America. There has been a recent spike in Silicon Valley investors coming to Kenya. Market players call them “helicopter investors”: they fly in and out without real knowledge of the realities on the ground. This creates a ‘bubble’ in company valuations, especially for tech-enabled companies. Another consequence of this trend is that more than 90% of funding for east African startups goes to expats, and not to local founders. Women founders receiving investment are under-represented, too.

That means missed opportunities. As Esther Ndeti, executive director at the East Africa Venture Capital Association puts it: “The risks of investing in Kenya and more generally in Africa may be viewed differently by outside observers than by investors on the ground. Not to mention the myriad of investment opportunities that local investors are discovering every day.”

 

Policy to allow changes at scale

Building on recent government initiatives and other market evolutions, the future Kenya NAB could work on untapped opportunities for policy change and other interventions. This would unlock significant pools of local capital for impact:

  • Pension funds: since 2015, pension funds can invest up to 10% of their portfolio in private equity and venture capital funds. They currently hold approximately $10bn AUM. With even 1% of portfolio allocation to impact, the sector could be transformed.
  • Dormant bank accounts: in 2011 the Unclaimed Financial Assets Authority was created to manage unclaimed assets (currently approx. $380m AUM), part of which could be used for building a Wholesale Impact Fund.
  • Angel investment: with a total of approximately $10m invested by angel investors in Kenya since 2008, spread across 82 investments, we can imagine that entrepreneurs will increasingly get access to appropriate risk capital, if there were more favourable policies for angel impact investment.
  • Green bonds and social impact bonds: the Kenya Bankers Association is actively working with the government to get Kenya’s first green bonds off the ground.
  • Private sector: the Kenyan government, in collaboration with the UN, launched the Private Sector Health Partnership Kenya four years ago. Several large companies such as Safaricom, Huawei, Philips, MSD/Merck, Unilever and Glaxo Smith Klein are supporting the government’s work to improve maternal health. Such pilot programs could be replicated in other sectors.

 

An enabling environment for entrepreneurship

The Ministry of Trade recently led a policy hackathon to improve coordination and support to SMEs and social enterprises. New policies are being designed as a result.

Betty Maina, principal secretary at Kenya's State Department of Investment and Industry Ministry of Industry, Trade and Cooperatives, says governments have “the basic responsibility of creating the environment and policies to transform their countries”. Her department has a project to support incubation and startups, aiming to help SMEs improve managerial and technical capabilities.

 

Financing the SDGs

Kenya could unlock $10bn by 2030 to finance the SDGs.

This is the rough estimate we made based on the spectacular growth of the country’s impact investment industry. We also believe that the country could even achieve this faster, if the Kenyan ecosystem sets up an active National Advisory Board. This represents all the stakeholder groups in the country, needed to redirect significant capital flows towards social and environmental impact, and achieve the SDGs. Private-sector led, yet in close partnership with national government, a NAB raises awareness, creates market intelligence, changes policies, and mobilises additional financial resources for public good. We see that in 32 other countries in the world: a NAB is the basic infrastructure to accelerate such change.

This article was first published on Medium and is reproduced here, lightly edited for style, with permission. More information is available in GSG's Kenya report and Africa report. Header photo: Sanergy has built a network of over 2,000 Fresh Life Operators who provide safe sanitation to urban residents.

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