In the affairs of conducting business – whether it is a single, family-owned venture or a large multinational conglomerate – capital is at the crux of the undertaking.
In this edition, The Exchange brings to you Part 2 of a two-part series on Patient Capital and how Africa can reap the tremendous value of philanthropy in business.
Patient Capital: An Instrument for Financing Development
Over the last decade, a new breed of investors focused on financial returns with a strong social and environmental value proposition have emerged in Africa. These “impact investors” seek to consolidate financial returns with social impact by utilizing the apparatus of venture capital to make principal investments in private, high-growth companies/organizations that have the potential to deliver some quantifiable social or environmental benefits.
Patient capital is an emerging investment instrument that generally falls under a broad category of vehicles for financing social change and economic growth at the same time called Impact Investments. This is changing the way philanthropy views business and the way businesses view social development.
Patient capital does not have a specific definition, but generally refers to ‘investment’ characterized by its ability to provide seed and growth capital that can wait a considerable amount of time before desiring anticipated yield on investment returns. Financial return is not the sole motivation driving the patient capitalist; rather, delivering social impact with financial return as a bonus incentive over the long term is the most important investment determinant.
Patient capital, allows the investor to forgo an immediate financial return in anticipation of more social and economic gains in the long run. It possesses hybrid characteristics of philanthropic grants and conventional investment vehicles. When compared to grants, there is an expectation of financial return on investment while when compared to typical investment instruments, it delivers both social and financial yield with more flexibility.
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While conventional philanthropy has contributed immensely to social change pilots and model testing, one of its challenges is that of local sustainability and scale-up of some initiatives which may not have a coherent framework for sustained financing beyond the project lifecycle. Businesses are often under pressure to maximize shareholder value and view social change from the lens of corporate sustainability. This puts corporate social investment efforts into the sustainability and scale-up dilemma common with the conventional philanthropic model.
The goals of a business model based on a patient capital investment include: (a) deferred investment payout, (b) flexible equity arrangements to accommodate organic growth, (c) catalyst to demonstrate the feasibility of the specific social enterprise model it supports, and (d) generating a “patient” return on the investment which will allow it to remain sustainable, recycling the returns into covering the costs incurred in running the project.
Potential Growth Opportunities for Patient Capital in Africa
The patient capital sector is still relatively new, but it is growing speedily and even more importantly, having a remarkable impact. Patient capital is an investment intended to return its principal plus interest; it is not a grant. It may take the form of debt, equity or loan guarantees and be characterized by long term prospects for return of capital, an intensive support system for businesses to grow and be self-sustaining and the willingness to forgo financial returns for social impact. When structured properly, patient capital can catalyze a pipeline of high-impact solutions, build organizational capabilities to be self-reliant and provide the capital to deliver social impact at scale.
Africa’s potential as a development market for business is underestimated as does the potential for business to play a major significant role in resolving the continent’s biggest challenges. Africa’s fast-growing population and market present important opportunities for patient capitalists. Greater innovation and investment from the business community is important to meet Africa’s demand for goods and services, create jobs, decrease poverty and close the gap in its infrastructure.
In a population of about 1.2 billion with an estimated target of 1.7 billion by 2030, there is a huge non-consumption market that conventional business projections often neglect. More than 80 per cent of Africa’s population growth over the next few decades is likely to occur in cities, making it the fastest-urbanizing continent in the world. Patient capital can fuel market-driven innovations that can take advantage of the hidden opportunities inherent in the social innovation focused on addressing the plethora of social problems, as well as generate new growth opportunities in the non-consumption markets.
With regard to the increasing household and business consumption, rapid urbanization, population growth and technology penetration, Africa’s emerging economies present numerous opportunities for investment in a range of sectors. As part of the short, medium and long-term growth strategy, there is need for multi- sectoral collaboration from both, public, private and social sector organizations to drive market-driven innovations that can tap into existing and non-consumption that the pandemic may have created.
Although the private sector more than ever before has rallied around governments in mobilizing the needed capital to support health and social response during COVID-19, it has also been badly hit by disruption of supply chain operations, human capital flight and revenue loss. No doubt, the private sector will struggle to keep up support both in terms of direct financial support as well as fulfilment of corporate sustainability efforts. The use of the patient capital approach is a more scalable and sustainable approach to do well and drive economic and business growth at the same time.
Public financing measures for COVID-19 include managing the direct social and economic shock to livelihoods and indirect capital measures to MSMEs most hit by the impact of the pandemic.
Governments need to do more in creating the right policy frameworks and incentives to attract more philanthropic capital into the social sector and take a more business-minded approach to supporting the economic growth and recovery efforts of government.
Governments should build the mechanisms and systems to support non-profits, explore more flexible models for maximizing economic and social value through the use of philanthropic capital. They also need to strengthen local and global MSME value chains such that they can be well resourced to pursue market shaping activities as their success presents a win-win scenario of creating a sustained pipeline for funding, as well as help communities succeed where they would otherwise not stand the chance.
The growth opportunities for patient capitalists are numerous especially in Africa. The economic development and growth potential of the African market makes the continent a favoured destination for transforming charitable investments into patient capital. The traditional model of donors needs to evolve to ensure it fulfils its potential as a catalyst for growth and serves the needs of those the donations are intended to support.
The patient capital approach to social financing is an effective tool in creating practical solutions to the issues of poverty in many developing countries and sectors across the world. The use of patient capital as a mechanism for boosting economic growth and development is a new paradigm in international development.
Philanthropies have a unique opportunity to evolve their strategy to make their philanthropic efforts more impactful as they work with global collaborators, local organizations, and communities to address some of the most pressing issues of our time.
Africa’s philanthropists and donor recipients alike (civil-society organizations, local implementing partners and host governments) need to become more knowledgeable about the potential of patient capital. They also need to evolve their business innovation models in order to position and persuade global and African donors in readiness for the boom of this unusual business approach to development financing.
Africa is ready for this new paradigm and all public, private and social sector actors need the support to create the right tools to adequately channel the social investment and philanthropic capacity of Africans to deliver more scalable, inclusive and sustainable growth.
A recent dossier on Africa’s philanthropic potential explores the role of leadership within the continent in supporting the African diaspora to channel its disposable income to organizations best positioned to create African wealth. It suggests that after so many decades of dependence on foreign funding, it is time that wealth – and not poverty – should dictate how the African continent develops.
Through the patient capital approach, Africa’s philanthropy flow can target economic growth opportunities in poverty, poor access to education, quality healthcare, jobs, livelihoods and food security. By channeling the right mix of financial resources to address the continent’s most pressing problems, it unlocks new vistas of sustainable development by shifting its focus from poverty reduction to wealth creation.
Ikechukwu Ibeawuchi is Head, Strategy and Growth at Sociocapital Impact Group
Sociocapital is a social impact organization partnering with philanthropies, public, private and social sector organizations to improve lives, empower communities and transform systems through market-based solutions delivered at scale.