African investors warm to regional funds of funds

Years-long efforts to get local funders in Africa to step up with financing for small businesses and economic development are starting to bear fruit. 

In Ghana, the Ci-Gaba Fund-of-Funds is nearing a first close to drive capital to small and mid-sized businesses in West Africa. 

“Fundraising has been good,” said Hamdiya Ismaila of Savannah Impact Advisory, which manages the Ci-Gaba Fund of Funds, expressing a sentiment not often heard from fund managers in today’s market. 

In Zambia, the central bank is providing $200 million to anchor the Small Business Growth Initiative, a small business fund of funds. 

“I’m looking forward to the numbers beginning to show that the finance ecosystem is being disrupted,” said Austin Mwape, a former deputy governor of the Central Bank of Zambia who is now working with the National Advisory Board for Impact Investing Zambia.

And in Nigeria, pension funds have said they will match a possible $50 million investment from the government in the Nigeria Wholesale Impact Investment Fund, a fund of funds that will invest to tackle poverty alleviation, job creation and sustainable economic growth. 

The funds, initiatives of the GSG Impact National Advisory Boards for Impact Investing in each country, are helping fill a financing gap for small businesses and critical economic growth sectors. 

Ismaila and Mwape spoke to ImpactAlpha at last week’s Africa Impact Summit, hosted in Accra, Ghana by Africa Impact Investing Group, a consortium of national advisory boards across Africa. The theme of the event: “Transforming systems: Redefining impact for real change in Africa.”

“Our companies are small and can’t take certain kinds of capital,” Ismaila said. “Foreign capital comes and it is heavy. There’s the need to have aggregators who aggregate big pools and give it to these smaller funds to really invest in a pipeline for larger funds to come in.”

Hourglass dilemma

The early successes of such initiatives in engaging local institutional, public and high net-worth funders is a promising signal for Africa’s local impact ecosystems, which are working to move away from overseas funders and open new channels of affordable and tailored financing.

The locally-led funds of funds are a response to what has been called “the hourglass dilemma.” 

“We have all this big institutional capital that can’t get to small businesses,” said Drew von Glahn of the Collaborative for Frontier Finance. “These funds of funds create pathways for institutional capital to reach the underserved small business finance market.” 

Launched in 2023, Ci-Gaba is a $75 million blended finance vehicle of Impact Investing Ghana that aims to invest in providers of capital to small and growing businesses across West Africa. It’s looking at raising 70% of its capital from domestic capital providers. 

The Ci-Gaba fund has received commitments from a European development financial institution and small business-focused family foundation, with the aim of hitting its official first close of around $35 million in September this year. 

To cover its operational expenses, it also raised funding from the Argidius Foundation, aided by the Growth Firms Alliance or GFA an alliance of five philanthropic funders that is mobilizing resources, both financial and non-financial for growth firms in developing countries. The Growth Firms Alliance was instrumental in securing the development finance funding for the first close. 

To keep up the momentum, Ci-Gaba already is making investments using capital it had previously secured from two Ghanaian pension funds, backstopped by catalytic capital  from UK’s development financier FSD Africa. “It’s a demonstration and so I want to make sure that this thing works,” Ismaila said. 

From a pipeline of 42 funds, the fund has already backed two funds and is looking at deploying up to $7.5 million. Ci-Gaba focuses on small funds to help them absorb capital, since there’s often a mismatch between what the small business market can absorb and some of the larger funds that target larger deals. 

Ci-Gaba is part of a consortium of other funds, managers and financial sector regulators advocating for institutional capital providers in Ghana to allocate 5% of their assets under management to venture capital and private equity firms. 

Ismaila notes that pension funds especially, have been increasingly interested in looking at alternative deals, though they lack experience in this sort of capital allocation. It’s now working with them to help them get more hands-on exposure and build their capacity for these investments.

“Savannah has given our pension fund investors a co-investment opportunity and they can be second a team member to sit with us and learn through it,” she says. “Private equity and venture capital is the deployment of the riskiest of capital. That is why we have tools and systems that mitigate some of them, experience and expertise is one of them.” 

Wholesale impact

Ci-Gaba and the other funds have taken a page from other local and regional “wholesale” impact investment models, like the UK’s Better Society Capital (formerly Big Society Capital). 

Such social investment wholesalers move money into the market, to support impact-oriented organizations with “the right kind of finance so that they can ultimately deliver more impact,” Better Society Capital explains on its website. “It invests in a way that aims to catalyze co-investment, bringing in more capital from other investors.”

The UK government set up Better Society Capital in 2012, seeded with £75 million from dormant bank accounts, to finance UK-based social enterprises and charities. 

“The structure of a wholesale fund of funds — that inspiration came from those dormant assets and the concept of having a domestic source of capital,” explained GSG Impact’s Elizabeth Boggs Davidsen.

GSG Impact is helping the local national advisory boards adapt the wholesale fund model to fit each particular market. More advanced economies, like Japan, already have been able to replicate it. Access to those kinds of dormant accounts is not generally available in emerging markets. 

“Local pensions have been a clear and obvious potential source of patient capital,” said Boggs Davidsen. Each fund is seeking concessional capital to derisk the strategies and attract more capital. 

Boggs Davidsen sees momentum picking up, as local fund managers and other private capital providers bring to market alternatives to commercial bank financing or microfinance.

“If you can hook a domestic source of capital, it gives a sense of certainty to other institutional investors,” says Boggs Davidsen. “While it’s important to have the catalytic layer, the most important piece of the puzzle is the domestic capital.”

Affordable and accessible

In Zambia, the national advisory board has been leading the structuring and fundraising for the Small Business Growth Initiative, or SBGI. It’s set up to provide different types of capital to meet small businesses at their stage of growth. One pool offers short-term working capital, while another offers more flexible, long-term financing to help businesses acquire equipment, ramp up production or expand into new markets. 

To attract private investors, especially conservative local institutional investors, the Bank of Zambia put up $200 million in first-loss debt financing for the short-term lending pool. 

The Small Business Growth Initiative is looking to lend to banks as well as non-bank and fintech lenders, with incentives and subsidies to encourage lending to encourage on-lending to small businesses, and particularly to first time borrowers and underserved sectors such as climate reliance and women-run businesses. 

Mitigating repayment risks will allow those funders to lower the cost of capital it provides to small business borrowers. Creating more resilient lenders who can then expand their lending operations has a multiplier effect on access to affordable financing for small businesses. Mwape expects the data will begin showing a shift in the cost of capital for small businesses. 

“It’s a huge deal. They can significantly drop their price without compromising on their margins,” he shared. “They will maintain or even increase their margins, while the small business sector starts getting financing at a significantly reduced rate.”

Mwape is eager to mobilize capital to extend the reach of the Small Business Growth Initiative.  

“We need to start expanding. Expansion is what will generate jobs,” he said.

The small business growth initiative had secured the first $1 million of a larger tranche from the US government’s Millennium Challenge Corp. for the alternative finance pool. That funding was pulled earlier this year when President Donald Trump returned to office this year and gutted overseas development programs. The small business growth initiative is looking to replace that funding with pension and development finance institutions.

Global Steering Group for Impact Investment, or GSG Impact, which works in over 50 countries globally to incentivize impact investing, has been key in fostering collaboration. GSG Impact’s Boggs Davidsen believes that unlocking domestic capital in emerging markets needs a layered approach, one that combines new fund structures, policy reforms and blended finance. 

“Policy is probably the most important tool in the toolkit today,” Boggs Davidsen told ImpactAlpha. “You need to figure out what kind of policy incentives you can put in place if you want to unlock some of the demand and really build out more of the capacity for the pipeline.”