If you are a philanthropist, grantmaker, financial advisor or involved in private equity, you have probably come across the term “impact investing” in the past few years. It’s a relatively new concept all over the world, but a particularly nascent one in South Africa.
According to the Global Impact Investing Network, impact investing refers to investments made into companies, organisations and funds with the intention to generate social and/or environmental impact alongside a financial return. At its core, it aims to bring the usually disparate worlds of driving profits and driving social impact – which have traditionally been treated as entirely different activities – together. Investing in commercial models that actively drive and measure social change while delivering financial return to investors is not only possible, but represents a critical strategy to increase and maximise the amount of capital dedicated to impact.
The impact investing sector in South Africa is new, but it is gaining traction fast. Within the last year, an Impact Investing National Task Force with high-level representation from government, business and civil society has been established; the Public Investment Corporation has expressed interest in putting some of its assets towards impact (pension fund activity has often been a “game changer” around the world in terms of increasing impact capital); and President Ramaphosa’s recent Investment Conference featured an entire day focused on how impact investing can help drive inclusive growth in the country. There is a growing number of players in the space – including fund managers, academics and advisors – all of whom have a role to play in building a strong impact investing ecosystem in the country.
All of these developments are encouraging and they signal we are on the right track. But for the impact investing industry to truly thrive in South Africa, the regulatory environment must be conducive as well. Given our unique position in the market, Tshikululu interacts with both social investors and social enterprises on a regular basis. What we find for both groups – those with funding they want to deploy to drive social change and those who seek funding to make that change happen – is not an empowering environment, but a constrained one. We’ve recently completed an in-depth analysis, and it’s clear that there is a lack of appropriate legal frameworks for both social enterprises and impact investors.
For impact investors, there are numerous vehicles that might be utilised, including Special Purpose Vehicles, Small Business Funding Entities (SBFE), Venture Capital Companies, Public Benefit Organisation (PBO) Trusts and non-profit companies to name a few. Each of these has distinct advantages and disadvantages, but none of them are ideal. Whether it is restrictions in terms of what type of investing can be undertaken, ineffective tax incentives or a lack of flexibility in terms of structure and duration, all these investment vehicles leave an innovative impact investor wanting more. For example, a SBFE is tax exempt, but not tax-deductible, which reduces interest in the vehicle. (Over the past four years, only one that we know of has been established nationwide.)
For social enterprises looking to employ commercial (and sometimes untested) business models to solve entrenched social challenges, the options are even more limited. If an enterprise is registered as a non-profit company, it may be able to access grant funding but will struggle to secure other types of investment (especially if it also has PBO status from SARS). If it chooses to go the for-profit route, it may attract debt or equity investment, but almost all foundations and trusts will be unwilling (or unable) to provide financial support. In response, we see a growing number of organisations that are establishing both a for-profit and non-profit entity to attract different types of capital to support their vision. Such “hybrid” arrangements can take a variety of forms, such as the non-profit owning shares in the for-profit or one entity owning certain intellectual property which is then licensed to the other entity to implement. While there is nothing untoward about this approach, it adds bureaucratic and operational complexity – not the least of which is ensuring full compliance with multiple regulations and regulators – that distracts from delivering real social and financial value.
At the best of times, driving social change is a difficult and complex task. Similarly, establishing and running a successful business is hard work (the Department of Small Business Development recently noted that 70 – 80% of SMMEs fail within the first year). Doing both of these things at the same time is really challenging. For impact investing to take off in South Africa – which will mean more money targeted at tackling poverty, unemployment and inequality – it is essential that we create the smoothest runway possible for impact investors and social enterprises alike. At Tshikululu, we will continue to explore the regulatory space in the coming months and years in the hopes that we can contribute to setting the ecosystem up for success – and real, meaningful impact.
Head of Social Impact