Prospects for the development of impact investing in South Africa

Abstract

Impact investing, where investors seek opportunities that both create social value and achieve financial return, is at a nascent stage of development in South Africa. As it gains prominence, impact investing is increasingly being seen as a potentially effective instrument to mobilise private capital for social development. This study examines the prospects for its development as a distinct form of investment in South Africa. Using qualitative research techniques, the study identifies the main factors that constrain, and the main factors that favour, its development in this country. The study uses data collected through semi-structured interviews with representatives of 16 participants in the sector, including investors, social enterprises and intermediary organisations. The participants were identified using purposive sampling, and the data was analysed using thematic content analysis. The study found that the development of impact investing in South Africa is constrained, in the first instance, by the inherent tension between the pursuit of social value and the achievement of financial returns. It is constrained also by the challenge of accessing capital, the shortage of market intermediaries, low levels of entrepreneurial activity, regulatory constraints, and limited government capacity to provide support. There are also several factors that favour the development of impact investing. These include significant market opportunity, represented by high demand for social services, a vibrant social enterprise sector, and significant amounts of unallocated domestic capital. This opportunity is reinforced by recent developments with respect to the establishment of an impact investing market infrastructure and changes to regulations governing pension fund investments. The study concludes that, on balance, conditions for the development of impact investing in South Africa are favourable. However, the pace at which it grows, and the ultimate impact that it achieves, will depend on the extent to which the identified constraints can be overcome, and the factors that favour its development effectively exploited.