As part of a research project supported by C3, Open Capital analyzed financing gaps for small and growing businesses (SGBs) in the agriculture and health care sectors in sub-Saharan Africa, quantifying the impact and need for catalytic debt in these sectors. The resulting report, Scaling Impact of Agricultural and Healthcare SGBs in SSA through Catalytic Debt, shares the perspectives of entrepreneurs throughout the region and illustrates what is needed to help businesses thrive.
C3 checked in with Remy Olsen, senior project leader in Nairobi, Kenya at Open Capital, on what he is seeing in terms of opportunity and growth potential for African SGBs. He also spoke about the results of the Open Capital study during a recent webinar on catalytic capital sponsored by AVPA and C3.
C3: Can you share a bit of the motivation for your research? What is the importance of catalytic capital in advancing progress, especially given the $331 billion financing gap for businesses in sub-Saharan Africa?
RO: Open Capital was founded to create opportunities for African companies struggling to grow and access capital. We know there is an enormous financing gap, and that the risk profile for these businesses is very different than what commercial capital is willing to accept. Catalytic capital has unique potential, not only to help SGBs scale their impact-based businesses, but also to bring investors to the table who wouldn’t otherwise consider the SGB segment. We work with SGBs & SMEs every day, so we understand their challenges and how catalytic capital can enable both immediate and long-term growth financing. We work closely with financial institutions across the region to better understand their risk appetite, especially when it comes to SGB & SME lending, and we really think there is a great, mutually beneficial opportunity to bring local businesses & financiers together—but this requires more catalytic capital to close that gap.
C3: Your research honed in on SGBs in agriculture and healthcare. Why focus on those two sectors? What did you learn?
RO: While there is a financing gap for SGBs across almost all sectors,we wanted to examine two impactful sectors where the capital gap is a particular constraint to business growth. There are other sectors like fintech that have seen a major boost in commercial capital injections over the last decade (despite a dip the last couple of years) but agriculture and healthcare are two sectors that could especially benefit from increased awareness around the impact generated through increased catalytic capital. These two sectors often have a longer timeframe to achieve a return on investment (ROI) for investors, so we wanted to highlight the impact possibilities to hopefully help crowd in more catalytic capital, especially through debt products, into the sectors.
Speaking of that impact potential, we found an estimated $82 billion financing gap for agricultural SGBs and a $14 billion gap for healthcare SGBs. If investors could address those shortfalls, they would fuel 21 million agricultural jobs and 812,000 health care jobs, not to mention indirect impacts for families, climate – the list goes on and on.
But we know that we can’t fill that gap overnight. Therefore, we also looked at a more gradual and realistic approach. What happens if catalytic capital could enable $1 billion annually for these sectors for 10 straight years? In agriculture, it would create 2.5 million jobs and support 29 million more farmers. In health care, it would mean 580,000 additional jobs and support medical care for 10 million more people a day. That’s a massive impact, and this analysis led to a lot of learnings, which can be found in the more detailed report.
C3: Interestingly, your research looked at more than just data. It also reflected the voices of entrepreneurs across the continent. How did that come together?
RO: It’s very easy to lose the voice of real entrepreneurs when looking at these enormous numbers. We always want to be as humanistic as possible, and to help entrepreneurs tell their stories—which isn’t done very often in these kinds of macro and ecosystem reports. Through their eyes, you can really see how much need there is, how difficult it is to attract capital, and how massive the impact can be for individuals themselves. Through this grassroots angle, in addition to the macro, you can really start to visualize the actual impact created and see the trials and tribulations through the eyes of the entrepreneur.
C3: Do you see investors responding to these kinds of stories?
RO: I do. That’s why it’s so important to bring in both the macro data and the voice of individual entrepreneurs. If you are talking to organizations that are familiar with catalytic capital, such as impact investors who understand the balance of ROI with impact and how it looks over 10 years, then these stories only help reiterate the need for their risk-willingness, funding, and support. But they need more access to catalytic capital to expand their portfolios. With more commercial players, these are the types of stories and impact figures that could help change their perspective and begin conversations with catalytic capital providers as they think about how to expand their portfolio to more impact investments.
Overall, despite what we think are short-term setbacks in markets like the U.S., we are seeing increasing interest in ESG and impact investments across the globe and across more investor types, which is very promising. Every investor has a different risk appetite, so we hope telling these on-the-ground stories of real entrepreneurs and the impact (and ROI) their businesses can achieve will help match more investors and opportunities, like the ones we discussed in the report.
C3: Based on your research and experience, are there specific tools or approaches that investors could pursue to accelerate impact?
RO: Definitely. There is a real need for catalytic capital in the form of first-loss guarantees and subordinated positions to incentivize lending from traditional investors. We see opportunities for nonfinancial, technical assistance over the lifespan of a debt instrument, including post-investment support, which both helps to maximize impact and often improves financial returns of the investment by strengthening the underlying enterprise. We also see significant potential in innovative financing models, such as pay-as-you-go models for healthcare equipment or agricultural equipment renting – which helps increase access to critical tools for SGBs by financing large upfront CapExs.
Patient, catalytic capital offers an opportunity to build stronger, more sustainable businesses, which then de-risks follow-on investments and creates stronger long-term returns for financiers, opening emerging markets for the future.
C3: Are you seeing positive signals in terms of ecosystem development and capital access in Africa?
RO: We are. If you look at how fast Open Capital has been able to grow, that is a sign of just how apparent the need for capital is amongst SGBs and their potential to scale. Since 2010, we have raised over $1.6 billion USD for high-impact businesses in Africa and are working with a variety of DFIs, commercial institutions, impact investors, and others who see the financial and impact ROI realized in these SGBs through more catalytic products.
I think more awareness about the amount of impact that is possible and the financial ROI that can be achieved will really help continue to push the field forward. The financing gap is massive, but we see more players coming into the fold, and we hope initiatives like C3 and sharing more insights like we did in this report will help keep the momentum going.
C3: Open Capital works across multiple sectors and countries in the region. What other kinds of opportunities and progress are you seeing?
RO: As you mentioned, Open Capital is sector-agnostic and works across impact-based sectors on the continent. Our largest sectors are agriculture and energy access, while one area I’m very excited about isour fintech and financial inclusion work, especially with the massive strides the continent has taken over the last couple of decades to provide game-changing technologies, such as mobile money and the financing products available on the back of it. There is a considerable opportunity to increase access, especially in more rural communities, to financial tools and services, such as micro loans, insurance, and savings accounts, that will help grow individual and community livelihoods while increasing resilience. I’m really excited to see these growth trends continue and to enable more individuals to gain access to critical financial products and services to increase financial security.