Africa has been the top geographic focus for impact investment for a few years now. But as capital inflows increase in African nations, we have seen some investors struggling to allocate resources effectively to achieve both the impact and the financial returns they desire. One reason? They’re instinctively looking for established companies with compelling business plans, good teams, and robust accounting and reporting standards that can also achieve strong social impact.

Unfortunately, the number of high-impact companies that meet “safe bet” specs is simply not increasing at the same rate as the number of funds. And Africa’s challenging business environment, coupled with the high cost of reaching low-income consumers in informal and rural markets here, tends to amplify trade-offs between profit and impact.

Some investors are changing tack, taking on higher risk by investing in early-stage, impact-focused enterprises. Others are amending their impact targets in hopes of gaining on commercial performance. But these investors, too, face challenges in aligning their investment strategies with the market. Data on performance of impact investments in Africa is scarce, and so setting expectations is difficult; no one knows quite what is reasonable or possible. Cambridge Associates and GIIN released the first report tracking the performance of impact investment funds globally last year. However, the research can only assess funds with a significant track record, excluding those launched later than 2010 (the point at which impact investing really took off in Africa).

Emerging insights

KPMG’s International Development Advisory Services (IDAS) manages various development funds across Africa. Through this work, the firm has allocated concessional capital to more than 200 businesses implementing innovative, early-stage projects that seek both profit and impact. We believe that the experiences of businesses in this portfolio can provide useful insights for impact investors interested in early-stage finance, or wanting to better understand trade-offs between impact and commercial performance. To that end, we recently examined the portfolio’s commercial and social impact performance and took an in-depth look at several high-performing sectors: dairy and poultry, livestock, seeds, pay-as-you-go (paygo) solar distribution, and contract farming.

We found that both commercial and impact performance vary significantly by sector and by mode of engagement with poor people. For example, agro-processing projects in the portfolio—companies that buy produce from smallholder farmers to process and sell on to consumers—tended to be more profitable than the input-supply projects, which provide things like seeds or fertilizer to farmers. But neither of these types of agribusinesses grew as quickly as the off-grid renewable energy projects.

Off-grid solar paygo companies in the portfolio, for instance, have achieved tremendous growth and fanfare from impact investors, because they can reach millions of people. However, their dollar benefit per person is significantly lower than the benefit per person attained in agro-processing. We have seen processing projects transform the lives of a small group of farmers, but this kind of work can be difficult to scale.

Interestingly, we found no consistent relationship between impact and profit. Commercial performance varied more by sector than impact level. This suggests that commercial performance can be improved (at least slightly) via thoughtful selection of sectors and business models, instead of by sacrificing impact goals. While many projects in the portfolio were not profitable within their first four years of operation, some sectors (such as dairy, poultry and paygo) achieved breakeven more quickly and provided strong social impact.

With more nuanced insight into how different sectors and business models can achieve distinct combinations of impact and profit, investors should be able to craft more specific and successful strategies.

Perhaps unsurprisingly, the data also confirmed that successful businesses have the most impact; many of the projects with the greatest impacts outperform the portfolio average commercially. (Many of the funds that we manage intentionally support companies that have impact by default rather than by design, which means growth and profitabilty are central to their business models.)

That said, the slow rise to profitabilty across much of the portfolio emphasizes the continuing need for soft funding to get new impact-oriented businesses off the ground in Africa. Truly patient, risk-tolerant, early-stage financing provided by experienced, on-the-ground fund managers, can play an important role in identifying and supporting the growth of more viable companies that have a social impact.

Until investors put more money into early-stage finance, they will continue to struggle to find good homes for the large amounts of impact capital currently seeking later-stage opportunities.