CATHERINE WIJNBERG: Enterprise and social-impact investors face bars

SA has a unique challenge in the form of an oversupply of investment funds dedicated to small businesses, and an undersupply of investment-ready SMEs to which these funds can flow. These unutilised funds represent an untapped potential to stimulate the economy, generate jobs and, if correctly applied, ensure environmental sustainability. 

In a low-growth economy this investment stalemate is especially challenging, with informal and emerging small enterprises in need of growth finance having to engage with a highly risk-averse lending sector.

Impact investing refers to investments made into companies, organisations and funds to generate positive social or environmental impact alongside financial returns. Unlike traditional investing in which the primary goal is financial gain, impact investing seeks to create measurable positive outcomes in areas such as sustainable development, social justice, environmental conservation and community empowerment. 

A core challenge for social impact investors and enterprise & supplier development (ESD) funders is the limited availability of an investment-ready pipeline. Small businesses and emerging entrepreneurs frequently lack the business and financial skills to develop and scale ventures. They thus often have low profitability and weak growth potential.

Most also lack the necessary capacity and investment readiness skills to prepare and present a sound investment proposition. Worsening the situation is that many intermediaries lack the technical and investment readiness skills to prepare, support and connect emerging entrepreneurs with suitable investors. In addition, fund managers, constrained by their mandates, the need to secure maximum broad-based BEE (BBBEE) points and a perception that the ESD industry is already in place, are largely reluctant to invest in building this pipeline.

This trio of challenges results in a low quality and quantity of investment-ready ventures and excessive competition for the small pool of investment-ready ventures. 

Limited accessibility

The logical solution is for ESD fund managers and impact investors to work with intermediaries such as Fetola that do have these pipeline-building skills and support them to strengthen the investment readiness of emerging entrepreneurs at the appropriate level. This will improve small business performance and derisk investment returns, as well as boost the measurable social and environmental impact.

Despite more than 600 funding and investment products targeted at small businesses, there is limited accessibility to affordable capital for early-stage and high-risk ventures, especially for businesses with business-to-consumer models. ESD and social impact investors often face a trade-off between financial returns, social impact and risk. This is especially challenging in the context of low economic growth and high uncertainty. The result is that investors target supply chain and procurement finance, but not in the much-needed R250,000-R5m growth finance segment. In addition, available capital is often at a punitive cost for small businesses, resulting in business failure, low deal success rate and a vicious cycle of increasing risk premiums and cost of finance to the SMEs to compensate. 

It’s time to rethink the assessment of risk and reassess the purely commercial nature of ESD and impact investing, through mobilising and optimising different sources of funding via blended finance structures. Successful deal flow needs to be enabled with alternative due-diligence models, specialist due diligence teams, targeted track and trace technology and long-term trust-based customer relationships to reduce the investment risk and drive deal flow. Integrating technology into the process via guaranteed payment solutions will support the scalability and scaling of funds. 

Other opportunities include improving the enabling environment and infrastructure for social impact investing, such as legal frameworks, tax incentives, intermediaries and platforms. These changes can help facilitate and accelerate the flow of capital to social impact ventures.

Specialist support

One of the challenges for impact investing is the high failure rate and weak impact outcomes of the investment. This is unsurprising given the poor investment readiness, lack of formality and inexperience of many emerging entrepreneurs. The added pressure of financial performance needed to meet repayments can cause high levels of stress and an inability to identify and optimise growth opportunities. This is especially challenging in a sluggish economy. 

One solution is the provision of specialist postinvestment support for emerging enterprises to support their transition into the new growth phase, reduce default risk, boost opportunities for new growth and innovation, and widen the investment performance. 

A persistent challenge for impact investing globally is the lack of a clear and consistent definition and measurement of impact. Different investors and intermediaries have different criteria, indicators and methods to assess the impact of their investments, such as social return on investment B Impact Assessment Global Impact Investing Rating System, sustainable development goals, and many others. These different rating systems create confusion, inconsistency and incomparability among stakeholders. Added to this, measuring impact can be costly, time-consuming and complex, especially for SMEs that lack the resources and expertise to do so. This burden can result in nonreporting, or inaccurate, unvalidated results that don’t stand up to scrutiny.

We need to develop and adopt a common framework and standard for defining and measuring impact to harmonise and simplify the social impact measurement process, as well as to enhance the credibility and transparency of ESD and social impact investing. Impact data can be further improved by providing user-friendly tracking tools and aligning impact measurements to the realistic possibilities at SME level. Further use of professional, independent impact assessment can also be deployed to gather and verify the wider long-term impact of the investment. 

ESD and social impact investing is a powerful and innovative way to unlock growth by financing emerging small businesses. However, investors face many challenges of their own, such as lack of access to qualified investment pipeline, the limited capacity and skills of social impact entrepreneurs and intermediaries, low rates of successful deal flow, weak postinvestment performance and difficulty in verifiable measurement of social impact. These challenges hinder the investing ecosystem and reduce its contribution to the social and environmental wellbeing of the country. 

• Wijnberg is founder and CEO of Fetola.