Africa is facing major headwinds from the sudden cancellation of US-funded aid programs. But for certain sectors, the challenge to invest could prove to be a blessing of disguise, as a focus on African influence investors say.
“In the long run, this may be something that can turn into opportunities,” says Nimrod Gerber, managing partner at Vital Capital, an impact investment company focused on water, food, health and sustainable infrastructure sectors. He says that companies in Africa that receive “commercially oriented” support rather than relying on grants from aid agencies could ultimately prove to be more durable and more impactful.
USAID sucked the gut, but investors can step up
The United States Agency for International Development (USAID) has been hampered since Donald Trump took office since 83% of its programs have been cancelled. Another important donor, the UK, has announced drastic cuts to support its funds as it prioritizes defence spending.
There's not much that the private sector can do to close this gap. For example, in the case of humanitarian intervention, there is little scope for private investors to replace aid.
However, Gerber argues that private investment can play a role in mitigating losses to the USAID ecosystem building program. He points out that African governments and financial institutions, alongside private sector developers, are taking the lead in Mission 300, an initiative that will connect 300 million people to power networks by 2030.
But Gerber believes the biggest opportunity for the private sector is to step on where USAID and similar agencies support private companies with grants and other support. Some of these businesses are currently facing immediate cash crunches. “This is where the private sector can get involved,” he says. Investors like Vital Capital, who are obliged to provide both impact and return, can inject capital into these types of businesses and use their “operational expertise” to help them grow.
Short-term pain, long-term benefits?
While many donor countries are expanding their global aid programs, Gerber believes development financial institutions can still play a key role through their blend finance fund structure. There, they provide “first loss” capital. Such funds, managed by companies such as Vital Capital, are usually obligated to provide financial benefits along with impact and environmental, social and governance goals.
Unlike USAID, the US Development Finance Corporation, which was founded during Trump's first term, has so far escaped the Chopping Committee, but will need to be re-authored by the US Congress later this year. There have been some suggestions to reorient the body towards investment in domestic industry, but it is unclear whether the mission will change.
Gerber argues that DFC is “very efficient” to deploy capital using commercial lenses. He suggests that using more blend finance mechanisms, rather than providing grants directly to businesses with aid, could produce “good results.”
Gerber also sees opportunities for African pension funds to make greater contributions by rolling out capital to private investment funds. According to the Mo Ibrahim Foundation, these funds combined $2000.5 billion in assets in 2022 (other sources point to higher numbers). However, they are notoriously conservative in their investment strategies.
“Impact Investment is the perfect bridge,” Gerber said, as pension funds diversify beyond the traditional approach of purchasing government bonds while also contributing to the National Development Goals.
