Investors interested in new technologies understand that risk comes with the territory. The issue for private backers of Equator, an Africa-focused climate tech venture capital firm, was the territory. Would typical VC returns for a climate tech fund be possible in Africa?
Equator, a sister firm to Boulder, Colo.-based early stage tech fund Factor[e] Ventures, hit the market in 2019 as one of the only pure climate tech funds for Africa. After a difficult six years raising, it closed its first fund at $55 million, with most of the capital coming from the International Finance Corp., French and British development financial institutions Proparco and British International Investment, and the Shell and DOEN foundations.
An additional, catalytic investment of $4.7 million from BII helped the fund lock in a number of private investors, including Singapore’s Kibo Invest and American and European family offices and high-net-worth individuals. Those investors had been reluctant to invest in Equator not because they feared loss of their capital, but because they didn’t know if African climate tech could deliver returns to match the risk.
“They were not worried about downside protection,” Equator’s Nijhad Jamal told ImpactAlpha. “They were actually thinking about the upside – the returns and exits.” There weren’t enough proof points for climate VC on the continent.
Equator had initially structured the fund with just one class of shares. BII invested $10 million, the IFC and Proparco each invested $5 million, and the Korea Green Resilient and Innovative Development, or K-GRID, program chipped in a $1.5 million guarantee. After hearing from private investors about concerns about returns, BII made an additional commitment from its highly catalytic Kinetic climate facility, which will provide a return enhancement to the fund’s first-time African climate tech investors (but not to BII’s $10 million commitment or to the other DFIs).
Jamal says this use of catalytic capital signals a shift in investment attitudes. Overseas private investors have historically been preoccupied with their perceived risk of investing in emerging markets.
“I think people understand and are getting more comfortable with the risk side of the equation,” he said. “The return side of the equation, however, has become more interesting, especially in areas like climate tech, because there are global technology trends that are creating a more enabling environment for what we do and what we invest in.”
Equator and BII’s hope for the return enhancement mechanism is that as investors get comfortable with the sector, they’ll recalibrate their risk-return expectations, and that fund managers like Equator will be able to raise commercial funds in the future. For now, Jamal acknowledges that catalytic capital and development finance are needed to bring private investors into African climate tech.
He said, “I continue to believe that if we are investing in solutions that are bringing tangible benefits at affordable price points in large markets, we will see capital flow both from private and development-focused sources.”
