With the US’s retreat in international development and the climate agenda, Japan has become one of the leading providers of blended capital for both. It’s ramping up its investments in private capital funds in particular, which funnel money to local small businesses and green opportunities.
The latest example: a $50 million commitment to Helios Investment Partners latest private equity fund for growth companies supporting Africa’s digital transformation.
The London-based firm has for more than two decades been investing in Africa through a series of private equity and private credit funds. It is aiming to raise $750 million for its fifth equity fund, which is also backed by other development finance institutions, including Germany’s DEG, the European Investment Bank and the International Finance Corp.
JICA’s investment is part of the development bank’s Impact Investing for Development of Emerging Africa, or IDEA, strategy, which promises to deploy $750 million and mobilize an equal amount from other investors for Africa’s private sector over the next three years.
“We’re doing this as a natural course as our work evolves in the development space,” Ryo Tsujii tells ImpactAlpha. “We need to pivot to private sector engagement in Africa and businesses are natural enablers of economic growth.”
Regional reach
Japan’s development finance agency has been named this year in deal after deal in Africa and Latin America, in addition to a steady stream of investments closer to home, in emerging Asian economies.
In Africa, JICA made a $10 million investment in Novastar Ventures’ third fund, and a $40 million investment in India-based Aavishkaar’s Global Supply Chain Support Fund, which invests in trade lines among Indian Ocean countries, including East African nations.
In Latin America, JICA committed $1 billion to IDB Invest to launch a co-investment vehicle for private-sector projects across the region. It has also invested in Dalus Capital’s third fund in Mexico, which backs early-stage impact and climate tech startups.
To be sure, JICA’s private sector financing outside of Asia continues to represent a small share of the agency’s portfolio. About 12% of its private finance and lending activity went to Latin America last year, and just 2.6% to Africa, compared to 68% in Asia. But it’s more than the year before, when Latin America and Africa each received just 1.2%.
The expansion of JICA’s activities beyond Asia is notable given the US’s development assistance retreat, but not correlated, Tsujii insists. Rather, its deal activity aligns with Japanese investors and corporations’ own expanding interests in emerging markets, which offer both new customer and production channels.
Japanese insurer Sumitomo Life Insurance, for example, is an investor in LeapFrog Investments’ fourth Emerging Consumer Fund, which targets healthcare and financial inclusion in Africa and Asia, as well as BlueOrchard’s emerging markets public debt impact strategy.
Sumitomo Mitsui Trust Bank, Toyota Tsusho Corporation, Tokyo-based investment firm SBI Holdings, and Japan’s ICT and Postal Services, a public-private investment fund, have all invested in Kepple Africa Ventures, a venture capital firm with teams in Kenya and Japan.
“It’s natural for us to double down in that space,” Tsujii says. “We hope we will manage to mobilize the Japanese private sector because they are strategic investors and they’re also patient capital providers for the continent.”
It also serves as a counter-weight to China’s spending and influence, especially in Africa.
Additionality in Africa
JICA’s IDEA initiative builds on years of work providing technical assistance and advisory work to support Africa’s private investment environment. The initiative is focusing on fund investments in Africa’s core economic and social opportunities, including financial inclusion, healthcare, food security and green growth. JICA is targeting fund managers “that are capable of deploying and implementing exits,” Tsujii says.
“Our focus will be on the capacity or track record of fund managers,” he adds.
Established managers like Helios, in other words.
Such managers exist in Africa but most are first-time or smaller fund managers raising funds of anywhere from $5 million to $50 million.
“This segment is where we see the demand on the ground,” said Adesuwa Okunbo Rhodes of Lagos-based Aruwa Capital Management said on a recent Agents of Impact Call. Aruwa rites equity checks of $1 million to $3 million. It raised $30 million for its first fund and is now in the market with its second fund and a target of $60 million.
“This segment of the market offers the best, most attractive risk-adjusted returns across the capital stack,” said Okumbo Rhodes.
With too little development and international capital flowing to such funds, however, local fund managers are turning to local high net-worth and institutional investors who are more deeply connected to their markets.
“We’ve seen that the market has been struggling to raise funds, deploy capital and make sufficient returns to meet the requirements of investors,” Tsujii acknowledges. “This trend has created mixed views on the market potential in Africa.”
“We need to play a countercyclical role to grow more confidence in the markets [for private sector investors], and to help the ecosystem to keep evolving,” he says.
IDEA includes a small pool of capital for first-loss protections, but most of the financing will be deployed through conventional DFI financing for private sector entities like Helios’ latest fund.
“Some of the key learnings are that we need to be patient to implement our strategy and this initiative as a DFI,” Tsujii says. “JICA would like to make the most of Japanese potential to deliver the best for Africa.”
