The Mastercard Foundation’s Africa Growth Fund is among the most significant catalytic capital initiatives for African small businesses. Now in its fourth year, the fund has committed nearly $200 million to 16 African fund managers and investment vehicles capitalizing local businesses, with a handful more set to close in the coming months.
A new “learning book” from the fund reflects on difficult lessons of trying to shift investment norms and support local economic growth through market experimentation and systemic change.
“The fund has the power to shift priorities in the market by signaling its criteria and aspirations. We did not use this power effectively, and we sent some mixed messages before eventually strengthening our processes and systems,” admitted the fund.
The 66-page report represents an acknowledgement of the fund’s missteps and market criticisms on its multi-year journey advocating for systemic change in how private capital in Africa is deployed.
“Striking the right balance between disciplined execution and iterative learning is one of the fund’s greatest challenges, affecting everything from investment selection to how we engage with investment vehicles,” the report states. “Where possible, the fund will seek to resolve tensions in a future iteration.”
“From the beginning, it was built as a learning prototype,” added Femi Balogun of the Mennonite Economic Development Association, or MEDA, manager of the MF Africa Growth Fund, who spoke in a public webinar last week about the report.
Such admissions are rare from a large funder and provide valuable lessons for the foundation and other funders investing in Africa. Market participants say the missteps have caused significant setbacks to some local fund managers working with limited financial resources in a difficult market.
“I am pleased the Mastercard Foundation put real resources into understanding and documenting their mistakes, but I’m still frustrated that so many funds had to suffer for them to learn some pretty basic lessons,” Aunnie Patton Power, impact investing advisor and founder of the Innovative Finance Initiative, said.
ImpactAlpha spoke to more than a half dozen local fund managers, investment consultants, limited partners and impact and development finance professionals working in African private equity and small business finance about their experiences with MF Africa Growth Fund and MEDA. Most spoke on the condition of anonymity.
Managers described years-long due diligence processes, unclear communication of eligibility requirements, and moving targets for impact and portfolio investments. Limited partners and other ecosystem professionals expressed frustration with investment requirements that were expensive or onerous for first-time managers. One described MF Africa Growth Fund’s “impossible conditions for a small fund.” Another went so far as to say the foundation had “thrown $180 million out the window.”
But in an extremely tight funding environment, where many organizations are competing for a shrinking pool of international development finance, one fund manager called MF Africa Growth Fund a critical source of capital for local managers. “Any funding at all, in this phase, is a blessing.”
She put the onus on managers to “figure out how to work through competing and/or changing priorities, the complexities and nuances of each funder and stakeholder, and calibrate their tolerance levels. It’s the nature of the beast.”
Mixed signals
Toronto-based Mastercard Foundation is one of the largest foundations in the world and one of the biggest philanthropic players in Africa. MF Africa Growth Fund, which operates as an independent vehicle funded by the foundation, was established with three objectives, explained Balogun.
“First, to invest capital into women-led investment vehicles and small businesses that are African-owned and led. Second, to create dignified and fulfilling work for young women on the continent—that’s actually the North Star of the fund. And third, to influence the ecosystem in ways that shift power,” he said.
The fund’s design and execution was developed by Mastercard Foundation with a consortium of five organizations that include MEDA, Criterion Institute, ESP Partners, Genesis Analytics and Africa Communications Media Group.
“We are three and a half, four years in, and a lot of that time was just to get organized,” Criterion Institute’s Joy Anderson said on the webinar.
As it was assembling the strategy, “we signaled that our priority was investment vehicles led by women,” the report states. “The perception in the market was that we were filling a gap for the women who manage investment vehicles.”
Balogun reiterated that in outlining the fund’s objectives on the webinar. But investing in female fund managers was not the primary goal of the fund. “It was a means to an end of creating jobs for young women, not the end in itself. This tension in the market created expectations around which investment leaders should or would receive capital,” the report states.
The fund’s investment screening criteria also led to confusion around this point: the fund would only consider vehicles with women in leadership positions.
“We assumed, and perhaps presumed, that women would support women. They may, but it is not automatic,” the report states.
The fund’s portfolio of investment managers is 100% composed of women-led or co-led vehicles, including Nigeria-based Aruwa Capital Management’s first and second funds, Uganda-based Inua Capital, Kenya and Nigeria-based Chui Ventures, and Côte d’Ivoire-based Janngo Capital.
Other female fund managers who thought they were eligible for MF Africa Growth Fund capital, however, eventually learned that eligibility depended on having a clear gender thesis, not merely being a female fund manager.
Adding to the confusion was that most fund managers’ first point of contact with MF Africa Growth Fund was via its fund advisor, I&P. The French impact fund advisor and manager had been recruited to help MEDA build the fund’s pipeline; MEDA, however, controlled the investment process.
Last year, MF Africa Growth Fund eliminated I&P’s role as fund advisor, in part to minimize miscommunications to the market.
MEDA now represents the “centralized point of direction, which was particularly important as we sought to accelerate and retool the operations of the fund,” states the report.
Capital deployment v. design
As Mastercard Foundation, MEDA and the other consortium partners were setting up the fund, another point of tension emerged around pressure to deploy capital versus catalyzing systemic change in the African investment ecosystem.
“These two were often in juxtaposition or conflict with each other,” noted Anderson. “We recognized the urgency to move capital, but we also need to build capital structures.”
MF Africa Growth Fund sought to strike a balance with one of its key investment requirements: that investment vehicles be domiciled in Africa. Its goal with the requirement was to build a more localized ecosystem of funds to “channel capital directly to the continent” and also to unlock and mobilize capital from local investors, from high net-worth individuals to institutional investors.
Most immediately, however, it threatened managers’ ability to raise capital from overseas investors, who still, for now, make up the majority of private investment on the continent.
“One of the pieces [of systemic change] that was most pronounced was the fund’s commitment to domiciliation, and sometimes that slowed things down,” explained Anderson.
The fund provided operational funding and support to help local investment managers set up entities in multiple jurisdictions, both in and outside Africa. “This approach not only satisfies the fund’s requirements but also addresses the preferences of a broader investor base,” the report states.
“If their goal is to support systems change, err on the side of getting money out the door to those doing the work on the ground, rather than hiring consultants to build complex strategies and processes that are out of sync with what is really needed,” said Patton Power.
MF Africa Growth Fund maintains that the domiciliation requirement is a bright spot in learnings so far. And others in its portfolio and network argue that the long-term impact will outweigh short-term challenges.
“Requiring every vehicle to register on African soil slowed first closings, yet forced local legal, tax and fund administration capacity to mature. Short-term friction, long-term depth,” wrote Alfonso Campo of AVCA.
“African domiciliation signals long-term commitment. When you’re domiciled in Africa, you’re betting on the ecosystem. It shifts perception. You go from opportunistic capital to embedded capital,” shared Patrice Backer of Senegal-based private equity firm AFIG Funds, on last week’s online discussion.
Mauritius is the strongest and most attractive jurisdiction for African fund managers. “We’re beginning to see it in other markets like Rwanda and Ghana,” Backer continued.
Long-term, he hopes overseas investors will adjust their perception of African domiciled funds. “Many LPs still prefer funds domiciled in Luxembourg or Delaware. African domiciliation challenges investors to reframe risks.”
Power shift
Efforts to recalibrate investment risks and power dynamics in Africa became a major source of tension for MF Africa Growth Fund. The fund’s initial investment strategy in fact reinforced norms around vehicle type, size and strategy.
“In the interest of swiftly deploying capital, the consortium initially prioritized capital for investment leaders who could raise additional capital from other investors and get to an investment close,” the report states. “But those other investors were working within the norms of the market – and so by insisting on their acceptability in the eyes of these investors, we were pushing [managers] toward those norms in due diligence and negotiation.”
MF Africa Growth Fund says it now allocates a portion of its capital to make anchor investments in new vehicles “without the requirement that the vehicles immediately leverage additional capital.”
That signals the credibility of local managers and locally-designed strategies, said Backer. “The norms of global capital are still defined in New York, London, mostly western countries. They are not defined in Lagos or Dakar or Nairobi.”
“African fund managers constantly navigate this tension,” he continued. “We’ve had to explain why we source a different way from what the management consulting firms tell you, or why a Black-led fund with deep local roots should be seen as a premium feature and not as a risk.”
African fund managers and ecosystem builders see greater participation from local investors as the key to sustainable growth for private investing on the continent, and to power dynamic shifts.
“To truly shift power, we need more African capital funding African innovation,” said Joyce-Ann Wainaina of early-stage venture fund Chui Ventures. For its first close, 90% of Chui Ventures’ were African high net-worth individuals; 60% were women from one of its core markets, Kenya.
More managers on the continent are succeeding in raising capital locally. WIC Capital, a women-led and -focused investment firm in Senegal, was anchored by funding from Senegalese and Ivorian business women. AFIG Funds, Mirepa Capital in Ghana, and other fund managers are focused on mobilizing African institutional investors for private vehicles that support small businesses and local economic development.
“That kind of local ownership not only drives success, to a certain extent,” says Wainaina, “but it also ensures that we have a pool of people who are very close to the problems, who are very close to the ecosystem.”
