Why are impact investors ignoring African healthcare?

Children in Africa are 14 times more likely to die before their fifth birthday than children in Europe or North America. There are 2.3 doctors per 10,000 people in Africa, compared to 39.4 in Europe. Africa accounts for 96% of global deaths from malaria and 61% of deaths from AIDS.

These statistics, and countless others, clearly illustrate the urgent need for investment in Africa’s health systems. Indeed, the Sustainable Development Goals contain multiple targets that enshrine the collective responsibility to tackle the world’s most pressing health challenges by 2030. Yet, according to figures produced by the Health Finance Coalition, only 1% of global health funding is spent in Africa – meaning the continent faces an annual shortfall of more than $200bn.

While a large part of the solution to the funding shortfall for health in Africa must come from governments, the need to support the private sector – which largely consists of thousands of small-scale clinics and pharmacies – cannot be overlooked. John Fairhurst, head of private sector engagement at the Global Fund to Fight AIDS, Tuberculosis and Malaria, says that 50-60% of initial malaria care is delivered by the private sector. “People tend to go to private sector pharmacies or clinics to get tested, even to get the first dose of treatment,” he says. 

Evidently, the world’s massive pools of investment capital are largely ignoring the need and opportunity to invest in Africa’s healthcare providers. But, perhaps more surprisingly, ‘impact’ funds – those with a mandate to achieve positive social or environmental outcomes, alongside financial returns – are also shying away from healthcare in Africa. Despite the obvious potential to contribute to the SDGs, HFC figures show that just 1.6% of $500bn invested globally in achieving ‘social impact’ is directed towards African healthcare.

“Where the need is greatest you have relatively modest spending from private capital,” notes Martin Edlund, the HFC’s executive director. “We find ourselves at a juncture where there’s a huge gap between the world’s global health goals, the health needs, and the means we have to address those challenges.”

Investors struggle with impact

Impact investors from outside Africa are often philanthropic foundations or ‘family offices’; they may invest directly in companies or put their money into funds operated by asset management firms. Expectations on the financial return to be achieved vary among impact investors. According to the most recent Global Impact Investor Network survey, only one-third of impact investors are willing to accept returns that are below the market rate.

Fairhurst warns that investors will need to adjust their return expectations if they want to make impactful investments in African healthcare. Investing in healthcare businesses that serve low-income patients is almost inevitably going to deliver lower returns, he says. “Until we get that different philosophy from some of the impact funds, I think the centre of gravity is inevitably going to fall where impact is more of a secondary component.”

But making investments that exclusively target low-income populations is also challenging within prevailing investment models. Partly for reasons of efficiency, managers of private equity or other large, closed-ended funds generally prefer to make a smaller number of large investments. They therefore look for companies that are already reasonably large, with demonstrably viable business models.

“There’s still very much a chicken and egg problem here,” says Eline Blaauboer, a partner at the Investment Funds for Health in Africa, an impact-focused private equity firm. She says that healthcare providers that serve lower-income patients and have not yet proven their business models suffer from a shortage of capital, while impact investors have few opportunities to back companies that meet their investment criteria. “A lot of impact investors have struggled with finding good healthcare deals.”

Blended finance

Part of the solution to attracting more funding – both from philanthropists that prioritise impact, and from commercial investors seeking market-rate returns – lies in innovative financial structures.

Nicole Spieker, CEO of PharmAccess, a foundation that promotes public-private cooperation in African healthcare, explains that a “blended finance approach” relies on certain impact-oriented investors in a fund being willing to accept “first loss”. In other words, if one of the fund’s investment fails, the impact-focused investors – often development finance institutions – will absorb the loss. Investors that prioritise financial returns can then invest into the same fund, with a layer of protection. The approach, “takes away some of the risk with the investors, so that they’re more likely to invest,” says Spieker.

Noorin Mawani is the co-lead of the Transform Health Fund, an investment vehicle being managed by impact-focused private fund manager AfricInvest. She says that the fund, which will make debt and mezzanine finance investments, is seeking to raise $100m from a variety of commercial and non-commercial sources. She says the fund will have “two different share classes with different return profiles”.

“The idea of doing that is actually to make sure we’re apportioning risk and return in line with what those investors require – a corporate, even if they agree on the impact mandate, has a certain return threshold they need to hit.”

Debt is best?

Mawini adds that debt investments are well-suited for supporting smaller healthcare businesses. “We really want to be able to reach the SMEs,” she says. “Debt is a good product for that. In smaller companies it’s harder to achieve an exit, which equity forces you to do, so self-liquidating instruments are helpful from that perspective. It lets us fill a big gap in the market.”

Another institution that aims to support the finance-starved pharmacies and clinics that make up the backbone of the healthcare system in most African countries is the Medical Credit Fund. Kennedy Okongo, the MCF’s East Africa director, says that the fund was established to “bridge this gap for healthcare providers who are actually not being served by conventional ways of lending.”

Okongo notes that small-scale health enterprises have traditionally been perceived as “very difficult to work with” by local sources of capital in countries such as Kenya. Development finance institutions, meanwhile, are sometimes willing to provide loans to directly to healthcare businesses, but typically have a minimum loan amount of several million dollars. The MCF, by contrast, is willing to lend as little as the equivalent of $100 in local currency. “We are able to reach a wider net,” says Okongo.

Okongo says the MCF, which was established by PharmAccess, has invested €154m over the past decade, achieving an impressive 97% repayment rate. While this has been achieved partly through providing technical assistance and other support alongside the loans, the MCF’s financial success provides a powerful rebuttal to those who assume healthcare in Africa is not a viable investment.

Digital opportunities

It is not only pharmacies and clinics that require investment. Digital healthcare companies also provide another means to reach low-income populations and strengthen the healthcare system.

“There’s been a massive growth in the last few years around these digital-enabled health approaches,” says Fairhurst. Digital healthcare companies offer a very wide range of services. Patients can receive preliminary consultations or get reminders to take their medications through apps; pharmacists can use digital services to help with their inventory management and logistics; physicians can access remote support with diagnostics and other tasks. Indeed, digital services can potentially provide “a much broader, more effective reach into some of the more remote, poorer parts of society,” Fairhurst says.

Spieker agrees that investing in digital healthcare companies is a potential gamechanger. “We should stop thinking just about building hospitals and we should start thinking about building these transformative solutions,” she says.

Spieker gives the example of CarePay, a company established with the support of PharmAccess in Kenya to administer healthcare payments. This allows funders of healthcare – including governments and insurance companies – to pay into a patient’s mobile wallet, which the patient can then only use to pay for healthcare. “The profit margins per person are very little,” says Spieker, “but because there are so many people in Africa, it’s still a nice income model.”

Preparing for the next pandemic

Covid-19 exposed multiple flaws in the health systems of African countries, perhaps most notably in terms of the continent’s capacity to manufacture and distribute vaccines. Less than 1% of vaccines used in Africa are manufactured locally. And almost two years since the Covid vaccine rollout began, barely a fifth of the population is fully vaccinated against the disease.

Fairhurst warns that the lack of distribution capacity is a particular concern. Inefficient delivery mechanisms partly explain why almost 30% of Covid vaccines received by Africa have gone unused. Improving distribution, he says, is “as important as having a vaccine.”

One potential positive from the pandemic is that the world has finally woken-up, at least to some extent, to the importance of strengthening global healthcare systems. “I actually think if we were trying to raise [the Transform Health Fund] without Covid having happened, it might be a lot more difficult,” says Mawani. “Healthcare is still on people’s minds.”

“This is the time to build that infrastructure so that we’re ready for the next one. Because there will be a next one.”