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Will increased Private Equity interest in Africa trickle down?

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Avatar of Ben
Ben
Reputation: 340
asked August 29, 2011

In March, the Carlyle Group launched their first Africa-centric fund. A month later they opened their offices in South Africa and announced plans to  expand their team to Nigeria and Zimbabwe. David Rubenstein the co-founder of the Carlyle Group said at a recent conference, ‘I am very bullish on the prospects for Africa. Nothing compares in terms of economic growth as a percentage over the next decade.’ And he is not alone. In June Helios Investment Partners closed Africa’s largest ever buyout fund for $900 million (maximum target investment is $250 million) signaling the growing investor interest for the continent. 

These two developments reflect the findings of an April survey from Coller Capital and the Emerging Markets Private Equity Association that showed 38% of limited partners had plans to begin or expand their African investment programs, compared with 15% a year earlier. The Wall Street Journal followed by reporting in July that a record 79 African focused funds were currently making their fundraising rounds. Only a fraction of these efforts are likely to be successful, but clearly there is a growing resource base being put into place for the continent’s most promising endeavors. 

But what does all of this mean for African SMEs that could offer so much additional growth and development for so many African countries? What does this mean for the smaller businesses still overlooked by international and local investors? According to Guido Boysen, the CEO of GroFin Africa, ‘The capital needed to drive economic growth in Africa certainly exists, but could be invested in an asset class with a potentially greater impact.’ He argues unlocking the SME segment will remain a challenge until we recognize that many of these entrepreneurs are actually sophisticated business professionals that don’t require as much assistance as sometimes believed. It is also important to recognize that many SMEs out there are actually quite profitable and that there are an increasing number of exit opportunities. He continues, ‘The SME sector is ripe for investment, and the capital exists for this investment to take place.’ Now it is just a matter of closing the gap.

What do you feel needs to happen if we are to get more investor interest for African SMEs?
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Avatar of David Amakobe
David Amakobe
Reputation: 250
answered August 29, 2011

In the early years, all smart money coming into Africa either went into companies with name recognition or projects where a proven business model was being transferred to the African market with local government participation as equity partners. This meant setting up companies like Mumias Sugar Company ltd, Housing Finanace Company Ltd, Bamburi Cement Ltd, Magadi Soda Ltd etc. The Banks that followed this money were also name recognition institutions, Barclays, Standard Charter, etc they all played to their customer base – The Multi –Nationals and their highly paid employees.

The Banks showed no respect for the salaried teachers, the tea farmers or the cane farmers. These were made to line-up for ages to get their salaries; finally the banks decided serving this market was not worthy. They closed rural branches to concentrate on high value accounts. The smart money on the stock exchanges cheered!

Those teachers, civil servants and farmers who were now unbanked had to go somewhere, they went into cooperative societies and building societies. This Societies understood them, they did not make them uncomfortable, their offices reflected their new clientele because they were them! The highly paid clerks with the name recognitions even referred customers to the building societies with the tacit approval of their managers. The Big banks did not want ragged people in their hallways to embarrass their high net worth clients.

An SME building society started in 1984 recognized a real need in the market place and opened its doors to those shunned by the Stock Exchange quoted banks. The society opened branches where the big banks had closed theirs. Their offices were basic but they made their newfound clients comfortable. Equity Building Society was growing. Equity clients were even the jokes of the employees of the big banks. The Society transformed into a Microfinance and then into a bank.

Some early smart money recognized that Equity was onto something. After some time, the big banks starting losing some of their high noteworthy clients to equity. The Rest is history.

The morale of this story is that if the new money coming into Africa goes for name recognition and not ideas, it will fail but if it works harder, shades its cultural blind spots to enable it see further then more EQUITY BANKS are coming out of the woods!

If Carlyle Group, Helios Investment Partners et al have patient capital, look beyond the traditional, and seek to meet real needs  shading  the cultural blind spots that Africa need to be helped by some standard proscriptions, they will succeed and Africa SME will grow!

Trickle down implies that the market has continuously down trodden people; I would rather aim to partner and grow. A Venture needs more than money, it requires culturally sensitive management with good ideas meeting real needs.

That is my take.


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