Attracting African Capital to Invest in African SMEs
What does it take to finance early-stage Small and Growing Businesses in Africa? A new handbook shares the experience of African investors, and shows how building local ecosystems and attracting African capital will enable the growth of the sector.
Investing in Small and Growing Businesses (SGBs) in Africa is now recognized as a powerful way to bring about economic and social development. Many investors launched funds in the past 15 years to take up this challenge, including: Investisseurs & Partenaires, Injaro and XSML in Western Africa, but also Novastar and Pearl Capital in Eastern Africa, among others. They raised funds from development finance institutions (such as IFC, Proparco, and FMO) at a time when SGB investment was still new in Africa. Despite the challenges, these pioneers have shown that it is possible to finance African SGBs with equity, and many of them have already realized their first exits with success. The new handbook Investing in Africa’s Small and Growing Businesses—published by Investisseurs & Partenaires in partnership with the Aspen Network of Development Entrepreneurs, Ernst & Young, and the INSEAD business school—highlights the best practices developed by some of these early investors.
Today, the challenge to finance early-stage SGBs remains. Early-stage SGBs typically need smaller investments (between US$50,000 and 500,000 per company). SGBs are critical to job creation and inclusive growth and account for the largest proportion of African companies. But financing smaller businesses means raising a smaller fund with higher constraints, making it very difficult to attract traditional funding from development finance institutions (DFIs). How can early-stage investors achieve the promises of impact and value creation without finding adequate capital?
Fortunately, some are following the model of South Africa’s Business Partners, which raised 50 percent of its $24 million equity from South African corporations and financial institutions as early as the 1980s.
The good news is raising African capital is increasingly possible. Now that DFIs have led the way, more African actors are willing to take the risk of investing in SGB-focused funds. Hervé Hien, Managing Director of Sinergi Burkina, explains: “Sinergi Burkina is the first investment company in Burkina Faso and among the first investors targeting SGBs with needs between $50,000 and $400,000 in West Africa. We have raised $3 million in initial equity for our evergreen vehicle and most of it is African capital. Of our 14 investors, 7 are African entrepreneurs, one is a bank, one is the leading insurance company in the country, and one is the largest corporation in the country.”
Why would these local investors be more adaptable to the constraints of investing in small companies than DFIs are? Hervé Hien argues: “Most of our investors joined Sinergi Burkina for two main reasons. First, for social responsibility reasons, they show that they commit to the development of small businesses and entrepreneurship in the country. But above all, they do so for strategic reasons. Sinergi will finance 50 high-potential SGBs in the next ten years, and each investor plans to build synergies with these portfolio companies. The bank wants to lend them money, the insurance company wants to insure them, and the corporations want to outsource work to them. Synergies with their own core business makes these investors much more flexible on liquidity and short-term profitability criteria.”
Launching a new fund to finance African SGBs is a challenging endeavor, which requires a strong local ecosystem of actors. This is not only true for raising funds but also for pipeline development and management support for portfolio SGBs. The I&P handbook provides critical insights born from the experience of six cornerstone investors targeting early-stage African SGBs—from fund design to exit. Its objective is to encourage the birth of new African fund managers dedicated to investing in early-stage SGBs.