Investing in Africa’s Entrepreneurs

By Simon Merchant, Co-Founder and CEO, Jacana

Investing in Africa’s Entrepreneurs

Jacana recently completed an investment in Reltex Tarpaulins Africa in Kenya, where workers manufacture emergency relief materials for the humanitarian sector

There is no denying that Africa is enjoying a period of unprecedented growth. Its economies are developing faster than anywhere in the world, its population is set to double by 2050 and an emerging middle class is driving increased consumer spending.

However, despite impressive macro-economic growth indicators, poverty is still ubiquitous and unemployment rates remain high. Without new job creation, economic development will stall and the region could face widespread civil unrest.

It is well-established that SMEs are the engine of social and economic growth in Africa: the key drivers of GDP growth, enhanced wealth and increased Government tax revenues funding public services and infrastructure.

Critically, SMEs are also the primary source of new job creation. In high income countries, small businesses provide 60% of employment opportunities compared to less than 20% in developing countries.

Empowering entrepreneurs to grow successful SMEs is therefore critical for the long-term and sustainable economic development of Africa.

The question, of course, is how? Ask any of the 400 delegates at last month’s African Venture Capital Association conference in Ghana and the answer will be the same: private equity. Providing both growth capital and value-add expertise, private equity is a unique vehicle for entrepreneurs seeking to expand, whilst offering investors attractive rates of return.

SME private equity: the challenge

Investing in SMEs in Africa, however, is notoriously difficult. Existing SME private equity funds lack investment track records, which are critical for securing backing from international investors. They also lack the depth of resources and experience needed to overcome the considerable financial, operational and strategic challenges of investing in SMEs, where entrepreneurs often lack management capacity and experience.

So successful SME investors need to be able to support their portfolio companies and add value to their operations. This takes resources, however in this part of the private equity market, funds are small by definition therefore management fees are low. As a result, the traditional model for private equity does not work for African SMEs because precisely in the part of the market where fund managers need more resources to support portfolio companies, fee levels can usually only support small teams with limited experience.

Furthermore, if African SME private equity funds do succeed in overcoming the many challenges to developing experience and a track record, they immediately raise larger funds and focus on bigger transactions, so their expertise is lost to the SME sector.

As a result, when targeting the SME part of the market in Africa, international development finance investors are often faced with sub-scale, first time fund managers which lack track record and are high risk.

Jacana: the solution

Jacana was created as a solution to this problem. Founded by a group of UK philanthropists and entrepreneurs, Jacana is a pan-African private equity firm that invests in SMEs to create jobs, and deliver financial and social returns. Uniquely structured to overcome the challenges of SME investing, Jacana is the only long-term, scalable platform with a permanent commitment to SME private equity throughout Sub-Saharan Africa.

Our central innovation is our permanent commitment to the SME market. We can do this because we have a unique model that combines African professionals who understand their local markets and can provide close support to portfolio companies, with highly-experienced international private equity veterans (our “Expert Mentors”) who commit their time and expertise on a pro-bono basis.

Jacana currently has 6 Expert Mentors with over 130 years of collective private equity experience, who work in partnership with our investment teams in Nairobi and Accra to develop talent and track record. Our local teams are highly experienced in the local business environment and have unrivalled contact networks enabling us to source the best deals.

The result is a balanced team where 20-year veterans work alongside African investment managers to structure great deals, grow successful SMEs and deliver superior financial and social returns.

Our investments

We invest in businesses that typically have 10-200 employees and need investments of between $1 million and $5 million. To date, our local teams have invested a total of $20 million in 19 portfolio companies employing over 500 people.

Our most recent investment is with a company called Reltex Tarpaulins Africa – a leading supplier of relief materials to the humanitarian sector. Reltex manufactures tarpaulins used for emergency shelter by many of the world’s major international relief agencies. As Africa is the recipient of about 60% of the world’s relief efforts annually, Reltex’s location on the continent distinguishes it from others in the market, who are primarily based in Asia. Reltex has established itself as one of the world’s market leaders through its commitment to quality, speed of response and proximity to relief recipients.

Earlier this month, our team in East Africa completed an investment in Reltex in collaboration with the Belgian Investment Company for Developing Countries (BIO). The investment will finance capital investments and provide expertise that will double Reltex’s production capacity. As a result of the investment, 80 new jobs will be created and Reltex will be able to respond to emergency situations with greater speed and more shelters, helping thousands of disaster-struck refugees.

The Jacana concept is now proven. Our geographic footprint spans 6 markets to date in East and West Africa and we have a number of new markets in the pipeline. We are now building gradually towards a $200 million fund to significantly increase the scale and geographic reach of our operations, enabling us to grow successful businesses all over Sub-Saharan Africa and deliver strong returns to our investors.

By creating a long-term platform for SME investment, and growing successful businesses that will create new and better jobs, we believe Jacana can have a truly lasting impact on Africa’s economic development.

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