Conduits of Capital

2.2. Country-level Benefits of Private
Equity Participation – Benefits Beyond
Portfolio Companies
Beyond the provision of desperately needed capital,
PE availability can also have broader country-level
demonstration effects from the creation of role-model
companies with good management practices.
Sampsa Samila and Olav Sorenson looked at regional
economic activity in US metropolitan areas from 1993 to
2002 and reported that venture capital positively affected
firm starts, employment, and aggregate income (i.e., wage,
salary, bonuses, and benefits). The authors suggested that
venture capital stimulates the creation of more firms than
it funds through two mechanisms: (i) capital constrained
would-be entrepreneurs are more inclined to start firms;
and (ii) VC-backed firms promote spin-offs as employees
absorb tacit knowledge on how to properly build and run
entrepreneurial ventures. 8
Despite numerous differences between venture capital in
the United States and that in frontier markets—from the
way deals are structured to the exit avenues available—we
suggest that Samila and Sorenson’s findings hold for frontier
markets. Because research has found that the management
practices of companies in developing markets generally
lag their Western counterparts, 9 the exposure to VC-level
management practices may even be disproportionately
valuable.
The Bella Research Group also encountered the “rolemodel”
effect first hand in our evaluation of a risk capital
program (IFC SME Ventures) in pre-frontier, conflict-affected
markets (Liberia, Sierra Leone, and Democratic Republic
of Congo). In particular, we found that successful portfolio
companies engendered entrepreneurial interest in the local
community. In interviews, we heard numerous accounts
of entrepreneurs in VC-backed firms advising friends on
startup management.
Given the importance of PE in frontier markets at both
the firm- and country-level, we next explore the research
suggesting that these benefits are maximised when PE
firms are based in the local economies of their portfolio
companies.
3. THE LOCALISATION OF
PRIVATE EQUITY
In this section, we explore the importance of a local
presence for Africa-focussed PE funds. The saying that
“all politics is local” can be equally applied to PE activity,
where the actual investment origination, assessment, and
monitoring processes require a detailed knowledge of the
local market, a network of local contacts, and the ability to
visit the company on a regular basis.
Because PE strategies must be tailored to the specific needs
of the market, there is near unanimous agreement among
practitioners that an on-the-ground presence is critical
to success. Experts in development finance institutions
(DFIs), consultants, and trade groups have concurred
that a local presence is attractive to limited partners (LPs)
because it differentiates the fund managers, facilitates
“[a]ccess, reputation checking, due diligence, management,
acquiring talent, [and] acquiring leverage,” 10 and generates
proprietary deal flow. 11
Yet the benefits do not accrue only to the fund manager
or its LPs—a local PE fund confers benefits on its portfolio
companies as well, which we describe below.
3.1. The Mutual Benefits of
Localised Private Equity
We briefly observe the mutually beneficial effects of localised
private equity for PE firms and their portfolio companies.
We first describe two key academic studies suggesting
the importance of locality in value creation. It is important
to note that that the academic literature described below
refers to venture capital (VC) in the United States. We
suggest, however, that the main issues faced by venture
capitalists in the United States—i.e., information problems,
contract enforcement challenges, etc.—are analogous to
those of PE fund managers in developing markets. We also
survey practitioner opinion generally and, as a “mini-case,”
describe Blackstone’s efforts to establish a local presence
in Brazil.
Academic Literature
Venture capitalists play an important advisory role in the startups
in which they invest. As one might expect, geographic
proximity impacts value creation. Shai Bernstein, et al. ex-
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