Conduits of Capital

4. ROLE OF DONORS AND
TECHNICAL ASSISTANCE
PROGRAMMING
Two broad conclusions can be derived from the previous
sections as regards the role of donors.
First, there is high potential associated with investment by
PE funds in smaller enterprises in Africa. PE fund managers
fully recognise the imperative of enhancing the contribution
of the PE industry to servicing
smaller enterprises. However,
here they are confronted with
a classic market-failure.
General partners (GPs)
face a dilemma in servicing
small enterprises in that the
identification / search costs
(often hampered by weak
accounting / reporting),
investee company preparation
costs (enterprise restructuring,
Source: EMPEA.
including governance
and management) and
investee company monitoring costs (often entailing close
involvement in key decisions as well as quite intrusive
micromanagement, such as oversight of cash-flows) tend to
be as high or higher for small enterprises compared to more
established enterprises. GPs are unable to fund these high
fixed costs from the industry-wide standard 2% of capital
that is devoted to the GP’s annual management fees.
As a result, the focus of the PE industry invariably drifts
upward towards larger enterprises, particularly as the size
of the enterprises in which PE funds are invested grows
and the focus of GPs inevitably ‘graduates’ towards larger
investments which are less costly to service.
Were the factors outlined above to be overcome, extending
the frontier of enterprises serviced by the PE industry to
smaller enterprises could herald the next major innovation in
development finance, similar to the microfinance revolution
of past decades. While, as in microfinance, there is an
important potential role for
donor support in ‘seeding’ and
providing technical assistance
to new SME-focussed funds,
care will need to be taken
both in how this ‘seeding’
process is undertaken and
in designing support so
that it serves to catalyse
rather than replace greater
private sector involvement.
Initially ‘soft’ capital could be
provided by investors such
as IFC and CDC to seed new
PE SME-focussed funds.
However, the objective would be that these funds
establish a track record and, once the model is
tested, private funding could be attracted to a second
generation of funds. 15 The overall framework of the traditional
and suggested fund structures is illustrated in Figures 7 and
8 below.
15
More radical suggestions might be explored, such as making SME-focussed PE funds open-ended, but this would immediately compromise the PE fund
structure and the incentives of PE general partners focussed on realising capital value appreciation during the predesignated 10 year life of most PE funds.
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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