Conduits of Capital

management extends to monitoring company revenues and
inventory, being co-signatory to checks issued by the investee
companies, preparing Board meetings and the basis for
decisions to be taken, etc.
Strengthening the local presence of PE fund managers is a
necessary complement to extending the support provided
by PE funds to early stage, smaller investee companies and
entrepreneurs. While some ‘onshoring’ of such capacity has
started to take place in Nairobi and Lagos, strengthening the
presence of PE funds under local management is important
both from the perspective of enhancing growth of the PE
industry 23 and so as to gain understanding and acceptance
of PE investment among local institutional investors.
Locally-domiciled PE fund management teams need to
gain experience in long-term equity-type investments and
business partnerships, sector know-how, business strategy
development and enterprise management / monitoring.
Support also needs to be provided to fund managers to build
and maintain specialised operational capacity, organisational
infrastructure and IT systems.
As outlined above, expanding investment by PE funds in SMEs
will initially depend on investment and technical assistance
made by DFIs and donors. In proposing that DFIs / donors step
up their focus on providing support to PE investment in SMEs it
is worth emphasising that PE fund managers see considerable
potential hurdles associated with donor involvement, such as:
• Lengthy, bureaucratic and expensive set up procedures,
which makes the whole start up process lengthy and
complex: lengthy budgetary cycles of DFIs associated
with complex legal procedures (‘legal overkill’).
• An uneasy mix of social and developmental objectives
which are difficult to match with commercial reality.
• An unhappy combination of risk acceptance and risk
aversion.
• Unrealistic targets for returns and short time horizons.
‘Quick wins’ and ‘low hanging fruit’ are familiar mantras.
• Burdensome standards of governance and reporting
to ‘best international standards’ that deters commercial
operators.
• Expensive and demanding due diligence procedures
before making investments that can be seen as a
major deterrent to private owners of potential investee
companies.
• The provision of technical assistance is not well
coordinated with the equity funding. Insufficient local
ownership and capacity building for local professionals.
These factors do not necessarily deter the big multinational
private equity funds which are looking for investments of US$25
million to US$50 million+ and can afford to engage in the
process of observing the full panoply of international best
practices, and are looking for quick profits and exits, but
such processes can be major impediments to the smaller
operation. Overcoming these hurdles will require concerted,
even pioneering efforts outside of the mainstream operating
environment of donor institutions. The IFC’s SME Ventures
program provides an example of an interesting initiative
targeting the SME market in fragile states in Africa (and
elsewhere), and provides some guidance as to how
PE activities can be implemented even in very difficult
circumstances. It is indicative of the challenges faced by
donors that this initiative was specifically targeted at fragile
states in part so as to avoid conflicting with the mainstream
market-conform focus and philosophy of the IFC’s
PE investments.
Thus thought now needs to be given as to how donor-funded
initiatives, such as the IFC’s SME Ventures program, can be
both replicated in mainstream markets and expanded so as
to leverage DFI investment with private sector investments.
There is also a lot to be learnt here from efforts made by GroFin
and Business Partners, particularly as regards challenges
faced in scaling up tailoring PE investments to smaller
enterprises and scaling up these business models to achieve
more significant impact.
6. IMPACT
The creation of a local PE industry that provides risk
capital to smaller domestic companies is a powerful tool for
economic development. Originating deals and monitoring
investment performance requires detailed local knowledge,
micromanagement and support in the form of consulting and
mentoring programs, and cannot effectively be undertaken at
arms-length. Establishing such capacity in Africa can contribute
to closing the SME financing gap, “the missing middle.”
Parallel efforts need to be undertaken to step up the role of
local financial sectors in the providing the legal, regulatory and
taxation framework as well as processing capacity for private
23
As noted above, a ‘hubs and spokes’ model is the most likely development here, where hub PE fund managers establish spokes in neighboring countries.
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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