As African entrepreneurs expand their businesses, they look not only for capital but also for expertise from their investors to help build their ventures. And, although much investment in African businesses is domestic or intra-African, significant flows of money and business guidance are coming from the rest of the world.
Last year saw foreign direct investment into Africa remain constant at $54bn. Increased flows went to sub-Sarahan Africa and east and central regions, offsetting declining funds to north Africa and areas of the west affected by the outbreak of the Ebola virus.
“There is a vast amount of money flowing in from overseas, from Europe, the US and globally,” says Dominic Liber, a partner at Leapfrog Investments, a private equity manager specialising in financial services companies serving poorer communities.
Much of this money comes in the form of private equity, not only because of the problems of investing through public markets, but also because the informed knowledge that comes with it is as welcome as the capital.
“Entrepreneurs and businesses in Africa seeking investors are typically looking for more than just money,” says Mr Liber. “They look for specialist expertise too and the capability of the investor to add value well beyond the money.”
As in many developing markets, publicly listed equities are a cause for concern as investors fret over corporate governance standards and struggle to find sufficient liquidity.
Although there are stock markets across the continent, in sub-Saharan Africa, only the Johannesburg Stock Exchange has sufficient liquidity for comfort. Trading volume on the Nigerian stock exchange, the largest outside South Africa, is just 1 per cent of that on the JSE, according to Mr Liber.
While emerging markets debt is an established market, African corporate debt is a very small part of that. Corporates in Ethiopia, Mozambique, Morocco and Nigeria have issued bonds in recent years, as investors’ thirst for yield leads them to look beyond mainstream emerging markets.
So private equity and other direct investment remain the order of the day for most companies seeking capital at all stages of their business life.
According to an annual report from the United Nations Conference on Trade and Development, many of the largest investments into Africa were private equity-driven. US specialist KKR made its first African direct investment last year, putting $200m into Afriflora, the Ethiopian rose producer. Carlyle, another private equity group, raised nearly $700m for its first sub-Saharan Africa fund and Blackstone and Edmond de Rothschild, private bank, have made commitments to the region.
The weight of money coming into African private equity is creating a challenge — how to put the capital to work quickly in a crowded field.
“The private equity funds have so much money, they’re venturing out of their comfort zones,” says Nicolas Clavel, founder and chief investment officer of Scipion Capital, which specialises in African trade financing. He has seen private equity bidding for deals in competition with Scipion, even though trade finance is far removed from traditional private equity. He has also been asked to manage money on behalf of private equity funds anxious to put their money to work as quickly as possible.
At the other end of the scale, even tiny enterprises need some initial capital or credit and innovation is creating interesting opportunities for investors.
Micro-credit, the investment innovation that provides credit to groups traditionally excluded from financial services to start small businesses, is big business for investors. Luxembourg has been working hard to establish itself as a centre for microfinance funds.
However, academic research is raising doubts about the efficacy of this form of development funding, while at the same time, technological innovation is starting to provide alternatives. Mobile money, where small amounts of money can be transferred using mobile phone accounts, provides similar sums to microcredit, but on more flexible terms and with much greater convenience.
“For clients this offers great advantages,” says Paul Clark of Ashburton Investments, a South African investment manager. “The convenience of paying and receiving payments remotely is huge,” he says.
While friends and family are still the primary source of start-up capital for someone setting up a small business, angel investors are beginning to form networks to access the most interesting ideas at a level where entrepreneurs are not yet looking for capital through a formal process.
This widens the pool of capital available to small-scale entrepreneurs, and gives them access to investors with the business experience they need to develop their enterprises.
With luck, this should begin a cycle of growth and advice that can be repeated until the entrepreneur has grown the business and is able to either sell it or hand it on to other family members.
Sophia Grene
Grene is a reporter on Financial Times fund management (FTfm).
