Tanzanians start own Sh480bn equity fund.

aminiusiamini · 2014-04-30T07:59:21+00:00

With sound macroeconomic fundamentals confirmed, African countries could expect increased interest by private equity investors in their small and medium enterprises.There is huge pent up demand for financing in Africa, with more than 85% of small and medium enterprises (SMEs) un-served or underserved in terms of access to finance.What should countries do to attract more private equity into sectors like manufacturing, service delivery, energy, banking, consumer goods, and refining rich raw materials?Nordic and other donor and investment agencies could actively support domestic private equity funds that source deals in Africa, and thus promote real development impact.The quiet sense of optimism about Africa that begun in 2010 following the seminal article titled Whats driving Africas Growth is now giving way to deliberate confidence in the continent by outside investors. Such confidence comes from sustained postings of solid economic growth largely driven by an expanding middle class, effective investments in domestic infrastructure and productive capacity, increased urbanization due to higher rural to urban migration, and more income in the pockets of the average African citizen. The IMFs latest Regional Economic Outlook for sub-Saharan Africa projects an acceleration of GDP growth to 6% in 2014, up from around 5% in 2013. Other good news fueling the optimism comes from the ability of policymakers in Africa to maintain prudent macroeconomic policies that have steered the continent ably despite the downturn in global conditions and strong domestic headwinds in private investment and consumption, public finance execution, and corporate and public governance. Inflation is largely under control, debt management systems are working effectively, and risk management particularly around commodity price swings is in place. With such fundamentals confirmed African countries could expect increased interest by private equity investors in their small and medium enterprises. There is huge pent up demand for financing in Africa, with more than 85% of small and medium enterprises (SMEs) un-served or underserved in terms of access to finance. Furthermore, Africa has a higher capital deployment ratio (which is the ratio of cumulative investments to cumulative fundraising for private equity) of 109.3% between 2001 and 2010 (source). Yet today Africa represents a significantly underserved private equity environment that is less penetrated and has more inefficiency than most other emerging markets. Private equity markets in sub-Saharan Africa make up less than 0.1% of the regions aggregate GDP. Other emerging markets like India and Brazil for instance post seven and four times greater private equity penetration respectively (source). Private equity could serve an important role by providing SMEs in Africa with capital as well as offering much needed advisory services and knowledge transfer to help SMEs take advantage of the excellent economic opportunities. What could be the potential holdups and what should countries do to attract more private equity into manufacturing, service delivery, power generation and transmission, banking, the consumption sector, and value adding activities into Africas rich raw materials extraction sectors? First, countries need to work harder to increase domestic revenue mobilization that is required to fund priorities like infrastructure, energy, and human capital development. Widening the domestic tax base could bring in much needed domestic revenues. The biggest potential contributors to domestic revenues through taxes and fees are the SMEs that employ the majority of working age people in most African countries. Private equity is also more attractive and can help enhance domestic credit markets, particularly in relation to exit strategies, if local banks can further leverage it. Furthermore, many countries could transform their rich natural resource base into sustainable human capital and institutions that will outlast the depletable oil, natural gas, minerals and other extractive resources. Policies to support SMEs could therefore be better aligned to policies to raise domestic revenues by rendering tax payments affordable to the average SME, which would increase their incentives to work in the formal sector. Second, human capital needs in private equity could benefit from special support, including skills in banking and finance, accounting, legal structuring, and investment management. Skills in short supply in the area of management, engineering and entrepreneurial skills could also be beneficial to SMEs and private equity and venture capital investors seeking talent alike, as at present there is a shortage of such skills. Third, countries may well enhance the regulatory environment that underpins good performance of SMEs. This includes improving legal infrastructure, shifting the potential for transactions to the realm of contracts rather than relying on trust mechanisms that limit the scale of investment that could take place private equity. Harmonizing accounting regulations and allowing simplifications for family owned and small revenue base companies to comply could also go a long way towards supporting SME management teams to improve the quality and frequency of reporting. Benchmarks and support structures to improve corporate governance could also help SMEs become better managed, and hence more attractive to private equity from institutional investors in developed countries. Fourth, countries could improve efficiency of public expenditure by improved targeting priorities for SMEs. This includes channeling investments to infrastructure needs of SMEs, better targeting subsidies to the poor for services like health and education, so their disposable income can go to meet other consumption priorities. Better-aligned public investments could boost performance of SMEs by lowering operating costs, raising demand for their products, and thereby raising their capacity to contribute to further job creation and expansion of their strategic footprints domestically and regionally. Improving efficiency of cities and how they function, especially port cities, through urban renewal investments, would also be money well spent in terms of lowering operating costs for SMEs, in so doing making them more attractive to private equity injections and improving the ease of doing business. Fifth, countries would benefit from centering attention on trade policies especially in relation to emerging countries like China, India, and Brazil, as well as South Africa. Focus on improving regional integration policies could open up opportunities for increased intra-African trade and provide much needed market access for SMEs seeking to diversify geographically. Regional integration policies would particularly benefit the more entrepreneurial SMEs that take advantage of making consumer products accessible to broader swathes of the population, as was done so effectively in mobile banking and payment systems. Other potential benefits could accrue to SMEs working in agricultural and food processing, as food trade is of high demand across borders. Policies to enhance regional labor markets, for local talent to move across countries would also be beneficial. Enhanced mobility would address skills gaps in accounting, finance, legal, and human resource management; all skills in high demand for effective deal sourcing. Private equity could be a catalyst for these changes and could be the lever that strengthens policy reforms. Finally, countries can strengthen their fiscal, monetary, and financial sector policies to prepare themselves for increased exposure to global capital flows as a result of increased interest in private equity. This includes policies related to debt markets and access to finance for SMEs during their growth and expansion phases or when seeking M&A with external partners. Strengthening local capital markets would support the missing middle (SMEs needing capital between $0.5 to $15 million) to get access to growth capital. There is a critical role to be played by multilateral institutions like the International Finance Corporation (IFC), the African Development Bank (AfDB), and the European Investment Bank (EIB), particularly in supporting policy reforms and developing capacity of the SME sector. Bilateral donor agencies including Finfund, Norfund, Swedfund or Denmarks IFU could actively support domestic private equity funds that source deals on the ground in Africa and ensure investments generate real development impact. Civil society organizations can engage investors to adopt sustainability practices in their dealings with Africa. Impact investing can ensure responsible strategies by those seeking to foment SME development in Africa. Companies in the Nordic countries could support African SMEs through strategic M&A and sourcing partnerships. By Dr. Frannie A. Léautier, Science Po, Paris; Partner and CEO, Mkoba Private Equity Fund; former Director of the Africa Capacity Building Foundation and of the World Bank Institute.

Thread starter aminiusiamini
Start date Apr 30, 2014

aminiusiamini

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Tanzanians start own Sh480bn equity fund.

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