By Jean-Michel Severino, CEO of Investisseurs & Partenaires
Africa’s small and medium businesses (SMEs) form what is often called the “missing middle” of African economies. The smaller the investment ticket is, the higher the transaction and monitoring costs are, reducing the net profitability for investors. In addition, the poorer and more fragile the country is, the riskier the investments are. These are well-known facts amongst private equity professionals. Small businesses require small investments but also long gestation periods, as well as sizeable personalised financing and access to specific expertise and knowledge. Fragile countries require in-depth knowledge of the environment in all its dimensions to make wise choices. This is why so few investors are willing and able to finance small African businesses and invest in complex local situations. The choice of supporting these businesses and investing in fragile countries is primarily a choice of impact. It implies several adjustments to ensure the sustainability of the investment fund.
It is choice that Investisseurs & Partenaires (I&P) made when it opened in 2002. Its vision is funding small enterprises and microfinance institutions with a sustainable, humanistic and impact-driven approach, using a tool that has proven useful for European companies: private equity. And its focus from the beginning has been least developed countries, and among them areas, like the Sahel, and countries, such as Madagascar or Côte d’Ivoire, affected by political or security challenges. The approach was quite unique and unproven at that time. Fifteen years later, we see a real momentum in African entrepreneurship and the great impact formal SMEs have on economic growth, social development and stability. It’s the significant impact we have observed from creating local added value and long-term employment, addressing local needs, offering basic goods and services, and structuring local economic sectors. In fact, we estimate that 60% of I&P’s partner companies provide goods and services that directly address essential needs and contribute to the new Sustainable Development Goals. Moreover, the network of local formal entrepreneurs we help grow constitutes a significant force for improving the quality of national governance in private and public sectors.
Indeed, my time with I&P has reinforced my conviction that the private sector can play a useful and most needed role in solving some key development issues. Lessons from that experience are newly published in a document aptly called “15 lessons from Africa.” What follows here highlights three best practices when it comes to working with small and medium-sized businesses in those difficult countries.
First, small businesses need longer maturity than usual investors are accustomed to: patient capital is necessary to give these companies the time to reach a targeted stage of development. This is the reason why two of our vehicles, targeting startups and small businesses with investment needs below EUR 600 000, are evergreen companies and not closed-ended funds, the most prevalent model in the private equity industry. It is essential to adapt the structure of the financial vehicle to the long development time of small businesses in Africa, especially for the youngest, smallest and least structured ones. Even if the overall deal flow of companies seeking investment funds has grown considerably over the last decade, very few small-sized companies are actually fully ready for investment. This implies a lot of time and effort between the first contact with an entrepreneur and the actual investment (6 to 18 months). Some ways to support companies in their pre-investment phase include incubators, technical assistance, and small interest-free and collateral-free loans. Together with the U.S. Agency for International Development, I&P, for example, launched an acceleration program in Niger, Burkina Faso and Senegal to bring high potential startups and SMEs to an ‘’investment ready status.”
Second, small businesses usually need close, intense, multidimensional and long-term support. To offer support on such recurring issues as business strategy, management information systems, marketing and human resources, I&P depends on the involvement of a growing network of experts who are volunteers or financed by technical assistance. Similarly, to facilitate follow-up (and reduce its cost), getting closer to the portfolio companies is useful. Thus, I&P opened its first African-based offices after the launch of its IPAE fund to make day-to-day collaboration with companies easier. It now counts six local offices in Ghana, Cameroon, Senegal, Madagascar, Côte d’Ivoire and Burkina Faso. This is also driving the launch of the program IPDEV2, which aims to incubate a network of African impact funds.
Third and finally, investing in African SMEs is foremost an issue of human relations. Considering the difficulty of recruiting and setting up qualified middle management in the African context, investors must rely even more than usual on the entrepreneurs. Building a relationship of trust, mutual understanding and partnership with the investee is key to success, especially in the negotiation phase. Equity investment is indeed still relatively new in Africa, and I&P is often the first non-family shareholder in the companies of its portfolio. For this reason, I&P almost always invests as a minority shareholder as most entrepreneurs want to maintain control of their company.
Still, each deal is structured on a case-by-case basis, depending on the profile of the entrepreneur, the maturity of the company, and the sector and country of operation. It is a delicate but worthwhile exercise, which significantly reduces the risk of misunderstanding with the entrepreneurs, especially when preparing exit strategies. It should be noted, however, that no standard, “one-size-fits-all” investment arrangement exists, despite increasing attention paid to setting up investment arrangements and formalising processes.
By building on these experiences and good practices, the hope is for more impact investors to finance and accompany a new generation of African entrepreneurs and promote the development of SME investment – and its impact – throughout the continent.
M. Severino previously served as Vice-President for Asia at the World Bank (1997-2001) and as Director General of the French Development Agency (2001-2010).
Investisseurs & Partenaires (I&P) is an impact investing group dedicated to African Small and Medium Enterprises. Since its inception in 2002, I&P has strived to develop innovative solutions to support SMEs. In 15 years I&P has financed and supported more than 70 companies operating in 15 countries in West and Central Africa and in the Indian Ocean.
To read more on I&P’s contribution to the SDGs and discover its last study on the subject, click here
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