Hurdles fund managers face while investing in Africa

Wednesday January 30 2019

FDI

Almost every fund manager in Africa wants to build and support scalable businesses that not only help homegrown start-ups flourish but also have profit at the heart of these investments. FOTOSEARCH 

By MERCY MUTUA
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In recent years, Africa has captured the appetite of international investors. According to a report by Africa Business Central, venture funding jumped over 50 per cent in Africa over the past year.

Another report by TechCrunch brings good news on increased local venture capital fund formation in Africa.

As Africa’s investors march towards development, the early-growth fund managers face a unique set of problems that need to be addressed.

Almost every fund manager in Africa — be it in impact or otherwise — wants to build and support scalable businesses that not only help homegrown start-ups flourish but also have profit at the heart of these investments.

While the entrepreneurial wave is a blessing, there are certain roadblocks that need to be removed.

These include lack of exchange, skills and experience acquisition or a platform to help with over 100 different aspects of fund management and investment that will enable fund managers to freely access and share their knowledge.

From my interaction with fund managers across various investment stages, there are a few common problems that stand out.

Fund managers from Kenya, Nigeria or any other part of Africa, especially in early-stage investment, face similar problems that don’t get talked about.

There are visible signs everywhere that many investors across the globe want to be part of Africa’s growth journey.

Beyond parachute investing, there are deep day-to-day and functional problems that African fund managers face that require urgent attention in order to achieve the promised outcomes and returns.

Finding and developing a successful pipeline fund means managers have to find strong businesses that fit their investment plans and execution strategy.

Many businesses identified look good on the surface, but have issues once you look under the covers.

This is why over 75 per cent of venture investments fail. Inexperienced fund managers get caught after making an investment due to underlying issues that they didn’t initially see. This is true because there are not that many “investment-ready” businesses that pass diligence.

The resulting lack of investible pipeline slows down the deployment process, reducing investor confidence.

More important, shallow pipelines limit the choice of investments, potentially leading to compromised selections or overpaying, thus reducing the odds of strong returns.

Optimising cost of doing Businesses

Within Africa, early-growth investments are often lucrative at the top line but can be expensive to transact and manage, substantially depressing net returns.

Challenges include dealing with opaque and fragmented laws, leadership capacity building, taxation complexity, segmented markets, and country-specific regulatory frameworks.

Most Limited Partners (LPs) prefer to invest in fund managers that are domiciled in tax or regulation friendly jurisdictions.

These challenges are just the tip of the iceberg, but if addressed using regional and global best practices, it’s possible to find opportunities for outsized returns.

As funds grow, managers need to seek multiple new channels for fundraising. They can’t rely solely on small local family offices and (Development Finance Institutions (DFIs).

The clear option is to have a blend of both global investors and regional LPs.

But these potentially highly effective alternate fundraising options that would enable managers to realise Africa’s growth potential continue to be out of reach for many. Why? Because managers have not adopted global best practices that regional and global investors expect.

Once operating at a high level, fund managers have a much stronger ability to prevail in the increasingly competitive world of fundraising from regional and global LPs.

Currently, there are a few business initiatives that are helping early-growth fund managers tackle the above mentioned problems.

One such is the Capria Network. The fund managers learn from each other about the problems they face and the support they need in solving them.

Capria works closely with fund managers to facilitate them in becoming top-class investors in emerging markets.

The Africa Private Equities /Venture Capital space is dynamic and complex, yet simple if understood.

First, Africa is a continent and not a country, with clear and distinct diversity in culture, language and way of doing business.

We should own our space and share our knowledge and truth so begin to see the meaningful effect of any investments made in Africa.

This can be done in two ways: Creation and nurturing of local fund managers to collaborate with externally founded fund managers and and deepening of access to local capital, blending this with external funding.

The growth of the latter will spur the growth of the former as fundraising is one of the main roadblocks that fund managers face strangling many fund managers dreams before they become a reality.

Mercy Mutua is regional director for Africa at Capria

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