Category Archives: Venture Capital

Financing High Value Industry in Africa

The most recent data from the UNCTAD World Investment Report shows that foreign direct investment (FDI) into Africa was down 21 percent in 2017 compared to the prior year. The decline is attributed primarily to lower commodity prices. More diversified exporters such as Ethiopia and Morocco fared better than those countries that are more dependent on commodity exports. Recently, commodity markets, particularly oil, have rebounded suggesting better macroeconomics for many countries which should improve the FDI numbers. We will know things have changed for the better when more economies look like Ethiopia and Morocco and the ability to attract investment is not tied to commodity prices.

In a recent post on emergingmktstories we addressed the need to encourage high value trade and investment in Africa and to discourage unnecessary imports such as used clothing. It is especially important to finance the growth of the African private sector. This includes startups, established companies, and greenfield projects. These companies have the greatest potential for wealth generation and job creation. Companies in high value-added sectors like manufacturing and agro-processing import tools and machinery—items in which US companies are competitive. In other words by investing in African high value industries we create customers for US exports and strengthen trade relationships. In addition, the better jobs these businesses create would result in potential customers for American companies.

HOW AFRICA CREATES VALUE

Examples of high-value industries include:

Agribusiness. Investment opportunities exist at all stages of the agricultural value chain. Investors looking for some combination of growth, impact and disruption tend to prefer downstream businesses such as processing, as well as those inputs that support agribusiness such as equipment finance and cold storage.

Possible investors: DFIs, Private equity, Impact investors.

Manufacturing. Investors look for large and growing markets, either for export or FMCGs (Fast Moving Consumer Goods) in the domestic market. They also seek reliable, cost efficient processes that meet international quality standards.

Possible investors: Private equity, off takers in the supply chain with government DFI support.

Minerals Refining. Most African countries recognize the need to develop refining capacity in order to make the most out of their mineral resources.

Possible investors: Multinational refiners. Private equity

Startups. Successful startups bring innovation and increased competitiveness to African economies. In addition, their rapid growth creates wealth and jobs. Such companies also have the potential for social impact by addressing some of Africa’s most urgent problems. We have previously discussed startup financing issues in this blog. We can now include impact investors as part of the African startup ecosystem.

Possible Investors: Venture capitalists, Angel investors, Impact investors

PROMOTING VALUE CREATION IN AFRICA

Those of us in what we’ll call business support organizations—advisors, development finance institutions, international development agencies and others in the business of stimulating Africa’s private sector should promote the conditions that make African companies attractive to investors. For now, let us consider two key factors where we can make a difference:

I. Reliable cash flow.

It is the most obvious requirement but often overlooked in presentations to investors. Investors want a clear demonstration of the source of cash. This is often accomplished by integrating into the supply chain of a large customer. A contractual commitment from such a customer enables the company to obtain not only long term investment capital but also lines of credit and other forms of working capital that fuel day to day operations.

For an agribusiness deal the commitment might be an off taker agreement from a wholesale buyer of the output of a processing plant. Such a commitment not only provides cash flow, but also validates the business model, giving evidence of a growing market for the product.

Similarly, African manufacturers or refiners would look to supply parts or other inputs to a manufacturer. Such companies might also ship finished goods to a large retailer like Walmart or Movenpick.

Depending on the needs of the business, support organizations can help African companies succeed in the supply chain in several ways:

  1. International Exposure – Connecting the company with global companies who could be potential customers. Providing exposure in their industry via conferences, exhibitions and trade shows.
  2. Technical Assistance/Quality Management – Making resources available to ensure that the company is operating at international standards.
  3. Financial Management – The ability to provide sound financial information is critical to not only keep investors happy but also give management the data they need to effectively guide the company.
  4. Impact measurement – Many African companies are capable of significant social impact whether or not they explicitly brand themselves as social enterprises. Many investors have their own proprietary impact measurement methods, often based on the UN Millennium Development Goals or the Global Impact Investor Network’s IRIS methodology.

In addition to steps noted above, business support organizations can also support startups:

  1. Business model refinement – Helping management understand their strengths in the market and how to achieve scale.
  2. Business planning – Telling the story in a clear and concise manner that shows the source of investors’ returns.
  3. Impact measurement – Many of today’s startups consider themselves social enterprises and therefore impact measurement is an even bigger priority than for most other companies.

II. People

Everyone wants a great business model in a large and growing market, but people are necessary to turn that business model into financial and social results.

  • Professional Management.

Investors are always interested in the capability of the people running the business. They want to feel comfortable that there is a management team to execute the plan they’ve come to believe in. Their capabilities are developed through a combination of training and experience.

  • Sound governance.

Strong managers and directors help the company establish a clear set of rules and procedures that give investors and other stakeholders confidence that the firm will deliver on its promises.

  • Competent staffing.

Well trained personnel in engineering, accounting, marketing and other functions are critical to the performance of the company.

Business support organizations can partner with workforce training firms academic institutions and professional organizations to help enhance management and staff quality in African companies.

BUILDING BANKABLE STARTUPS

Startups and early stage companies are something of an exception since venture capitalists are often more interested in the disruptive characteristics of the company. Investors in these companies understand they have accepted a higher level of risk and therefore expect higher returns as well. That said, there is nothing like a signed purchase agreement to validate the business model and increase equity valuations.

We urge American business and policy makers to be present on the African continent to work with DFIs and with African business to build long term partnership to benefit American and African citizens, businesses, and governments.

Darnley Howard is a partner at PAN Diaspora Capital Management. PAN Diaspora Capital Management  is an organizational partner with the Initiative for Global Development for the Advanced Executive Management Program. The Roadshow will provide high level training for senior executives and create a forum for American and African businesses to connect. For more information, visit https://igdleaders.org/

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EMERGING MARKET INVESTING PART II – 3 VALUE ENHANCEMENT STRATEGIES

 

This 2nd installment of our private equity series looks at how investors have succeeded this past year. While these tactics are well known by major private equity institutions we also consider the smaller investor and those investors new to emerging market investing. This investor could be a family office, or an accredited individual investor or investor group that prefers direct investing over the limited partner role. [We will use the term “small investor” to encompass all of thee groups realizing that they are not always small in dollar terms] The approach we advocate comes under the general heading of value enhancement or value creation.

Successful emerging market investors contribute more than money to the success of their portfolio companies. With their own resources and by marshaling expertise in their networks they can enhance the value of these companies leading to a more favorable outcome at exit. This is typical of the large PE firms whose senior staff often have operating as well as financial experience.

Although not all investors will have this kind of expertise on staff, those with strong networks can mimic the kind of value enhancement that is standard procedure at the large institutions. There are professionals with region or sector specific expertise that can deliver on an outsourced basis what they cannot do in house.

Here are three value enhancement strategies:

1. Upgrading business processes

 

The investors’ due diligence should include an assessment of the company’s strengths as well as any challenges that would impede its ability to implement its business strategy. Process improvements can occur in any of several areas:

 

  • Distribution

  • Strengthening the management team

  • accounting/finance/risk management

  • ESG (Environmental, Social, and Governance) upgrades such as social impact measurement using IRIS, implementing a diversity strategy, or improving environmental sustainability

 

Small investor’s approach: Engage advisors with background in: the portfolio company’s industry, accounting and/or finance, ESG reporting & measurement.

 

 

2. Help portfolio companies open new markets

 

Within their region – especially important in African countries where it makes sense to combine several small country markets into larger regional ones.

 

In investor’s home market. There are companies that assist international firms in entering and selling in the US.

 

Essential for companies with small domestic markets. Opening new markets is key for Caribbean companies who need to go outside their small markets in order to scale.

 

Small investor’s approach:

 

Use investor’s network to link portfolio company to export opportunities.

 

Engage business development & marketing firms that specialize in helping foreign firms enter the US market

 

 

3. Provide constructive influence to portfolio companies even with a minority share

 

Small investor’s approach:

 

Work with companies where entrepreneurs’ managers’ and investor’s interest are aligned. Use the due diligence period to assess the mindset and culture of management. Look for:

 

  • Management teams and shareholders with a long term outlook

  • Shareholders with skin in the game, cash or mortgageable real estate for example.

  • In some cases it is feasible and desirable to have a level of decision making authority written into the deal.

 

Create alliances with like minded shareholders.

 

These are some of the ways in which a small PE investor can be helpful to emerging market portfolio companies to the benefit of all stakeholders.

 

 

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Angel Fair West Africa 2014

 

 

In our last post on emerging market private equity we mentioned the African startup infrastructure and its potential to attract local and international venture capital. The startup community will be on full display in two weeks at Angel Fair West Africa, starting March 31 in Lagos, Nigeria.

 

Startups at the seed venture and growth stages will be featured. There will be two rounds of entrepreneurs pitching their businesses and panel discussions from founders and investors. In addition to the home country there will be startups from Cameroon, Ghana,Kenya and Senegal.

 

African venture capitalists and other investors will also be in attendance including 32 members of the Lagos Angel Network.

 

 

For more on Angel Fair West Africa, click here.

 

 

 

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