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Venture Capital for Africa: |
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Private equity or venture capital investments combined with active hands-on support in technical and managerial issues, well established in developed countries, would be exactly what is needed for local entrepreneurs. While such venture capital funds are active in Africa this essentially covers larger investments in sectors like mining, infrastructure, tourism and telecommunications. Potential returns on investments in small and medium scale enterprises that require professional management and considerable support are not sufficient to fund this, and therefore virtually no such equity activity exists.
On the other hand, it has been observed that technical support and capacity building for MSME's has not achieved the expected impact, at least in part due to the fact that no investment could be realized.
The financial system in virtually all African countries is very weak. Banks usually do not have the confidence of domestic savers, and therefore cannot attract longer-term funds. Other problems are the lack or weakness of domestic capital markets; a shortage of savings in the domestic system (capital flight) and a short term, risk avoidance oriented banking culture.
Venture Capital:
In response to the above-described situation, where potentially highly profitable investments are not made due to a lack of equity capital, venture capital funds were established, first in the most developed countries with well-developed capital markets. In the OECD countries thousands of venture capital funds operate with hundreds of billions of dollars at their disposal.
In developing countries in general, and Africa in particular, it is far more difficult to bring together the finance required to start an enterprise. With the exception of large-scale investments that may attract government attention and finance from local and international finance institutions, it is extremely difficult for small/medium scale enterprises to obtain finance, and certainly equity.
Equity is in fact available only from the IFC and some public/private international organizations like the Commonwealth Development Corporation, the KFW from Germany , CFD from France or FMO from the Netherlands . However most of these funds are interested in larger investments only, as smaller ones are too expensive to run. In fact this means that only stakes above several million dollars are taken. In addition most investments actually made by these organizations are in tourism or agriculture, sectors with a relatively safe and rapid payback, or mining where assets or excellent prospects are available at low prices.
Recently there has been new interest from external private venture capital; however this has been aimed largely at larger infrastructure and telecommunications investments based on privatization of existing operations or BOT modalities. For most small/medium local investors (under $ 1 million) there are effectively no sources of equity, certainly for the industry sector. Foreign direct investors fear the considerable political and economic risk of investing in developing countries and therefore require very high returns on investment. And also these potential investors are not interested in the small/medium investments, as the potential returns do not warrant the high cost in terms of management time, travel and other cost involved.
At the same time there are many good opportunities in developing countries for such investments. Also it can be considered that the political and economic climate in a number of African countries has changed dramatically in the last few years. Improved economic policies, monitored by the international community, privatization and private sector development policies have considerably improved the opportunities for investment in industrial activities.
The main problem of a weak financial system and a shortage of equity or long term capital continue to exist, working as a powerful brake on domestically driven industrial development and domestic private investment. At the same time, investment in small/medium enterprises would also provide more, and more decentralized employment opportunities, improved utilization of agricultural products, as well as a more robust economic system.
It should further be noted that, given the weak background of many entrepreneurs, the classical venture capital approach, with strong hands-on support from the capital provider is the ideal model for developing countries. For small/medium investments in risky developing countries however the potential returns on equity investments are not expected to be sufficient to cover the cost of this support. The result is that no equity investor operates in small/medium industry in Africa.
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