Association for Free Research and International Cooperation

Investment funds and traditional banks in Africa: Source development of local enterprises?

05.04.2020
Article from AFRIC Editorial
The truth about the blockade on project financing by traditional banks lies in the large number of regulatory requirements they have to meet. Indeed, more procedural and less open, the bank, in its role as a financial intermediary must always take into account a number of measures enacted by the Central Bank during its lending operations. This situation, despite expectations of high profitability and a risk that certainly exists but is often unjustified, has unfortunately prevented several companies from being able to develop their activities in time. So, to solve these problems and encourage creativity, an alternative has been provided by investment funds which, alongside banks, can promote complementarity between the economy of equity capital and that of indebtedness.

On the African continent, the connection can even be made with the existence of tontines “njangi groups”, which can be recognized as an old and effective financial alternative. Though these two modes of intervention share many points in common (project financing objectives), their contributions to the development of local businesses sometimes prove to be juxtaposed.

Faced with the considerable investment opportunities offered by the demographic, urban and economic changes on the African continent, it has become essential to mobilize new key players capable of financing projects ranging from very small enterprises to small and medium-sized enterprises. Given the fact that the leadership of traditional companies alone, which had been privileged market players for several decades, was no longer sufficient to meet demand on its own, many welcomed the arrival of capital and investment funds on the continent in the 1990s.

The pre-eminence of investment funds

Private equity and bank financing on the African continent are now at opposite ends of the spectrum. If investment funds, which are truly essential sources of long-term capital for African companies have begun to flow into the continent, it is not without reason. Faced with the procedural burden of traditional banks, whose activity is devoted to barely 20% of the population, investment funds have rapidly gained ground, standing out for their contribution to the success of the companies they financed. To make things simpler and more accessible, these new players have begun to diversify, leading to an ever-increasing interest which shows that the image of the region is improving.

Over the past decade, the continent has become a real field of action for private equity players. Private equity investors, who are closer to the realities of daily life, have understood the need to invest in sectors that deliver goods and services to Africans themselves. They have therefore organized their actions to target a triple purpose. This triple utility must, however, combine with a risk that exists today: the risk of “overheating”. To better contribute to the emergence of businesses, it is important for the actors to adapt to the specificity of Africa, characterized by small operations in the contexts of family entrepreneurs who do not wish to give up the majority of their company shares. In this African reality, tontines, which are very similar to investment funds, occupy a special place.

The specificities of African tontines

The investment fund is not necessarily a Western creation, it is also purely anchored in African cultures via the tontine networks that have enabled the development of many businesses in Africa, taking them from micro to macro enterprises and still contributing to their capital today. Like traditional investment funds, it is the lack of access to the banking system that has made the African tontine system almost vital today, even though tontines have existed since the 1970s, as Nzemen points out in ”Théorie de la pratique des tontines au Cameroun (1988)”. 

Tontines, defined by Zygmunt Bouman as an “associations of members of a clan, family, neighbours or individuals, who decide to combine goods or services for the benefit of all, and do so in succession “, also acting as a micro-credit open to relatives. They are very similar to traditional investment funds in their economic and financial roles. In its economic role, the objective is to use the funds allocated for short-term investments, collectively or individually. In its financial role, the objective of the tontine is to mobilize savings as well as investment funds. It then makes it possible to overcome the failures of the formal market, to have access to financial resources and to improve entrepreneurial performance.

The advantages of investment funds

On the African continent, the benefits of the presence of investment funds are immense. Apart from the fact that they draw on resources that are beyond the reach of banks, they would be even more successful if they were able to make better use of the vast resources that are beyond the reach of banks. But beyond all that, their presence is very welcome, as it allows for the availability of larger sums of money for investment. Even if it provides equity financing that is riskier than banks over the long term and often without collateral, private equity has the advantage of bringing proximity. It can easily meet the skill and structuring needs of startups by providing support in its areas of expertise (strategy, financial structuring, marketing and accounting, etc.) and by contributing to the good governance of its partner companies. The first advantage of private equity would therefore be that they offer personalized support to the management teams in implementing their project and a multidisciplinary transformation plan. Its presence in a company’s capital can also have a significant leverage effect in terms of financing and make it easier to obtain financing from a traditional bank.

Here, just like investment funds, tontines also have this advantage. In the case of individual use of the credit granted by the tontine, the individual who wishes to borrow must first present his or her project, which must “be accepted by the rest of the participants”. The use of the funds is sometimes monitored by a designated member of the tontine association. This also represents a form of personalized support for the project set up.

Private equity figures in Africa

For many, investment experts, Africa is the new Eldorado for private equity players. Even if it is still struggling to direct its financial flows towards the pool of SMEs in dire need of financing, the existing figures are very promising. All that the continent has to do is to be able to allow the emergence of a local private equity model adapted to the realities of African SMEs, as the tontines are already doing, even if they remain informal. 

The first quantified observation is that of the mobilization of direct investment in African assets. According to a report from France Invest, “Guide du capital, Investissement Africain, Investir dans la Croissance des Entreprises en Afrique”, the decade 2008-2018 shows a relatively stable and sustainable African private equity market with more than 30 billion dollars raised. Fundraising reached a pre-crisis level of $2.9 billion in 2008 compared to an average rate of $2 billion between 2000 and 2005. They subsequently fell in 2009 and then rose almost steadily to reach a new record level of $4.5 billion in 2015. Since then, they have remained at an annual average of $2.5 billion. The stability of the last three years of the decade attests to the continent’s ability to raise funds on a regular basis. Moreover, according to its 2019 report, “Prospects for the World Economy”, the World Bank, which makes forecasts in this area, had suggested that growth should reach 4% in 2019 and 4.1% in 2020 in the region.

Alongside traditional investment funds, tontines have not been out of work. In Cameroon, Togo and Rwanda, they have raised significant funds. In 2016 in Cameroon for example, according to official estimates of the Ministry of Finance, tontines managed and operated transactions worth $327.7 million. In Togo, in the same year, it was a significant part of the financial system, contributing $120-150 million. In Benin, according to an official of the National Institute of Statistics and Economic Analysis, “more than 60% of the population uses the services of the tontine to finance small projects (…)”. In Rwanda, in 2016, according to the country’s National Bank, “nearly 42% of Rwandans used tontines to finance their projects, compared to 19% in 2012”.

The attractiveness of long-term African investment funds

Based on the simple fact that the continent in 2010 had 6 of the 20 most dynamic economies, with average growth rates of 5% (compared to 3% in OECD markets – IMF, 2011), one can logically see the reason for this rush into the continent. In addition to international investors seeking to tame the market, several local investors from investment funds and tontines have been able to make their mark. Within their ranks, it is not easy to distinguish those who have gained the most ground. Sub-Saharan Africa remains the most popular region of the continent, according to Jennifer Choi, Outreach, Public Relations and Institutional Partnerships Officer of the Emerging Markets Private Equity Association (EMPEA).
Many traders in local markets depend on the tontine for seed capital and sometimes also for loans. In sub-Saharan Africa, the informal economy is one of the largest in the world. It accounts for 85.5% of total employment on the continent. In addition, 74% of women working in non-agricultural occupations needed the tontines for their start-up. According to some analysts, these circuits even employ 8 out of 10 young Africans.

As for traditional investment funds, a market increasingly dominated by foreign investors, several local investors have managed to stand out. These include fund managers Cauris (Togo) and Cenainvest (Cameroon), which have been able to more than 60 million euros in a few months to invest in SMEs on the continent. In a little over a decade, the teams led by Noël Eklo (Cauris) and Albert Bengala (Cenainvest) have built up considerable experience: For example, Cauris has invested in 41 companies since 1997, while Cenainvest has made nearly 35 investments since 1998.

Alongside them, AfriCap, a $42 million microfinance investor led by Anne-Marie Chidzero, is also one of the continent’s proudest investment funds. Initially created in 2001 as a Mauritius-based private equity fund before being transformed into an investment holding company, AfriCap has already invested in 13 companies in 11 countries. One of its biggest success stories has been its investment in the Regional Savings and Credit Bank, a microfinance institution based in Cameroon. With this investment, the Region’s revenues had increased by 22% to reach USD 6 million (EUR 4.3 million) in 2012.

Another success story is the Choose Africa Initiative, launched in March 2019, which devotes €2.5 billion to financing and supporting African start-ups, VSEs and SMEs between now and 2022. With these funds, €1 billion will be invested in equity in African start-ups, VSEs and SMEs and €1.5 billion will be earmarked to facilitate access to credit for SMEs via local public or private financial institutions (microfinance institutions, banks, leasing companies, etc.). In total, therefore, nearly 10,000 African SMEs will benefit from Choose Africa, including 600 through equity investments. 

With these figures, better than the traditional banks and their bottlenecks, it becomes certain that private equity has positioned itself as a sure solution to the financing of African companies. It certainly requires an adaptation of investment strategies to the characteristics of the continent, but it remains one of the most privileged sources of financing for a poor population.

Article from AFRIC Editorial

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