Moris Beracha: A venture capital fund for Africa

by Moris Beracha

The fall in commodity prices in recent years has been affecting the world economies. This external shock has led Africa to take one step back

Moris Beracha.- The fall in commodity prices in recent years has been affecting the world economies directly and indirectly. Large investments – in some cases – have had to be redefined and in others they have been more costly than what had been planned

This external shock in emerging countries has led continents such as Africa to take one step back, a decision that in my opinion does not seem to be the most sensible taking into account the potential that businesses have in that region of the world.

Fortune magazine was referring a few weeks ago to the 200 million dollar investment that the giant KKR made in Africa in a company of flowers in Ethiopia called Afriflor. Another example was that of Carlyle in Nigeria through a diamond bank, while the company Permira provided resources for a data center called Teraco Data in Sudáfirca.

However, with the fall in commodity prices some of these deals have been affected because large flows of money have been eroded and for firms it has been difficult to keep businesses afloat.

A figure that drew my attention was the $ 900 million that were invested in private equity agreements in the first six months of 2016, according to the African Private Equity and Venture Capital Association (AVCA).

Also, while large acquisitions have been slowed down, small agreements through the private equity model are growing according to AVCA. In fact their statistics show that about 75% of the agreements signed in the first half of this year were below 250 million dollars.

It was then that I remembered that I recently read information about the European Union’s decision to start a digital Startups investment and financing project through a private equity fund.

The reason behind this venture is that there is a great shortage of capital in the European market if compared to the United States.

In total this venture capital fund will handle about 1.6 billion Euros. 25% of these resources will be provided directly by institutions of the European Union, while the remaining three quarters will be provided by private investors.

I thought then that a model including a venture capital fund can contribute to its continued development in Africa. For me there is no doubt that Private equity is an alternative for investment and the creation of jobs and wealth.

There are some signs showing that this region of the planet has some strengths that many times are not taken into account. The Foster Swiss report notes that not all countries on the continent are victims of falling commodity prices.

While Congo, Cameroon, Madagascar, Algeria, Guinea, Zimbabwe, Sudan, Libya, Angola and Nigeria have been the most affected countries, Kenya, Ethiopia, Tanzania, Rwanda, Senegal and Ivory Coast are places where interesting businesses can be made.

Africa only has natural resources. While the primary sector has guided the growth of the continent in recent years, some countries have diversified their investment in other areas such as research and development. For example, Kenya has gone from spending in this area 0.3% of GDP between 2001 and 2007, to 0.9% in 2015.

Certainly African exports have fallen by $ 12 billion this year due to the fall in raw materials, but since Foster Swiss believe that they will rise by 30 billion dollars in the coming years. This projection is based on the fact that Africa allocates 27% of its exports to China, which shows that it is an important customer for global development. In addition, African countries have received foreign direct investment between 2005 and 2015 of 2.9% of their GDP, above the average 2.8% of OECD countries. The most attractive were Zambia, Guinea, Uganda and Tanzania, as stated in the Foster Swiss report.

These are data that show the route of the economies of the region and the potential that must be exploited through initiatives that involve investments. Starting with a startup financed through Private Equity does not seem to be a bad idea if you have a fund that provides not only the knowhow but the resources needed to grow moderately in times of crisis. The idea is that once the tsunami of commodity prices is overcome it is possible to settle in those countries and then think of an expansion.

Sometimes the great opportunities are to arrive first, we must be patient and take advantage of the cycles of the economy.

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