A number of successful FOBs have made effective use of credit to scale their operations, becoming the well-known brand names that today span Africa’s sub-regions, including Dangote in Nigeria, Groupe NSIA in Côte d’Ivoire, Bidco in Kenya and MeTL Group in Tanzania.
However, SMEs in Africa are 30% and 13% less likely, respectively, to obtain bank loans than large ones, meaning they represent an outsized share of the $190bn financing gap from the traditional banking sector, according to data from the International Finance Corporation. Alternative means of raising capital should, therefore, be in strong demand, but routes to private capital are not well-trodden.
For FOBs, offering equity to an external investor means sharing the company’s control outside the family – a concept many owners tend to struggle with. Having been at the helm since founding the business or having been passed the reins by a loved one makes ceding direction an emotional affair. For those that get to the negotiation table, entrepreneurs have had a tendency to focus narrowly on the investor that offers the highest investment for the least number of shares.
What has changed?
This reticence is gradually changing, however, both in terms of openness to investment and the evaluation of what value investors bring to the table.
James Mworia, CEO of Centum Investment in Kenya, told Asoko Insight that: “The key signal to family businesses considering an investment partner should be clarity on the new value creation compared to the value if they continued to pursue their own course. The founder or family needs to know what the value uplift from the partnership is and, crucially, if it is sufficient to leave both partners better off at the end of the period.”
This understanding of value creation being at the heart of an investment relationship has begun to impact the structure of investments, with advisors telling Asoko that the last few years have seen the emergence of longer-term focused funds that are more tailored for FOB needs.
Karim Anjarwalla, of the eponymous law firm Anjarwalla & Khanna, cited AfricInvest, FMO and Ethos, as among the investors with tenures of seven to ten years, a trend that has helped to make private equity (PE) fashionable among family business leaders.
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This evolution is visible in the numbers. In its African Family Business Survey 2021, PwC found that 16% of respondents planned to use private equity for future financing needs. While this is well below the 53% that planned to use bank financing and 31% relying on internal capital, it tops the global average of 10% of FOBs considering private equity to finance business growth.
At the same time, investors have been adjusting their investment strategies, increasingly targeting the mid-cap space most suitable to Africa’s SME growth engine. According to data from the Africa Venture Capital Association, between 2014 and 2019 the number of deals rose while the overall value tapered off, suggesting that ticket sizes are declining, which better accommodates Africa’s mid-cap companies.
According to investors and advisors Asoko has spoken to, the market’s sweet spot is investment opportunities between $10m and $20m. These ticket sizes are seeing the fastest growth and can expect the largest exit multiples, driving a clear shift to the midcap market – exactly where the financing gap is at its greatest and the potential economic benefits among the biggest.
This article was published in partnership with Asoko Insight
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