Fund targets bypassed African entrepreneurs

GroFin, an African investment group, is set to launch a $150m fund that aims to plug a financing gap aimed at entrepreneurs who have been bypassed by a surge in investment on the continent.

The financing gap – dubbed the missing middle – affects the owners of businesses that are too small to attract the specialist private equity groups that have flocked to Africa in the past two years, yet too big to raise capital from micro­finance institutions.

Private capital flows to the continent reached record levels last year, according to the International Monetary Fund, thanks to several years of consistent economic growth, greater financial stability, and the profits of the commodity boom.

The devastation wrought by the credit crunch elsewhere has enhanced Africa’s appeal as a source of superior returns that are not correlated with those in developed markets, in spite of political crises this year in Zimbabwe and Kenya.

But the novelty of GroFin’s initiative reflects the fact that much of the incoming capital has been accessible only to a narrow band of experienced executives and established corporations.

GroFin’s new pan-African fund – which has already secured commitments for $125m of the $150m it is seeking – will be the biggest test yet of whether its unorthodox approach to financing the “missing middle” can be a commercial success.

It will provide loans of between $50,000 and $1m to African entrepreneurs in the manufacturing, service and trading sectors, who have long struggled to raise capital from risk-averse local banks.

GroFin will charge interest rates about equivalent to those available from the banks but will not require collateral. It will not take equity stakes but its managers will give the entrepreneurs business advice and the fund will receive a cut of their revenues as a royalty payment.

GroFin was founded in 2004 by Jurie Willemse, a South African entrepreneur, and Chris West, now acting director of the Shell Foundation, which has put $15m into the new fund.

Mr West said the group was in effect creating “a completely different asset class” that was distinct from private equity, microfinance and commercial debt.

Guido Boysen, manager of a $25m GroFin east Africa fund that was launched in 2005, said its expected annual return for investors, before management fees, was 23.5 per cent.

It has invested in 45 entrepreneurs, including a Tanzanian chicken feed maker and a toilet paper manufacturer in Uganda.

But, due to the limited track record of GroFin’s approach, the new fund does not have any commitments from big banks, insurers or pension funds.

Its capital comes from groups that have their roots in development finance such as CDC of the UK and the International Finance, the private sector arm of the World Bank, which are each investing $30m.

Africa still accounts for a tiny proportion of the global private equity market and remains a no-go zone for many of the biggest US and European buy-out groups.