Small is beautiful

Micro-finance institutions throughout Sub-Saharan Africa have exploded in popularity as a destination for private equity capital. Can the love affair survive a rocky road ahead? Matt Levin investigates

AFRICAN FUNDRAISING GAINS GROUNDFormerly the domain of development finance institutions, African fundraising has expanded to include US and European institutional investors and nearly caught up Latin American fundraising for the first half of'2008. Below are African private equity fundraising totals since 2004

Year Fundraising
Total ($m)
2004 545
2005 791
2006 2,353
2007 2,340
H1 2008 1,258

Although the empirical evidence is sparse, so far returns have justified many of the investments private equity firms have made in microfinance platforms – at least anecdotally.

Aureos Capital's $1 million investment in Uganda Microfinance Limited, which transformed a notfor-profit lender into a licensed deposit-taking institution, yielded a 7.3 times cash multiple and an 81 percent return for its investors when the micro-lender was swallowed by Kenya-based commercial bank Equity Bank.

However, sales of micro-finance platforms to larger financial institutions – the most common exit path – may prove increasingly elusive as a result of the credit crisis.

Sub-Saharan banks may take a much more conservative stance towards expansion, especially in fledgling financial markets like Nigeria and East Africa. Because of the significant capital required to continually finance a micro-finance company, longer holding periods could prove very expensive for private equity firms.

“The growth is always there, the problem is it's often a bottomless pit and you run out of capital,” says Peter Schmid, a Johannesburg-based partner at emerging markets private equity firm Actis. “What you hope for is there's somebody who can link you to a deposit-taking institution who can continue your growth.”

Despite these obstacles, most general partners and micro-finance experts remain confident in the industry's ability to produce satisfactory returns.

For his part, Kuper is predicting even more of a proliferation of private equity funds dedicated to all sorts of micro-finance products – from simple loans to more elaborate agricultural, life, and health insurance offerings.

“We hope that there are 100 or 1,000 LeapFrogs in the future, and we anticipate that there will be a whole host of other micro-insurance, micro-savings, and micro-credit funds in the future,” he says.

“At the end of 2009, you're going to see a major distinction between managers who had dry powder, available resources, and money to invest. The managers who will make investments across the year will find real value and reward investors. The managers who found that 2009 was a year for fundraising and replenishment and renewal, they'll finish the year saying, ‘boy I'm glad that year was over’.”

Tom Gibian, co-founder, Emerging Capital Partners

“The major South African buyout firms have in the past been very South Africa-centric. You need to have people on the ground to really mitigate the risks of investing for markets north of the border. They will be increasingly focusing outside their borders, but it's going to take some time. There's a learning curve. I was amazed by the number of funds that were being raised and were raised successfully before this meltdown. There was a clearly a lot of appetite out there from investors.”

Peter Schmid, partner, Actis

“South Africa is going through an infrastructure boom. The OR Tambo airport has gone through a major expansion, there's a new subway system from the airport to the inner city and adjoining the three major cities. The major opportunities out there in South Africa are certainly energy, water transport and logistics.”

Sulanji Siwale, executive director, Freetel Capital

“The syndication universe has really narrowed now, where we really can only use local banks. The South African banks are also a little full up on retail on the mortgage side, but they're open for business in areas like manufacturing and services.”

Ngalaah Chupi, partner, Ethos Private Equity

“I don't believe mining and oil are going to go away, they are still at the core of Africa. We're having a lull perhaps now, but at the end of the day the appetite will still be immense and will always be there, and for carefully structured private equity deals the opportunities will also be there.”

Davinder Sikand, partner, Aureos Capital