It is beyond dispute that small and medium-sized companies (SMEs) form the backbone of wealth and job creation in any society. But access to capital, the vital life force of business, remains a major stumbling block to them. This is doubly so when firms try to obtain venture capital. But help is at hand. Anver Versi reports on an exciting project by an international firm that has set itself the task of solving just this problem.
THE JACANA IS A SMALL BIRD THAT APPEARS to be able to do the miraculous – walk on water. In fact, it crosses rivers and ponds by walking over lily pads but from a distance, it gives the impression of being able to defy the laws of nature and skip happily over water unaided.
“The bird, after which we have named our organisation, symbolises what we have set out to do – achieve the seemingly impossible but, in fact, do so based on sound investment principles,” says Simon Merchant, co-founder and CEO of Jacana.
The premise on which the private equity firm is built is relatively simple: for Africa to progress and alleviate poverty, it needs to increase the supply of good-quality jobs; SMEs are the principal source of jobs, so expand the SME sector and jobs will follow. The catch, of course, is that SMEs, like all other businesses, need capital to start up and keep going until they become profitable. This is where banks and most investors shy away – as many an aspiring entrepreneur has painfully discovered. But this is also where Jacana steps in.
Merchant explains: “SMEs are a major source of jobs in developed countries but are currently not so significant in sub-Saharan Africa. The major reason for this is a lack of risk capital to support the growth of SMEs and a lack of expertise and experience in the investment process.”
This creates an impasse. African private equity firms may understand their markets very well, but their lack of track record means that international investors keep their distance. In addition, entrepreneurs of their portfolio companies tend to lack management capacity and experience and fund managers themselves lack the resources and expertise needed to support their portfolio companies.
To add to the problem, African investment funds for SMEs tend to be small and thus management fees are also low. Therefore, as soon as they create a track record, funds head off towards the greener pastures offered by bigger transactions, leaving the vital SME sector high and dry. “As a result,” says Merchant, “even international finance investors are often faced with sub-scale, first-time fund managers who lack track record and are high risk.” Outcome: deadlock for SMEs which continue to wither on the vine for lack of capital.
Marriage of convenience
The solution to the conundrum – which like all good solutions seem obvious once it has been stated – is to find a mechanism which can marry international investment track record and management expertise to the invaluable local knowledge of African private equity funds and thus unlock start up financing for promising SME projects.
This is precisely what Jacana is all about. It creates partnerships with local private equity funds and uses its own track record and expertise to raise funds from international investors – both institutional and private – and add a layer of excellent management capacity to the mix. It is now in a position to provide both money and management know-how to African entrepreneurs who can come up with bright ideas.
The founding of Jacana itself was a bright spark to resolve a nagging issue.
Simon Merchant recalls the beginnings: “Two of my co-founders, Lord Joel Joffe (the former Chairman of Oxfam) and Stephen Dawson (co-founder of Impetus Trust, the UK’s first venture philanthropy organisation) met at a conference in 2008 and talked about poverty reduction in sub-Saharan Africa.
“Lord Joffe was a bit frustrated by the impact that he was having in the charity sector, and was wondering whether working with for-profit organisations would be more sustainable, having been encouraged by some investments he had made in small start-up venture capital funds in Africa.
“Stephen Dawson has been involved in private equity in the UK for about 30 years and was looking at ways to take a venture capital approach to poverty alleviation in Africa.”
Merchant himself has a professional background in entrepreneurship and early-stage investment and had been closely involved in development projects in Ethiopia, Burkina Faso, Ghana and Malawi: “Having sold my business in 2005, I was looking for an opportunity that had the potential to combine these two passions–SME investing and development in sub-Saharan Africa. Fortunately enough, I ran in to Stephen Dawson at the right time,” and Jacana was born.
Desire to make a difference
What characterised the three co-founders of the firm was a desire to make a difference in Africa rather than amass profits. However, it was clear that the philanthropy venture model was not working so they decided they would opt for a for-profit model but with heavy ethical and social underpinnings. The timing was also right with current African investments posting some of the best returns in the world.
“We considered investing directly into small businesses in Africa,” says Merchant “but concluded that we did not understand how business was done locally in Africa and that we were not part of the local community. We needed a local link.”
The idea was that instead of investing in one business, if Jacana could help local venture capital managers to become established and successful, they could invest in a number of companies and therefore have a greater impact on employment and prosperity.
Equally important was the need to transfer business knowledge and expertise both to fund managers and entrepreneurs. Despite tremendous progress that African entrepreneurs have made over the past 50 years, there is still a yawning gap in management skills and many otherwise excellent enterprises continue to limp along on practices that went out with the dinosaurs in other parts of the world.
To close the gap, Jacana combines the knowledge of expert local professionals with highly experienced private equity veterans (Jacana’s ‘Investment Directors’) from the UK who have over 100 combined years of experience in private equity to “structure great deals, grow successful SMEs and deliver superior financial and social returns”. The experts work on a pro bono basis.
Currently, Jacana has funds invested in Ghana, Liberia and Sierra Leone in West Africa and Kenya, Tanzania and Uganda in East Africa. In the near future the company intends to expand this coverage to include perhaps Ethiopia and Nigeria.
The total fund size is $43m, of which local teams, such as Fidelity Capital Partners in Ghana and InReturn Capital in Kenya, have invested a total of $20m to date in 18 portfolio companies employing over 1,300 people.
Typically, the SMEs Jacana invests in are businesses with 10-200 employees that need investments of between $1m and $5m in healthcare, financial services, basic manufacturing, agro-processing, property, technology and transportation. While the firm does not have a sector focus, Merchant has detected a growing trend towards consumer services.
The success of Jacana is yet another proof that the combination of a desire to do social good and an innovative approach to solve seemingly intractable problems also makes excellent business sense.