Access to capital is probably the most important factor in the success of growth-stage businesses. While investment finance is close at hand in many European countries (particularly the Scandinavian countries, as well as Germany, Switzerland, Luxembourg and the UK), the lack of access to finance handicaps businesses in Africa in terms of their ability to grow. It’s a problem that has plagued the continent for many years – and certainly hasn’t improved since the Covid-19 pandemic.
The Organization for Economic Co-operation and Development (OECD) believes that “domestic financing, such as gross private savings and taxes, is the single most important source of development finance in Africa” and could be an important source of financing for businesses. However, this source has become less and less available, with private savings declining by 17% between 2010 and 2018. At the same time, foreign investment has also declined.
In addition, recently announced changes to Regulation 28 of the Pension Funds Act in South Africa would potentially allow up to R800 billion to leave the country to be invested overseas. “While this decision is important for corporate investors, such as pension funds, providing access to many more options that could provide a return on the funds invested, the loss of these funds would have a severe impact on funds available to grow the economy in South Africa,” comments Bryan Turner, Partner at Spear Capital, a private equity firm that invests growth capital in businesses in sub-Saharan Africa.
One bright spot, however, is that in South Africa, the Public Investment Corporation (PIC) and the Government Employees Pension Fund (GEPF) have recently increased their investment allocation in unlisted assets, which will certainly increase the local capital allocation.
Contrast that with the fact that $1.5 trillion is available internationally in private equity – basically looking for suitable beneficiary companies to allocate. “It’s unfortunate that so many global private equity funds don’t look at the opportunities available in Africa,” says Turner. “Now, more than ever, emerging markets should be attractive to foreign investors. With the current sell-off of investments in developed markets, emerging markets offer greater attractiveness in terms of diversification. And, if properly selected, returns can be attractive too.
“Over the years, Spear Capital has identified many quality companies that our Nordic and European clients can invest in – often in countries that may not be well managed, but that does not mean that the company itself even can’t deliver. With strong management teams, a skilled workforce, and a deep understanding of the market, these businesses can generate good returns and grow significantly in size and scope. We’ve also identified some that have been extremely successful in providing services to international companies operating outside the continent, reflecting that companies domiciled in Africa can certainly stand out on the international stage.”
Investing in businesses in Africa offers the opportunity not only to deliver strong returns to investors, but also to have a positive impact on people and the environment. This is what drives Norsad Capital, a provider of private credit to growth-stage businesses in a number of African countries. The company applies funds from investors in Scandinavian regions to carefully selected companies ripe for growth.
“Our goal as an organization is to build a better Africa by providing financing to mid-market growth companies that contribute to the economic growth and betterment of the continent,” said Kenny Nwosu, CEO of Norsad Capital.
“We particularly focus on financial institutions, food value chain, soft and social infrastructure, as well as industries and manufacturing,” says Nwosu. “Many of these industries also happen to be large-scale job creators and are key to lifting people out of poverty and reducing inequality.”
Spear Capital and Norsad Capital encourage European investors to allocate funds to invest and lend in Africa. However, it is also crucial that economies provide more funds for investment in their own countries – which is why the potential loss of so much domestic money due to overseas investment among South-South pension funds Africans is worrying.