Co-financed by the Netherlands Ministry of Foreign Affairs (Development Co-operation) and private sponsors
Promote awareness of CSR in developing countries
Strengthen the capacity of SMEs to gain access to global markets in which CSR plays an increasingly important role
Establish partnerships between SMEs in North and South
O B J E C T I V E S
CONCLUSIONS AVCA MARRAKECH, 2004
Low return on VC investments in Africa
Difficult to raise second-generation funds
Lack of access to credit for enterprises
Public support for Private Equity investors and a legal framework are non-existent
PRIVATE EQUITY & VENTURE CAPITAL
AS A MEANS TO PROMOTE SUSTAINABLE ENTREPRENEURSHIP IN AFRICA
A Survey of 25 Venture Capital Organisations Active in Africa
What is the contribution of VC funds to sustainable development in Africa?
What are main bottlenecks faced by these funds and how can stakeholders solve these bottlenecks?
Is it possible to integrate CSR principles in doing business with VC firms in Africa and how?
Is there a demand for a special Business Development Services (BDS) Fund and/or program for the Venture Capital sector in Africa, based on CSR principles?
Netherlands FMO, RoValue, SOVEC
and Venture Capital for Africa
United Kingdom Actis, Aureos
10 SURVEYED VC COMPANIES IN THE NORTH
Ghana Aureos West-Africa and Fidelity
South Africa Actis-SA, Aureos-SA, Business Partners,
Endeavour, Enterprise Support, Horizon Equity,
IDC, IFC, Kingdom Zephyr, Khula Ent. Finance,
MEDU, Triumph VC
Tunisia TunInvest Finance Group
Zimbabwe Batanal Capital Finance,
Venture Capital Company Zimbabwe
15 SURVEYED VC COMPANIES IN THE SOUTH
People e.g. living wages, workers’ rights to organise, workers’ safety, workers’ training and education, and balanced child labour policies in compliance with UN child rights.
Planet e.g. efficient use of natural resources, control of pollution and waste recycling.
Profit a reasonable added value to all the company’s stakeholders,including shareholders, management, permanent and seasonal workers.
BASIC PRINCIPLES OF CSR (SUSTAINABLE ENTREPRENEURSHIP)
BDS Services for SMEs to help them develop and perform
better in all their business activities.
Business plan development, training and mentoring of entrepreneurs, financial, legal and tax support,
managerial coaching, access to information,
BUSINESS DEVELOPMENT SERVICES (TECHNICAL ASSISTANCE)
R E S U L T S
VENTURE CAPITAL HAS A POSITIVE IMPACT ON ECONOMIC DEVELOPMENT IN AFRICA, IN TERMS OF SUSTAINED ECONOMIC GROWTH AND EMPLOYMENT
Only one VC firm has actually measured its impact on sustainable development (the Acacia Fund in East Africa by Aureos Capital)
Impact for all the stakeholders at all levels is strong and positive.
Aureos Capital East Africa created 2,815 jobs from 1997 to 2003 with a total investment of € 12 million (€ 4,263 per job)
Business Partners created 700.000 jobs between 1981 and 2004 with a total investment of € 754 million (€ 1,077 per job)
Main focus of venture capitalists and fund managers is on net internal rate of return Realised IRR for Selected Venture Capital Firms In USD: 9 -14 % 1994 Kingdom Zephyr Technology Fund IPO In SAR: 40 % 1980 Horizon Equity Different Funds TFG, Maghreb Funds In USD: 5 -93 % average 24.6 1995 FMO Range during 24 years of investments of quasi-equity In SAR: 10 -16 % 1981 Business Partners Portfolio legacy funds, 11 investments, In €: -/- 7 -159 % average 31.0 1996 Aureos Southern Africa (ex-CDC) Portfolio legacy funds In €: 0 -15% 1996 Aureos African Investments (excl SA) Explanation Net IRR Started Fund
Access to Venture Capital for SMEs very limited
Small number of VC firms aim to serve the market segment for early stage investments and even less actually succeed in doing so.
Relative high transaction costs
Unattractive risk-return ratio
Huge gap between the supply and demand of Venture Capital in the market segment between € 20,000 and € 500,000
• Financial management of the VC and PE funds
• Capacity of the local entrepreneur of the portfolio company
• Lack of macro- and socio-economic stability
• Currency risks
• Lack of affordable business development services,
insufficient transfer of know-how and poor quality of market
MAIN BOTTLENECKS FOR VENTURE CAPITAL AND PRIVATE EQUITY FIRMS IN AFRICA 2.
Lack of well-researched market information. Being well-informed and able to mitigate risks are important success factors, in Africa as elsewhere.
Risks are higher in Africa than they are in Europe or the USA, but in reality not as high as one thinks.
VC Funds expect a gross internal rate of return of more than 20% over 5-8 years (like in Europe and USA)
There is a gap between the perceived risks and the real risks of investing in Africa, which tends to exaggerate the risks associated with Africa.
Mutually reinforcing process between commercial success in the short run and sustainable (commercial, social and environmental) results in the long run
Only a few PE & VC companies are aware or have an explicit strategy to this effect. No tools or indicators to measure impact
DFIs and Venture Capital Funds with 100% public funding comply with legal rules regarding governance and transparency. No pro-active strategy for investment selection based on CSR
IT IS POSSIBLE TO INTEGRATE CSR PRINCIPLES WITHOUT SACRIFICING PROFITABILITY, WHEN INVESTING VENTURE CAPITAL IN AFRICA 3.
• There is often a large gap between these investors in the North and the fund managers and SME entrepreneurs in the South, who are mainly focused on financial performance criteria
CSR is often seen as something that is imposed on governments and entrepreneurs in developing countries. Many SMEs in Africa already practise some kind of ‘tacit social responsibility’
IT IS POSSIBLE TO INTEGRATE CSR PRINCIPLES WITHOUT SACRIFICING PROFITABILITY, WHEN INVESTING VENTURE CAPITAL IN AFRICA continued 3.
Business Development Services (BDS) offer crucial added value to investors and entrepreneurs in the process of establishing successful venture capital investment.
Importance and success of BDS is demonstrated by the examples of Business Partners with its cost-efficient mentorship program and tight business model
THERE IS A DEMAND FOR A BUSINESS DEVELOPMENT SERVICES (BDS) PROGRAM FOR THE VENTURE CAPITAL SECTOR IN AFRICA BASED ON CSR PRINCIPLES 4.
• New IFC initiative, in cooperation with Business Partners International. Project to establish SME Solution Centres, for low threshold finance and BDS for SMEs. The pilot is being rolled out in Madagascar, Kenya and a West-African country. (integrate developmental and commercial goals)
Almost half of the VC Funds provide BDS, but there is still an unsatisfied demand. Mainly for market segments of start-ups, early stage and growth investments between roughly € 25,000 and € 0.5 million.
THERE IS A DEMAND FOR A BUSINESS DEVELOPMENT SERVICES (BDS) PROGRAM FOR THE VENTURE CAPITAL SECTOR IN AFRICA BASED ON CSR PRINCIPLES continued 4.
R E C O M M E N D A T I O N S
Make CSR more practical and applicable for all stakeholders, develop appropriate indicators and stimulate awareness of sustainable entrepreneurship in Private Equity and Venture Capital firms
Promote mutual understanding between investors North and fund managers and (potential) investee companies in the South regarding CSR
Recommendations on promoting CSR in Venture Capital and Private Equity firms
New financial products and procedures and a different mind-set are necessary when investing according to CSR criteria and rules; this implies awareness raising, information and capacity building for all stakeholders.
National Governments should establish a healthy investment climate that is attractive to CSR investments by legal reforms and tax incentives, developing alternative financial sources and capital markets, apply CSR criteria in privatisation processes and stimulating Public Private Partnerships
Recommendations on promoting CSR in Venture Capital and Private Equity firms
Multinational companies can play an important role in facilitating the access to venture capital for SMEs by co–funding VC funds in related business sectors and linking up with SMEs in supply chains set up from a CSR perspective
(Inter-)national banks and other financial institutions can put their CSR strategy in practice by investing a certain percentage of their profit in VC Funds that focus on CSR-related investment in SMEs
Macro-economic policies in developed countries can also play a role in reducing the risk involved in VC investments in Africa. For instance, access to markets in Europe, the USA and Asia, can be made easier by lowering trade barriers.
Recommendations on access to Venture Capital and Private Equity for SMEs
• Stimulate the development of a BDS programme aimed at increasing the access of SMEs to Venture Capital from a CSR-perspective. This could take the form of a self-sustaining facility that offers BDS to entrepreneurs, through a system of matching grants, vouchers or other financial instruments
Special BDS program could be funded institutions like the IFC, public development assistance funds, large International banks and pension funds, local banks, large foundations and NGOs
Recommendations on access to Venture Capital and Private Equity for SMEs continued
We take the view that CSR and sustainable entrepreneurship
in Africa must come from within the African business partners
themselves, especially the entrepreneurs. It should be a natural
part of the business practise and fit in the specific
African business environment.
Awareness raising and capacity building can help entrepreneurs