Adding Value to SMEs ThroughVenture Capital (VC)Michael OlorunninwoQuaking Aspens
Quaking Aspens2OutlineIntroduction – Industry FocusVenture Capital AdvantageChallenges Faced by VCs in the Emerging Markets
Quaking Aspens3• VC is a branch of Private Equity (PE) strategicallyfocused on providing early stage financing to start-upand small businesses i.e. SMEs• PE firms provide risk capital to large, establishedbusinesses with proven markets, and growth potentials• While VCs focus on SMEs with perceived long termgrowth potentials• Similar to mainstream PEs, VCs also bring on boardmanagerial and technical expertise, and have a say instrategic decisions• Most start-ups usually commence operations as SMEs,requiring patient, risk capital often between $25,000and $2 million• Emerging markets offer great investment opportunityfor VCs, especially in Sub-Saharan West AfricaIndustry Focus – Venture CapitalIntroductionSource: Financial Times, World Bank, CFED, Africa Economic OutlookMissing Middle of SME Financing7.8 188.8.131.52 5.6 5.8 184.108.40.206.96.40.02.04.06.08.010.02003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Western Africa - Real GDP growth (%)
Quaking AspensUnfriendly business environment:poor infrastructure, inconsistentgovernment policies, inadequateeconomic incentives, poor legalframework, corruption4SMEs in the Emerging Markets…Key Growth DriversRising in income levels and theconsuming class− Annual consumption to rise to $30trillion by 2025, up by >100% from2010Impressive Growth in EmergingMarket companies− Emerging markets to significantlyoutperform developed markets− Average GDP growth of 4 to 7% p.a.Double-digit growth of mobilephone, internet, e-commerce usage(internet penetration rising faster)More stable politics, propellingdriving economic reformsHigh proportion of activepopulation, about 40-60%Source: CBN, Bain Insights, McKinsey Global Institute.Increased entrepreneurial flair,huge informal sectorPoor funding: little access to flexible,risk capital, high interest rates (~23%),unreasonable collateral requirements,poor relationship with banksLow managerial skills: dearth ofskilled business managers, inadequateknowledge of business practices, poorsuccession and corporate governance,high cost of consulting feesKey ChallengesLow access to modern technology:probably due to high costs (access tofinance), dependence on importation,lack of trainingPotential areas for VC value-add
Quaking Aspens5• However, SMEs presents unmatchedopportunities in the emerging market due to:◊ Huge potential for growth: GDP is growingat ~6%+, increasing consumer population,better reforms◊ Potential for Social, Environmental &Economic Impact: crucial contributor to jobcreation and economic growth◊ Lower capital requirements: i.e. investorscan spread risk across investment portfolios◊ Potential to contribute to povertyalleviation & achieve productivity gainsthrough the infusion of new technologies andbusiness practices◊ Access to new (underserved) or growingmarkets◊ Opportunities abound in agribusiness, tech.and e-commerce, manufacturing, and retailReason to Invest in SMEs?Why a targeted growth effort for SMEs?Source: CBN, USAID, World BankAs the world look to Emerging Markets for growth,the evident financing gap could potentiallyundermine global prosperity, with negativeconsequences for innovation, economic growth,and global macro-economic resilienceDifferences in SME contribution toGDP for low-income and high-income countries, show that growthin SMEs is likely to come from theinformal sector
Quaking Aspens6• VC improves access to funding - a major hindrance toemerging market SME opportunities and perform otherroles, such as:Bringing on plans to seek new markets, innovate, trainmanagement teams, improve business processes, makeacquisitions, strengthen financial controls and operatingsystemsHand-holding management through strategy executionto create active value-adding partnerships, oftenrequired by businessesProviding managerial talent, assisting investeebusinesses to produce better returnsEnsuring efficient resource (i.e. finance andmanagement time) allocation to opportunities withpotential for economic success and societal impact• Interesting, in the last 5 years, PE returns have been onthe rise in the emerging marketsVenture Capital AdvantageVC Investments targeted at Emerging MarketsDeal SourcingEvaluationStructuringInvestmentManagementExit Management12345Venture Capital Value MapО Key area with tremendous VC value-addpotentialSource: Capricorn Capital Partners, Bain Insights
Quaking Aspens7Why VC Value Model is Essential for Growth?Deal SourcingEvaluationStructuringInvestmentManagementExit Management12345Corporate governance:strengthen financial controls, riskmanagementManage relationship with otherfunding parties: with banksBuild management team, andincentivise growthDevelop growth strategies andprovide implementation supportInitiate value-driven mergersand acquisitionsManage growth for sustainabilityProvide well developednetworks, in-depth sectorialknowledge, proactive targetsPlay hands-on roleduring duediligenceFocus on strategyalignmentGrow businesses in size &profitability such that exitsvia, trade sale, listing, otherinvestors, become possible
Quaking Aspens8Challenges Facing VCs in the Emerging Markets (SSA)1• Investing in the emerging markets comes with various challenges. VCs must havecapabilities or strategies to overcome these challenges:• Finding good investmentsDetermined by calibre of managementteam. Need for effective due diligence• Riskier investment profilesRequire accurate understanding of localmarkets, regulatory environment, etc.• Availability of limited leverageNeed for strong relationships with otherfunding institutions e.g. banks, etc.• Challenges of survival and growthNeed for VCs to have strong operationalcapability to assist with growth• Apathy towards equity dilutionNeed for market reputation,communicating benefits of VC1. Sub-Saharan Africa
Quaking Aspens10Total Value of Gap in SME FinanceSource: OECD, World Bank, Capricorn Capital PartnersAppendix I: Gaps in SME Finance14.4%5.2% 5.1%14%4.9% 5%0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%Small Caps Medium Caps Large Caps3 year 5 yearTurnover Growth (%)(world average p.a.)
Quaking Aspens11Appendix II: Limited Sources of Sustainable Fundingfor SMEsSource: CBN, ICA0%10%20%30%40%50%60%70%Total Small Medium LargeDifficulty of Access Cost of DebtPercentage of SMEs reporting access to financeand cost of debt as a challenge (Nigeria)0%10%20%30%40%50%60%70%80%90%Nigeria Brasil Indonesia S. Africa India ChinaDifficulty of Access Cost of DebtSources of Financing (selected countries) Nigeria Brazil China India Indonesia Kenya S. AfricaRetained Earnings 70% 44% 13% 47% 38% 73% 66%Banks and Other FIs 1% 30% 27% 32% 16% 7% 17%Credits from Suppliers & Customers 25% 15% 2% 9% 4% 17% 12%Family & Friends 4% 5% 8% 9% 20% 3% 1%New Equity/Debt 0% 4% 12% 2% 2% 0% 1%Others 0% 2% 38% 1% 20% 0% 3%Majority of emergingmarket SMEs reportedlimited access tosources of finance.Percentage of SMEs reporting access tofinance and cost of debt as a challenge(Selected Countries)
Quaking Aspens12Appendix III: Access to Finance as a Major ConstraintSource: IFC, World BankBusinesses in high incomecountries, regardless of size,generally have better accessto financeLocation of businessesdefines huge disparity inaccess to funding.
Quaking Aspens13Appendix IV: Growth in the Emerging MarketsSource: Bain InsightsConsumption in the emergingmarkets expected to increase by>100% in the next 15 years.Growth in emerging marketcompanies surpasses those ofdeveloped markets by>100%
Quaking Aspens14Appendix V: Emerging Market PE Returns on the RiseSource: IFC, Cambridge AssociatesEmerging Market PE Index has out-performed marketindices over the past 3 and 5 year horizonReturns on EM PE have exceeded those on US PE over10 years and both US & EU PE over 5 & 3 yearsPE/VC provides better access to growth sectors(consumer markets, info tech, industries) – explainingthe difference in performance-4-20246810121416183 Years 5 Years 10 Years 15 YearsEmerging Market VC & PE Index MSCI EM Index S&P 500 IndexComparative Net End-to-End Returns as at 2011051015202530353 Years 5 Years 10 Years 15 YearsUS Venture Capital Market US Private Equity MarketW. Europe PE Index Emerging Markets VC & PE IndexCurrent PE Sector ExposuresInfo TechInfo TechIndustrials IndustrialsConsumerConsumerFinancialsFinancialsEnergyEnergyEmerging Market Private Equity MSCI Emerging MarketsEnergyFinancialsConsumerHealthcareIndustrialsInfo TechMaterialsTelecomsOther1 Comparative Net End-to-End Returns as at 201123123
Quaking Aspens15Appendix VI: The Opportunity keeps getting biggerSource: IFCDeveloped Markets Emerging Markets with PE OpportunityWithin the 10-year horizon from 2000 to 2010, PE has expanded tomore countries in the emerging markets. West Africa represents agrowing investment destination for PE, with Senegal, Cote d’Ivoire,and Ghana, now joining Nigeria, on the African PE map.
Quaking AspensAppendix VII: Country Overview – NigeriaOverview● Economic growth has averaged about 7.4% annually over the pastdecade and remained robust in 2011 at 6.9%, driven by the non-oil sector (i.e. telecommunications, construction, wholesale andretail trade, hotel and restaurant services, manufacturing andagriculture).● Government is expected to reach its target inflation of under 10%in 2013. Inflation rate fell 10.2% in 2011; but climbed to 12%following removal of subsidies on petroleum products.● The economic growth has not cut poverty nor created necessaryjobs. About two thirds of the population live on less than US$1 perday and unemployment rate in 2011 was 23.9%, up from 21.1%in 2010. Unemployment in the 15-24 age group was 37.7%, andfor 25-44 years, 22.4%.● Informal economy account for a large proportion of employment.PEST AnalysisPolitical Economic● Relatively stable politicalclimate followingpeaceful elections.● Violence in the North byextremist groups isgreatest source ofconcerns● Corruption levels remainhigh, undermining recenteconomic reforms● GDP growth is expected to besustained● Private and informal sectoremploys 80% of theeconomy● Access to and high cost offinance remain a majorconstraint to growth● Another challenge to growthis dilapidated state ofinfrastructure and over-dependence on oil revenueby government.Social Technological● Social indicators onhealth and educationremain weak. The 2011UN Human DevelopmentReport ranked Nigeria156th out of 187countries.● Increasingly successfultelecoms sector, increase inmobile telephony andinternet usage● Reforms in financial sectorpoint towards the embrace oftechnology to drive growthSelected Economic Indicators 2010 2011 2012 2013Real GDP growth 7.8 6.7 6.9 6.6Real GDP per capita growth 5.3 4.1 4.4 4.1CPI inflation 13.7 10.2 10.1 8.4Source: World Bank Database, Economist Intelligence Unit, Africa Economic OutlookMajor Sectors (contribution to GDP)Agriculture: 35%; Mining and Quarrying: 34%; Wholesale &Retail: 16%;Finance, Retail Estate & Business Services:6.3%; Manufacturing: 2%0.02.04.06.08.010.012.0Real GDP growth (%)Western Africa - Real GDPgrowth (%)Africa - Real GDP growth(%)
Quaking AspensAppendix VII: Country Overview – GhanaOverview● Ghana made progress in consolidating the gains made in themanagement of its macro-economy. Inflation dropped to 8.7 %and the fiscal deficit fell to 4.3 % of gross domestic product(GDP).● Middle-income status and oil receipts have provided the countrywith the fiscal space to seek non-concessional sources of finance.● Country continues to enjoy a more open society, with a vibrantmedia and strong public dialogue, which point to theconsolidation of democratic rule.● These have enabled Ghana to outperform most countries in WestAfrica and in the continent on measures of civil liberty, politicalrights and political stability.PEST AnalysisPolitical Economic● The organisation of districtlevel elections came underpressure due to 2010altering of the localGovernment Act.● Smooth transition followingrecent death of incumbentpresident received globalapplause.● Use of biometric registrationin 2012 elections is expectedto further checkirregularities.● Government has beenundertaking policy and regulatoryreforms for conducive enterprisedevelopment.● Ranked twice as top 10 globalreformer by World Banks DoingBusiness Report.● Private sector increasingly beingconsidered as significant financial& deliverty partner forinfrastructure.● Oil production to boost economy.Social Technological● Rapid population growth ratecontribute to poverty andunderdevelopment● Mobile telecoms is seeingsignificant growth. Currentlyamong the top 10 projected torule Africa’s ICT sectorSelected Economic Indicators 2010 2011 2012 2013Real GDP growth 7.7 13.7 8.3 7.7Real GDP per capita growth 5.4 11.3 6 5.4CPI inflation 10.8 8.7 8.2 7.7Source: World Bank Database, Economist Intelligence Unit, Africa Economic OutlookMajor Sectors (contribution to GDP)Agriculture: 30%; Wholesale & Retail: 12%; Transport &Communications: 12%; Finance, Retail Estate & BusinessServices: 10%; Manufacturing: 7%0.02.04.06.08.010.012.014.016.0Real GDP growth (%)Western Africa - Real GDPgrowth (%)Africa - Real GDP growth(%)
Quaking AspensAppendix VII: Country Overview – SenegalOverview● GDP grew by 4% in 2011 and this rhythm is expected to continueduring the coming years, with forecasts of growth around 4.2%and 4.7% in 2012 and 2013 respectively.● Growth is driven mainly by private consumption, which itself issustained by transfers from emigrant Senegalese workingabroad, and by the industrial and service sectors.● The elections were a major challenge to the countrysdemocracy, given rise to disagreements over validity of thecandidacy of outgoing president. However, the positive conductof the presidential election allayed fears of instability.● Unemployment remains a crucial problem, especially for youngadult whose employment rate is 25% below that of adults.Source: World Bank Database, Economist Intelligence Unit, Africa Economic OutlookPEST AnalysisPolitical Economic● Relatively stable politicalclimate followingpeaceful elections.● Still underlying an threatis intermittentintensification of violencefrom the 30-yearinsurgency by separatistrebels.● GDP growth is expected toaccelerate driven byambitious infrastructureinvestment funded byEurobond.● Country’s flourishingrelations with China and gulfstates is expected to boostFDI inflows.● There is no need for rapidinvestment in various sectorsto support growth trendsSocial Technological● 42% of the populationlive in urban centres,given its currenturbanisation rate of3.3%, half of thepopulation will be residein urban centres by2015.● Presence of good fixed linetelephone system, althoughnearly two-thirds all fixed-line connections are in thecapital, Dakar, where a call-center industry is emergingSelected Economic Indicators 2010 2011 2012 2013Real GDP growth 4.1 4 4.2 4.7Real GDP per capita growth 1.4 1.3 1.6 2.1CPI inflation 1.2 3 2.6 1.9Major Sectors (contribution to GDP)Wholesale & Retail: 20%; Agriculture: 17%; Transport &Communications: 12%; Manufacturing: 14%; Finance, RealEstate & Business Services: 13%0.01.02.03.04.05.06.07.08.09.0Real GDP growth (%)Western Africa - Real GDPgrowth (%)Africa - Real GDP growth(%)
Quaking AspensAppendix VII: Country Overview – Cote d’IvoireOverview● GDP growth contracted by 5.9% in 2011, the economy was hardhit by the negative effects of post-electoral crisis.● Substantial growth rates forecast (8.6% and 5.5% respectively,for 2012 and 2013) depend upon peace being consolidated andproductive capacities being restored.● Need for accelerating the reforms set out in the Extended CreditFacility (ECF) 2012-14 which aim to improve governance and thebusiness environment and boost performance in the financial,energy and coffee-cocoa sectors.● The mismatch between training and employment and theweakness of the job prospecting system comprise obstacles tothe promotion of youth employment and hampering efforts toreduce poverty.PEST AnalysisPolitical Economic● Institutional normalisation,strengthening ofdemocratic process andprogress towardsreunification andreconciliation isencouraging● Pleas for reconciliationand peace will need to bereinforced by dialogue● Hard hit by conflict,government introducedreforms and tax breaks to helpthe private sector● Country witnessedimprovement on DoingBusiness Rankings● Institution of public sectorreforms is expected to driveeconomy towardsnormalisationSocial Technological● Youth unemployment is achallenge, recentlyestimated at 40%.● Government is nowimplementing a povertyreduction programme● Technology use is drasticallyimproving and represents amajor growth sector in theeconomy.Selected Economic Indicators 2010 2011 2012 2013Real GDP growth 2.4 -5.9 8.6 5.5Real GDP per capita growth 0.4 -8.1 6.4 5.5CPI inflation 1.7 4.9 3.6 3.1Source: World Bank Database, Economist Intelligence Unit, Africa Economic OutlookMajor Sectors (contribution to GDP)Agriculture: 31%; Wholesale & Retail: 14%;Manufacturing: 13%; Finance, Retail Estate & BusinessServices: 11%; Government Services: 9%;-8.0-6.0-4.0-2.00.02.04.06.08.010.02003 2004 2005 2006 2007 2008 20092010 2011 2012 2013Real GDP growth (%)Western Africa - Real GDPgrowth (%)Africa - Real GDP growth (%)
Adding Value to SMEs Through Venture CapitalMichael OlorunninwoAugust 2012Quaking Aspens is a social enterprise focused on providing business solutions tohigh-potential SMEs in Africa.Our focus is to embrace SME entrepreneurs as they aspire to attain efficiency, pursuenew markets, visible growth, and profitability.Our teams are made up of experienced, multi-disciplinary professionals from variousfields in consulting.