Funding the missing middle

South African growth finance company GroFin is raising $160 million to target companies too big for microfinance and too small for commercial lending. With $125 million in dry powder, the firm is hoping to marry the art of business development with debt finance.

With good reason, microfinance is the philanthropic flavour of the day in the developing world, and has been in sub-Saharan Africa for much of the last decade.

The economic gains microfinance promises and in some instances has realised has generated a host of private equity funds aimed exclusively at the sector.

That's good news to Chris West, interim director of the Shell Foundation, which has sponsored GroFin and has invested in a variety of asset classes across the continent aimed at stimulating broader economic growth and alleviating poverty. But what about those African businesses that require more than the maximum allowed by microfinance but are simply too small for commercial banks and buyout firms to consider financing?

“The Shell Foundation has always wanted to come up with a new business model to serve the small and growing business sector,”said West. “We knew it was grossly under-serviced in Africa, we knew that there had been a lot of development efforts to target it but by and large success was very limited.”

In order to address this so-called “missing middle”in sub-Saharan Africa's fledgling private capital markets, in 2002 the Shell Foundation helped seed South Africa-based growth finance company GroFin, which recently announced that it had held a $125 million first close on its first pan-African fund.

GroFin Africa Fund, slated to have a final close nearing $160 million later this year, will target risk capital investments of between $100,000 and $1 million in Nigeria, Ghana, Kenya, Tanzania, Rwanda, Uganda and South Africa, across a wide swathe of industries.

“There's a huge market, a huge talented market, that is completely starved of business skills and access to finance,” said West. “But if you structure the model right, and integrate those two as we believe GroFin has pioneered, then you can do it in a way that generates attractive financial returns.”

GroFin, led by chief executive Jurie Willemse, hopes to marry the functions of a non-governmental organisation or consulting firm with a typical debt and equity investor, providing potential portfolio companies with business development skills before and after receiving an investment.

Those skills include basic business acumen like cash flow management, marketing and product development.

“We started off with this recognition that in this marketplace, skills were typically provided by consultancies or [non-profit organisations] and finance provided by other folk,” said West. “I wanted a one-stop shop solution.”

Thus far, GroFin's boutique approach to the small and mid-market has attracted a considerable amount of investment from several prominent development finance institutions, including: $30 million from the International Finance Corporation; $30 million from UK development-focused fund of funds CDC; $20 million from Dutch development organisation FMO; and $20 million from the African Development Bank.

The Shell Foundation has invested an additional $20 million since GroFin's founding, according to West.

Since its launch, GroFin has raised several country-specific or regional funds with an identical focus to the pan-African vehicle, including a fully invested $25 million East Africa fund and a $30 million Nigerian fund.

Although West is quick to concede that by no means should investors expect the types of returns marketed by larger African private equity funds, he is nevertheless confident that eventually small enterprises will emerge as potentially lucrative destinations for private capital.

“Our mission is to get lots of GroFins out there, because the whole sector is so underserviced,”he says.

Emerging Capital Partners has bought a $28 million minority stake in Togo-based commercial bank Financial BC (FBC). FBC will utilise the fresh capital to expand its presence in central and western Africa, according to a statement from ECP. The investment is ECP's eighth in the African financial services sector. In June, the firm announced that it had purchased $15 million in convertible bonds and common shares in African micro-lender Blue Financial.

AIG Investments, the asset management arm of troubled insurance giant American International Group, has invested in Nigerian microfinance platform Blue Intercontinental Micro Finance Bank. The undisclosed equity investment closed just a day after the US Federal Reserve announced an $85 billion bailout of AIG in which the government purchased an 80 percent ownership stake in the insurance company.

Aureos Capital has held a first close on its Aureos Africa Fund at $253.5 million. The UK-headquartered investor is targeting $400 million for the fund, eight times larger than its existing Africa-focussed funds. Investors in the fund so far include the UK government fund of funds CDC, Norwegian development fund

Norfund, the Netherlands' FMO, the World Bank development fund IFC and the European Investment Fund. Inspired Evolution Investment Management, an investment boutique based in South Africa and the UK, has held the first close on what the firm says is Southern Africa's first cleantech fund. The Evolution One Fund, which held an initial close of R400 million (€34 million; $48 million), has a target of R1 billion, which the firm intends to reach by July 2009.

African Development Bank Group president Donald Kaberuka has called for change in international trade. Speaking during a joint press conference in New York with Tanzanian President and chairperson, Jakaya Kikwete, Kaberuka outlined the benefits of fair trade to African economies.

The International Finance Corporation has appointed a new director for Eastern and Southern Africa, Jean Philippe Prosper, based in Nairobi, Kenya. Prosper previously worked as IFC senior manager covering East Africa. His new role is part of IFC's strategy to get closer to clients by bringing more resources to Africa and creating two sub-regional hubs. IFC also has a new director for West and Central Africa, based in Dakar, Senegal.