Private equity is being backed by Bob Geldof as a way to support African entrepreneurs and, ultimately, grow the continent’s economy

• There’s a brand new, and very refreshing, wind blowing through Africa at the moment that is making itself felt in a number of directions.Take these small gusts: The VC4Africa community names 2012 as The Year of the Entrepreneur.
• Bob Geldof, in what might be seen as a move away from his obsession with aid and debt forgiveness, raises $200m for an African private equity fund, with a target fund size of $450m.
• The US Patent Office is offering 50 patent holders expedited processing if they can prove a history of addressing humanitarian needs with their patented technology.
• Barack Obama announces public and private sector efforts that will harness the expertise of academia to develop new solutions to development problems. And he wants to leverage advances in internet technology to the same end.

• So what should one make of all this private sector and private equity-driven activity?  VC4Africa is a very active online community connecting entrepreneurs and investors that started life on LinkedIn and now has its own website. Recently it set out some key facts about Africa that should excite both entrepreneurs and investors:Africa has the fastest growing middle class, expected to rise from 60 million people in 2011 to 100 million in 2015.
• The African economy is expected to grow by 6% in 2012.
• Africa has 600 million mobile phone users, more than either America or Europe.
• Trade between Africa and the rest of the world has increased by 200% since 2000.
• Inflation in the continent fell from an average 22% in the 1990s to 8% in the 2000s.

Small company deficit

According to VC4Africa, what the continent lacks at the moment are SMEs. It has a lot of micro enterprises – you can see these everywhere you look in any African city – and quite a few very large companies (primarily mining and natural resources groups). But, what it lacks is the mass of SMEs in the middle ground that are often the driving force in developed economies.

Geldof is not alone in targeting Africa with private equity money – the sort of investment that is likely to play a significant part in building up the SME base. His $200m joins a $900m Africa fund from London-based Helios Investment Partners that “will invest $25m to $250m of equity per transaction in various forms, including business formations, growth equity investments, structured investments in listed entities and large leveraged acquisitions”.

Helios and Geldof will also be joined shortly by Carlyle Group, which established a team to conduct buyout and growth capital investments in Sub-Saharan Africa in March 2011, and is reported to be close to setting up an African investment fund.

Geldof’s conversion to a business-driven response to Africa’s growth and development problems is particularly welcome. Decades of aid have done little to encourage development or reduce poverty in Africa, that cash mainly being seen by the continent’s many corrupt rulers as rich and easy pickings.

According to Bloomberg Business Week the $200m raised so far for the Geldof-backed 8 Miles fund is a downward revision of the initial plan to raise $1bn – $450 million is now the end target. But this is still a substantial sum to invest.

Support enterprise

“Private equity,” Geldof says, “is one way to support the enterprise and dynamism of the people of the continent and help provide the jobs and skills that are needed”. And that’s the nub of all of these small gusts in what may really become a Wind of Change blowing through Africa – the wind that announces itself as coming to invest in the continent rather than coming to hand out money that then disappears into the pockets of the already-wealthy.

Jobs bring income, jobs help to support the dependents of those who are in work. Jobs, as Geldof points out, teach skills and within many of the companies that these funds support there will be entrepreneurial individuals who then see opportunities to strike out on their own and set up other new businesses.

So there is a virtuous spiral that could be created here. But there are also some serious risks that need to be acknowledged too.

Looking at the US government initiatives, it is easy to offer innovation grants as a spur to the development of new products. But there is no guarantee of success from the products that these grants develop. Back in the day, when I was writing about the test marketing of new consumer goods products, it was a mantra that “70% of new products fail”.

Risky business

But things seem to have got worse as the headline on a comment column on the Devex news and jobs website covering this Obama initiative asked: “Can USAID afford a 90 percent ‘failure’ rate?”.

Devex – a website that comes at this from the development community perspective – points out quite correctly that giving seed funding to entrepreneurs (American or African) can be risky. It quotes the Bill and Melinda Gates Foundation as assuming that only 10% of funded innovations will be successfully scaled up, hence the 90% “failure” rate.

So, the private equity groups who are about to pour money into Africa’s nascent entrepreneurs will be expecting a significant proportion of them to fail.

And then, of course, there are the private equity groups themselves. Private equity does not currently have the highest reputation in the developed world. Let us hope that they are moving their best, rather than their least good, aspects to the African continent. Let us hope that the plan is to invest new money into promising ideas and companies with potential, rather than to buy existing companies with their own money and then load them up with debt.

For Bob Geldof, in particular, to be seen travelling the road from campaigning for country-level debt relief to company-level debt mountains would be too ironic to bear.

But, being positive, there is a widespread and growing appreciation that Africa is ready to stand on its own two feet when it comes to trade and manufacturing, and this has to be a good thing.

Behind this there is also an understanding that the way to help individual Africans get out of poverty is to give them a truly sustainable job.

From Advance Aid’s perspective, if it focuses more light on the strengths of indigenous manufacturing and encourages a plugging of the gaps and the replacement of imports with local production, that is also a good thing. We want to do more and more business with African manufacturers and the more good ones there are out there, the better.

Howard Sharman is a senior consultant with Advance Aid.