Opinion: Ethiopia fusing ‘left’ business ideas with ‘right’ funds
It is important to distinguish between what’s happened with businesses and what might happen with investments Every investor wants to be where the growth is, the future, as the present is already priced in.
This emanates from the fact that many investors, fund flow volatility drivers of institutional investors, are sensitive to overall macroeconomic shocks, sanctions, human rights concerns, climate risks, and sustainability focus areas within a nation of potential attractive business ideas. These quantifiers push for pre-design of impact investing funds to roll on energy, transportation, healthcare, digital finance, microfinance, environment. Hence, fundraising is narrowing the investment gap or filling the missing middle connecting the ‘left’ business ideas with the ‘right’ funds of investors.
The real question is on which ‘right’ fundraising models work best in emerging markets, specifically in Ethiopia? Addressing this question requires uncovering the breadth of the impact fund ecosystem in Africa and the sectors, regions, and structures most targeted by impact fund managers. The best example, of unlocking the targets of fund managers, is the research findings of Oryx Impact, an impact fund of funds focusing on Africa, which targets investing in impact-focused PE, VC, and private debt funds that generate significant, measurable impact around economic development and job creation, climate change mitigation and adaptation and gender equality. The research is made official in April 2022 after two years of analyzing, engaging with, and gathering data on over 200 impact fund managers focused on Africa.
The main findings with its conclusion include:
- In Africa, investment opportunities may be facilitated by investing in a portfolio of funds, or in other words, a fund of funds structure. This provides not only access to funding investments, and through them to a number of underlying portfolio companies, but also allows for sufficient diversification across asset classes, geographies, and sectors. In this way, the risk of investing in a single company, fund, or sector is significantly diminished.
- Fund managers tend to develop regional or pan-African investment approaches to access the best quality deals across the continent and to diversify away the country’s risk. Based on 200 interviewed funds 65% focus on multi-African regions, 24% on regional, and 11% on specific African countries in which East Africa and Nigeria/Egypt are popular regions and countries respectively.
- Fund managers are flexible in their investment strategy, to select the best available investment opportunities across a variety of sectors. They may not fund targeting a specific sector and rather focus on service types mainly of financial services, ICT, food, consumer goods, clean energy, mobility and logistics, health care, education, and manufacturing.
- The vast majority of interviewed funds, 78%, use a standard, closed-ended structure, the most accepted among institutional investors; 16% open-ended structure, best for private debt funds; and 6% a holding structure, best for small funds.
Fusing Ethiopia
The above points clearly hinted at the sectors, regions, fund investment strategy, and fund structures targeted by impact fund managers. In line with this, the closed-ended structure funds of Ethiopia will start after the full operation of Ethiopia’s stock exchange, which is widely expected of attracting institutional investors. The open-ended structure could be amplified by supporting business ideas into a shared entity. Since African funds focus less on sectors and more on services amplifying sustainable and inclusive growth, pitching start-up ideas shall roll with less focus on sector and more on impact.
Unlike Ethiopia, funds are mostly financed by public investors, most of the development finance institutions, almost half of the interviewed 200 fund managers said the majority of their funding comes from private investors. In addition, half of the 200 Oryx impact funds of Africa invest more into female-led businesses or those companies targeting women as primary customers or beneficiaries. This difference should also be noted well.
The other point relates to the two sides of a coin- private equity and Going Public with valuation (IPO). Private equity firms may feel, and seem to prefer quite recently, that it is time to convert to corporations to attract institutional investors. All the evidence suggests the trend from public to private is a structural one while the trend toward the public is the recent paradox of equity firms. The paradox is a dual structure of shareholders which inevitably leads to ‘uninvestable shares’ for institutional investors. Hence, fundraising businesses either of choosing a simple structure to raise private equity or prefer a shareholding structure to raise capital going public through IPO.
Private equity investors could differ in their appetite with an offer for a majority stake strategy. A key part of being a control investor generates cash and is less dependent on the exit price. That is an attempt to ensure the right management is in place before investing. In real terms, private equity firms deliver deal origination, portfolio management, portfolio exit, a turnaround of distressed assets, and balance sheet restructuring. The other is portfolio management, financial due diligence, and financial modeling. Hence, a national private fund manager or international fund manager with an indirect presence, at least in a bold fund investment, in Ethiopia is very critical in accelerating both venture and equity investments. Moreover, in short term in a different entity out of existing entrepreneurs’ associations, establishing Private Equity and Venture Capital Association (PEVCA) for advocacy, research, events, and training of diverse sources of capital for existing and upcoming impact-driven business ideas shall not be missed.
