While the economy has taken a severe knock on all fronts both before and during the COVID-19 pandemic, there are still companies looking to expand and for which they will require a capital injection. For an SME looking to do this, particularly in Africa, a private equity (PE) fund may be the way to go, providing the company has what it needs firmly in place in order to convince possible funders.
There is plenty of activity in the private equity space in sub-Saharan Africa, which demonstrates that there are businesses which are growing despite the economic impact of COVID-19. For example, South African companies Peries Foods, Jincom and RunwaySale; as well as Zimbabwean companies Metro Wholesalers and Dendairy, were able to expand operations as a result of capital injections from Spear Capital, which invests in companies in countries throughout Southern Africa.
Many SMEs in Africa do not have the same support structures from financial institutions such as banks, as you would find in more developed economies. As a result, there has to be a lot of creativity in terms of how you fund your business, how you pay your suppliers and even how you negotiate contracts. When looking for investment, we recommend that SMEs should take the following into consideration to ensure they attract the attention of potential PE investors.
Not all PE investors fund the same kind of businesses and it is imperative to research and understand the types of companies that the funder you wish to approach usually takes on. It’s worth noting that a particular PE firm may not choose to invest only in businesses of a similar size or within a particular sector; other factors, such as the track record of management, may also be considerations. Portfolio diversification needs to be a key consideration, and this can be seen in the range of companies that a PE entity funds – for instance, food production, e-retailing and ink manufacturing, all of which are quite distinct. But, the one thing they should have in common is strong management teams and are mainly owner-managed.
Start with the basics
As with traditional financiers, PE investors will also want to see the basics such as a business plan that reflects the historic, current and forecasted financial performance of the company. In terms of the forecast figures, traditionally, sponsors would want to see up to five years. Our view is that, given our economic environment, it’s not straightforward to forecast so far ahead, so we typically request a minimum of a three-year horizon. Remember to also provide a profile of the company’s leadership team, and a SWOT analysis of strengths, weaknesses opportunities and threats. Do this with a realistic perspective – an investor does not expect a business to present itself as being free of any weaknesses or threats. It is the recognition of the existence of these issues that is important, with the investors and management being able to develop strategies to deal with them.
Understand your competition
This is about understanding how competitive the market is in which you operate. Management should show an understanding of the business’s competitors and provide investors with a view regarding how it sees its place within that competitive environment. A potential investor will try to ascertain whether the business that’s looking for capital really understands the landscape within which it operates. None of the companies we have invested in were the first-to-market. They all operate in sectors that are somewhat competitive; but what attracted us to them is that what they do in those markets is different to their competitors. That’s what I think has led to them having the success they enjoy and having made the progress that they have to date.
Demonstrate your resilience
Different geographic markets across Africa will have different factors to consider, depending on the ease of conducting business overall. The one key factor that is vital to all PE investors is demonstrating the ways in which a company has been and can continue to be resilient. It’s the one common thread that runs among all successful entrepreneurs regardless of which geography they operate within in Africa. Resilience is essential in the countries in which our companies operate because these are markets that can be extremely dynamic.