Small business forms the life-blood of any economy. If Africa’s small businesses can thrive, so too will the continent. However, few people raise the issue of how to sustainably finance small- and medium-sized enterprises across Africa. The sustainable financing of these businesses is the only viable development option that will help Africa grow its way out of poverty profitably.

For decades, African companies have been unable to access the funding that they need to grow. Development organizations and charities have done little to solve this problem. While they focus almost exclusively on the alleviation of poverty (rather than the creation of prosperity), many Africans find that they are barely able to help themselves, let alone lift others out of poverty through employment.

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Private equity and venture capital funds, the focus of this article, remain Africa’s best hope for economic growth. These vehicles not only bring much-needed capital to small- and medium-sized businesses in Africa, but also the governance and structure that they need to grow. A study by the African Venture Capital Association (PDF) found that 199 African companies backed by private equity between 2009 and 2015 generated a net 15% increase in jobs during the period, or nearly 11,000 jobs.

When small- and medium-sized businesses have access to adequate funding, they create jobs.

So, what keeps us from getting there? Certainly, there are myriad challenges facing anyone contemplating doing business in Africa today. In this article, we focus on three challenges (mind-set, people, and deal-sizes) faced by the private equity firms, venture capital firms, and multi-lateral organizations who grapple with how to finance businesses in Africa, and more importantly, with how to profit from those investments.

Different Mindset

Perhaps you’re familiar with the History Channel’s ‘Men who Built America’, a series that shows how Cornelius Vanderbilt, John D. Rockefeller, Andrew Carnegie, J. P. Morgan, and Henry Ford revolutionized modern society through their industrial innovations and business empires.

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Filmed in black and white, the series depicts how, as early as 1850, these industrial titans raised capital, wooed shareholders and introduced their innovations. American capitalism now leads the world, with Europe, Asia and Australasia building similar mega-corporations, all centered around innovation, mass production, and market demand.

Meanwhile, in Sub-Saharan Africa, capitalism operates at a level reminiscent of 17th century America. Most of the continent still struggles to industrialize. However, with access to the internet, mobile tech, and 3D-printing, Africa straddles development with one foot in the industrial revolution while the other lies knee-deep in the information revolution (also known as the fourth industrial revolution).

A different mind-set is required of foreign private equity and venture capital investors as they target African investments.

Making deals in New York will probably never be the same as making deals in Enugu (a city in Eastern Nigeria).

Traditionally, private equity funds have assumed the role of primarily providing capital. Africa requires more. When Africa-focused fund Qalaa invested in the Kenyan rail system, they brought not just funds, but also skills and technology. With this change in mind-set and approach, Qalaa helped the Kenyan rail system trim spending on fuel by 10%, and made the trains run more efficiently.

Traditionally, private equity funds have primarily provided capital. Africa requires more.The assumptions and conventions that govern the way most deals are done in the rest of the world do not work as well in Africa. These norms, expectations, and mind-sets that influence the approach funds bring to Africa make it difficult for them to invest on the continent. Investing in Africa requires an understanding of the complexities of African economies, and, in particular, the fragmented nature found in most industries, with a focus on aggregation, technology, and strategic partnerships, as a form of value creation.

Different People

Typically, private equity funds recruit financial experts with experience in investment banking, not in running actual businesses. This approach works in mature, structured economies where management talent is plentiful and value chains are developed.

Africa requires a different approach, a different kind of financial professional. African companies need oversight by entrepreneurial executives with experience in business execution. African companies need operations people, not investment bankers. Suleiman Kiggundu of CDC, a development arm of the British government that uses private-equity techniques, states that in Africa “you have to be really hands-on with every one of your companies.”

A 2015 Bain and Company report on Private Equity similarly agreed that funds need to focus on marshalling resources to actively create value in their portfolios, engaging earlier with the management of portfolio companies, dedicating more time and resources to identifying potential sources of value, and refining their value-creation models.

The report notes that few private equity firms systematically engage with each company in their portfolio, and still fewer do it consistently well, insisting that there needs to be a shift from deal-making to value creation.

To achieve this type of change, this level of engagement at the company-level, and to do it well, requires a change in the way private equity funds recruit financial professionals when they are creating, designing, and staffing Africa-focused funds.

Different Deal-Sizes and Engagement Styles

The IFC estimates that “up to 84% of small- and medium-sized enterprises (SMEs) in Africa are either un-served or underserved” in terms of access to capital. While African countries account for 3% of global GDP, they make up less than 0.1% of institutional investor portfolios.While African countries account for 3% of global GDP, they make up less than 0.1% of institutional investor portfolios.

Africa fund executives from private equity titans KKR and Carlye left their positions early this year. Neither of the mega-funds has been able to secure many deals on the continent. Too much money was poured into too few Africa funds, chasing the few big deals on offer. Most did not want or need that much money. Imagine trying to have a $500m minimum deal size in a country like Nigeria where only two indigenous companies have annual revenues exceeding $1bn.

To offer real value in Africa, the typical deal size must be reduced in order to adapt to the capital needs of a continent which is home to much smaller businesses.


According to McKinsey, Africa’s economic growth creates substantial new business opportunities often overlooked by global companies. Consumer-facing industries, including agriculture and infrastructure, could generate as much as $2.6 trillion in revenue annually by 2020.

Many African companies are successful. They grow faster than their peers in the rest of the world, and they are more profitable than these peers.
– McKinsey Global Institute. Lions on the move II: Realizing the potential of Africa’s economies.

The United States is private equity’s most competitive and expensive market for finding attractive investment opportunities. Given the massive growth potential shown by African companies, combined with their strong entrepreneurial culture, it makes sense for PE funds to seek out investment opportunities in African markets. The ability of private equity firms to adapt to and thrive in frontier and emerging markets is well-documented. For example, private equity firms are already firmly rooted in Brazil, but investors had to work hard to understand regional nuances and adapt to fast-changing conditions there. This has been the case in most dynamic young markets.

Investors will next need to learn how to adapt their approach for the markets in Africa. By changing their mind-set, hiring operations-focused executives, considering smaller deal sizes and staying actively engaged with the companies in their portfolios, private equity can transform Africa, and profit from their African investments.

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By Ola Brown

Dr. Ola (Orekunrin) Brown is a medical doctor, entrepreneur (founder of West Africa's first indigenous air ambulance company, Flying Doctors Nigeria), & investor (she sits on the board of directors of tech-focused fund, Greentree Investment Company). Follow her on Twitter: @NaijaFlyingDr.