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DealMakers AFRICA 2020 Annual
African SMEs a compelling proposition
by Axel Smeulders
Most economies across Africa are very dynamic, and much of this energy is being driven by small and medium enterprises (SMEs), which represent one of the most significant and important agents for economic growth and development. While that is not to say that Africa’s large corporate entities are not major economic contributors (they generally also started out small), the reality is that Africa's SMEs are both the lifeblood of economic activity and a source of employment for millions.
Critically, these SMEs are often also the source of much of the African industry’s innovation and entrepreneurial spirit. Many are proving to be instrumental in developing new industries, changing the way things were done traditionally, and quickly and nimbly adapting to new opportunities. As a result, they transform Africa's commercial and industrial focus and, often, its fortunes. This is especially true of small, medium and microenterprises (SMMEs) in the burgeoning fintech sector, and more broadly across the agricultural, industrial, consumer and service sectors.
Interestingly, most of these African SMEs are (or started out) as family operations, of which many have overcome significant challenges to achieve the growth and reach they now enjoy. However, for most of these business owners, funding – whether debt or equity – is still very difficult to access. This is primarily because their long history of unique business models and operations mean that they do not easily fit neatly into the traditional due diligence assessment boxes of investors or lenders.
It is an unfortunate situation, as the lack of capital or inappropriate capital structures (debt/equity mix or reliance on short-term funding) slows down or holds SMEs back from realising their full potential. The reticence by investors to back these businesses also means that they, as investors, are missing out on potentially spectacular long-term returns.
As increasing numbers of private-equity funds and investors begin to recognise the vast inherent value in many of these African SMEs, many other financiers, notably banks, seem not to be as quick to acknowledge this. It is a scenario that can easily be changed, but doing so requires commitment and action from both prospective funders and SMEs.
From an SME perspective, creating a compelling proposition for investors or funders must begin with placing greater priority on good governance and formalising their business, accounting, legal and management structures, without sacrificing their ability to grasp opportunities and respond to ever-changing markets. It also demands a commitment to working more closely with possible funders, to establish their expectations and implement a process to develop a more diversified and structured approach to finance that is better suited to the current and future needs of the business.
For their part, prospective investors or financiers need to be open to a significant paradigm shift. For one, investing in African SMEs is not typically the way to make a quick buck. In fact, to unlock the full potential of this type of investment requires a lot of patience, a long-term view, and willingness to see the relationship as a partnership, rather than just an investment. This is because, while an African business may be very successful within the context of its immediate operating environment and market, expansion and sustainable growth into broader markets will likely require a lot of guidance and mentoring.
The final, and possibly most important, consideration for any party considering a funding relationship with an African SME is to accept that profit should probably not be your only motivation. Most African business models are deeply entrenched in the spirit and principles of ubuntu (humanity towards others), and owners are committed to uplifting their fellow Africans. Interestingly, while this may previously have flown in the face of the profit-at-all-costs approach that has historically characterised most investment in the developed world, it now aligns very well with the fast-growing global prioritisation of environmental, social and governance principles. And, if investors in African SMEs can embrace this truth and accept the need to sacrifice short-term returns in favour of the socio-economic good of all Africans, their reward could very well be significant bottom-line benefits in the long term.
Smeulders is a Principal of Corporate Finance, Nedbank Corporate and Investment Bank, Africa region.