Wednesday, September 17, 2008

African Fund Set to Invest in the “Missing Middle”

Financial Times

A new African-based fund worth upwards of $150 million is set to launch by the end of the year. The fund is run by GroFin, an African investment group, and is aimed at small to mid-level entrepreneurs throughout the continent. The fund will offer loans between $50,000 and $1 million to African entrepreneurs who have had trouble obtaining loans from risk-averse local banks.

As previous posts have discussed, Africa has experienced record-level private capital investment in the past few years. There are many reasons for this; for instance, emerging markets in Africa have been largely insulated from the world’s credit shock, there has been consistent economic growth, and with the exception of a few countries (most notably Zimbabwe) increased political stability.

However, most of these gains in have gone unnoticed by the “missing middle” – businesses who lack the executive experience and size to attract large capital investors yet are still too big to obtain loans from microfinance investors. GroFin hopes to show that investing in the missing middle can be commercially successful. It plans to offer the loans at interest rates the entrepreneurs could obtain at local banks but are not requiring collateral. GroFin will also offer business advice and technical assistance.

Guido Boysen, the Regional General Manager of GroFin in East Africa, says GroFin helps insure success by “providing hands-on business development assistance” and that the key is that it “maintains a presence locally, on the ground.”

The fund will provide loans to many different sectors; such as, manufacturing, agri-business, tourism and transportation.

1) If this investment strategy proves to be successful do you expect to see more funds trying similar strategies?
2) Many large pension funds invest in emerging markets in Africa because of their insulation from fluctuations in global markets. However, the sheer size and diversity of these funds seem to suggest a hands-off approach. Would large funds be successful investing in the missing middle or do you think that the hand-on approach and local presence of GroFin is what leads to successful investments?

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