Private equity and TA, a winning combination for SMEs

It has long been common practice to provide technical assistance to support the development of institutions and companies in Africa, and Tuninvest-AfricInvest places support for small and medium size enterprises (SMEs) at the centre of its investment operations. The impact of this assistance could be as important to the development of SMEs as the financial investment. While the fund management company can provide strategic support, SMEs very often require specific external capabilities that they themselves are unable to attract or finance. Technical assistance instruments are therefore essential in addressing these needs and promoting the development of the fabric of SMEs in Africa. SMEs form the backbone of sustainable development in African economies. This is why all public-sector programmes that support the private sector place the emphasis on improving the regulatory and institutional framework of the SME system. These initiatives have led to taxation reforms that have reduced the burden on companies and encouraged greater transparency. They have also helped to simplify administrative and customs procedures (like the creation of a single agency for setting up a company in Senegal), and to improve training and stabilise the financial sector (banking, insurance and markets).

Strenghts and weaknesses of African SMEs

In spite of these advances, African SMEs are often still undercapitalised and rely excessively on credit. They present a number of shortcomings, for example poor control of the operating cycle and lack of monitoring of production facilities and marketing techniques, which generates significant working capital requirements. They also have difficulty in adopting the rules of good governance, particularly as relates to managing conflicts of interest and financial management, which can lead to accounting inaccuracies or even misuse of corporate assets. We should emphasise the shortcomings in the design and planning of strategic projects which have more to do with the administrative obligations associated with credit applications than the managerial roadmap. So what are the consequences? Investment decisions based on intuition, insufficient use of information systems and organisational inefficiencies resulting in duplication of effort, undermining of responsibility and centralised decision-making. Finally, we would draw attention to a recruitment and wage policy that makes it difficult to attract and retain the best skills, and the difficulty of anticipating and managing change.

Contributing to the development and long-term survival of SMEs

In the mid-1990s, the majority of countries in the Global South were involved in restructuring programmes, synonymous with an opening up to external trade and progressive disengagement from state-controlled production systems. This economic transition involved supporting the private sector and private equity investment activity to bring in the necessary equity and managerial skills, against a backdrop of very high debt, controlled inflation and fierce competition. It was at this time that private equity investment came into being in Tunisia, with the support of development finance institutions, including Proparco which played a leading role. The emergence of private equity investment in Africa would not have taken place without significant technical and financial support. Several private equity investment teams have benefited from technical assistance programmes. Tuninvest-AfricInvest was supported by the French company Siparex, before in turn lending its support to help other fund managers structure and develop their business. Taking into account the immaturity of Africa's SME fabric, the intervention of investment funds, to be effective, could not be confined to financial support alone. In addition to providing stable resources and helping to build the financial structure of SMEs, private equity investment firms have always helped to improve governance practices in Africa, by breaking their partners' isolation and enabling directors to exercise their full powers thanks to better quality of information. This support relies on the one hand on the expertise of the fund management company's personnel and their proximity to the companies in the portfolio and their management, and on the other its extensive network which the SMEs benefit from. Their management and strategic control experience also means they are well placed to encourage SMEs to optimise costs and improve operational efficiency. Private equity investment firms can also offer advice and support to implement efficient organisational structures to attract skills as well as remuneration systems that align the interests of the companies with those of shareholders and employees.

The keys to success

Given the complexity and diversity of issues that African companies are faced with, it is logical that they should turn to outside, mainly international expertise. The companies in which TTuninvest-AfricInvest Group invests are fast-growing SMEs seeking to innovate in their respective markets by launching new products, new areas of intervention or new techniques. They require specialist external expertise to help them develop their project, avoid errors, optimise costs and speed up time to market. The support provided must reflect local realities and characteristics. When Tunisia's first factoring company was launched, the Crédit Agricole group supported Tuninvest-AfricInvest by making an expert available for a week a month for two years to implement a new strategic plan geared to the local situation, characterised by the absence of an equivalent of the Dailly1 law for subrogation of debt. In Algeria also, Tuninvest-AfricInvest helped an Internet service provider preparing to launch an ADSL and Wimax business to review its marketing strategy using a telecoms consultant who took into account both European/US norms and local constraints. The company, which initially focused on expanding its network coverage then on targeted marketing aimed at corporate customers, is now a leader in this market segment. In Côte d'Ivoire finally, a supermarket chain benefited from support to reorganise its distribution network and redesign its information system, enabling it to keep track of stock turnover and margins by product and by outlet. This support, which took account of consumer habits in Côte d'Ivoire, helped to reduce losses and improve the company's working capital requirement and profitability. Taking the local context into account in this way means that the company's personnel need to be included in the work of the consultants, in particular via working groups. This active participation also results in more effective transfer of know-how and enables the company to develop resources and build on acquired knowledge in a constantly changing environment.

How to support technical assistance programmes

Tuninvest-AfricInvest co-finances technical assistance projects with subsidies granted by its fund investors (Table 1). The use of subsidies is justified either by the financial nervousness of companies in the start-up phase or when management is reluctant to call on international expertise, which it is not accustomed to and which costs more than local expertise. Once the start-up or turnaround phase is past, and having experienced international expertise, companies are generally more willing to pay for the services of outside experts. Since its establishment, Tuninvest-AfricInvest has invested in some one hundred SMEs. The inclusion of technical assistance since 2008 has enabled these businesses to make a quantum leap and improve return on investment. Eight companies in Tuninvest-AfricInvest's portfolio have benefited from technical assistance services worth a total of EUR 436,000. According to these companies and the management company, the technical assistance provided was at least as valuable as the financial resources allocated. The success of such programmes relies to a large extent on the terms laid down by the financial backers. Tuninvest-AfricInvest has asked the European development finance institutions –Proparco in France, FMO in the Netherlands and BIO in Belgium – to ensure that the facilities granted are flexible with regard to the choice and selection of experts, and that they require a minimum contribution on the part of the beneficiary to ensure in advance that the project is relevant and follow it up afterwards. In Nigeria, the AfricInvest Financial Sector fund in April 2008 invested in Abbey, a company specialised in the financing of social housing, in order to develop the mortgage offer. Financial support was accompanied by technical assistance covering the company's restructuring and operating review, strengthening of its information system, setting up new refinancing lines with longer maturity periods and changing the product range. In the absence of local experts, technical assistance was managed over a 3-year period by a Canadian consultant specialised in mortgage financing, 50% of whose remuneration was met by Abbey. The mission enabled Abbey to achieve its quality improvement objectives (improvements to the organisation, offer and risk management, and identifying new funding) and improve its profitability (double outstanding credit, a marked reduction in the cost of risk, and an improvement in net profitability of more than 100%).

Strengthening and expanding the scheme

Seven of the eight SMEs involved saw positive development as a result of the technical assistance provided. Technical assistance for SMEs is thus revealed as a key factor in the development of the SME fabric. However, the low level of funding granted so far is preventing investors from stepping up their support programmes. Certain adjustments would improve the way this works, for example the introduction of a repayment clause if the project is successful and the setting up of revolving lines of credit to improve leverage of funds. Financing fixed-term employment contracts for local or expatriate directors would, when necessary, make it easier to integrate experts into the management team of SMEs. Creating specific facilities could help to sustain investors' incubation activity during the first four to five years of an SME's existence, as is already the case for microfinance institutions.

 

1 The Dailly bill of January 1981, named after the French Senator who was behind it, relates to the transfer and assignment of business debt. It provided a legal framework for factoring.