JOHANNESBURG – While the economy has taken a severe knock on all fronts, there are still companies looking to expand and for which they will require 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.
South African company Yebo Fresh, originally funded by UK entrepreneur and investor Professor Stefan Allesch-Taylor, received an additional boost in September last year when angel investors Bas Hochstenbach and Frederik Gerner – the founders of early-stage investor E4Africa – were joined by WooThemes (today WooCommerce) co-founder Mark Forrester and Digital Planet CEO Neil Watson, to secure further funds for the upscaling of their online township shopping service.
Likewise, South African companies Peries Foods, Jincom and Runway Sale as well as Zimbabwean companies Metro Wholesalers and Dendairy were able to expand operations as a result of capital injections from PE firm 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. So 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.
However, the PE market is a very competitive one and SMEs should have the following in place to ensure they attract the attention of potential PE investors.
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, bankers invariably want to see five years. But in our economic environment, quite frankly, if you can look that far into the future, then you’re a bona fide clairvoyant. So, practically speaking, your forecast needs to be about the next three years.
I recommend a profile of the company’s management in terms of biographies of those who lead the company, and a SWOT analysis of strengths, weaknesses opportunities and threats.
And we strongly suggest a sense of pragmatism in putting this together because many SMEs think they have to put forward proposals where they have no weaknesses or threats, which is just not possible.
“Even the biggest companies in the world today still have weaknesses and risks; it just comes with the territory. A proper SWOT indicates an understanding from an entrepreneur that they are at least sober enough to comprehend the reality.”
UNDERSTAND YOUR COMPETITION
This is about understanding how competitive the market is in which you operate. What does the competition look like and where is the company looking for funding positioned within that market? For example, is the company looking to capture a 5- to 10 percent share of the overall market or is it a less saturated market with just a handful of players?
What a potential investor is trying to ascertain is whether the business that’s looking for capital really understands the landscape within which it operates. it may think it has amazing technology, but may not know that it’s actually been done before.
DEMONSTRATE YOUR RESILIENCE
While different geographic markets across Africa will of course have different factors to consider, depending on ease of business overall, the one key factor that is vital to all PE investors is demonstrating the ways in which a company has been resilient.
It’s the one common thread that runs among all our entrepreneurs regardless of which geography they come from. Resilience is essential in the markets in which our companies operate because these are markets that are not highly predictable.
RESEARCH THE INVESTORS YOU WISH TO APPROACH
Not all PEs fund the same kind of businesses, and it is imperative to research and understand the types of companies the funder you wish to approach usually takes on. But be aware that this may go beyond the nature or type of the operations in which investment takes place. It can even go beyond it to a similarity in management style.
Diversification is paramount to my firm, which has funded companies as different from one another as food production and ink manufacturing. What they do have in common is that they are owner-managed. If you look at our portfolio of companies, they are very different to one another in terms of what they offer, but what they all are is predominantly entrepreneurial owner-managed companies.
For example, we’ve assisted Dendairy, which is one of the three largest dairies in Zimbabwe today. But while the other two are listed entities, ours is owner-managed. So it fits perfectly into our portfolio.
He also notes, interestingly, that none of their companies was first-to-market. So they all operate in sectors that have competition. But what they do in those markets is different to their competitors.
And that’s what I think has led to them having the success they enjoy and having made the progress that they have to date.
Shaw Mabuto, Partner at Spear Capital
BUSINESS REPORT ONLINE