CONTENTS OF THE PRESENTATION

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CONTENTS OF THE PRESENTATION

• Introduction
• Objectives of the survey
• Results of the survey
• Recommendations

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I N T R O D U C T I O N
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DEFINING SMEs
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FACET GROUP
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ADAPPPT IN A NUTSHELL

• Adapppt was created in March 2003 by FACET,
• Fair Trade Assistance and SMO
• Co-financed by the Netherlands Ministry of
  Foreign Affairs (Development Co-operation) and
  private sponsors
• Promote awareness of CSR in developing countries
• Strengthen the capacity of SMEs to gain access to
  global markets in which CSR plays an increasingly
  important role
• Establish partnerships between SMEs in North and
  South

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O B J E C T I V E S
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CONCLUSIONS AVCA MARRAKECH, 2004

• Low return on VC investments in Africa
• Difficult to raise second-generation funds
• Lack of access to credit for enterprises
• Public support for Private Equity investors and a
  legal framework are non-existent

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• PRIVATE EQUITY VENTURE CAPITAL
• AS A MEANS TO PROMOTE SUSTAINABLE
  ENTREPRENEURSHIP IN AFRICA
• A Survey of 25 Venture Capital Organisations
  Active in Africa

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RESEARCH QUESTIONS

• What is the contribution of VC funds to
  sustainable development in Africa?
• What are main bottlenecks faced by these funds
  and how can stakeholders solve these bottlenecks?
• Is it possible to integrate CSR principles in
  doing business with VC firms in Africa and how?
• Is there a demand for a special Business
  Development Services (BDS) Fund and/or program
  for the Venture Capital sector in Africa, based
  on CSR principles?

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10 SURVEYED VC COMPANIES IN THE NORTH

• Belgium Bio
• France Proparco
• Germany DEG
• Luxemburg EIB
• Netherlands FMO, RoValue, SOVEC
• and Venture Capital for Africa
• United Kingdom Actis, Aureos

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15 SURVEYED VC COMPANIES IN THE SOUTH

• Cameroon CenInvest
• Ghana Aureos West-Africa and Fidelity
• South Africa Actis-SA, Aureos-SA, Business
  Partners,
• Endeavour, Enterprise Support, Horizon Equity,
  
• IDC, IFC, Kingdom Zephyr, Khula Ent. Finance,
• MEDU, Triumph VC
• Tunisia TunInvest Finance Group
• Zimbabwe Batanal Capital Finance,
• Venture Capital Company Zimbabwe

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BASIC PRINCIPLES OF CSR (SUSTAINABLE
ENTREPRENEURSHIP)

• People e.g. living wages, workers rights to
  organise, workers safety, workers training
  and education, and balanced child labour
  policies in compliance with UN child rights.
• Planet e.g. efficient use of natural resources,
  control of pollution and waste recycling.
• Profit a reasonable added value to all the
  companys stakeholders,including
  shareholders, management, permanent and
  seasonal workers.

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BUSINESS DEVELOPMENT SERVICES(TECHNICAL
ASSISTANCE)

• BDS Services for SMEs to help them develop and
  perform
• better in all their business activities.
• This includes
• Business plan development, training and
  mentoring of entrepreneurs, financial, legal and
  tax support,
• managerial coaching, access to information,
• network-building.

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R E S U L T S
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VENTURE CAPITAL HAS A POSITIVE IMPACT ON
ECONOMIC DEVELOPMENT IN AFRICA, IN TERMS OF
SUSTAINED ECONOMIC GROWTH AND EMPLOYMENT
1.

• Only one VC firm has actually measured its
  impact on sustainable development (the Acacia
  Fund in East Africa by Aureos Capital)
• Impact for all the stakeholders at all levels is
  strong and positive.
• Aureos Capital East Africa created 2,815 jobs
  from 1997 to 2003 with a total investment of 12
  million ( 4,263 per job)
• Business Partners created 700.000 jobs between
  1981 and 2004 with a total investment of 754
  million ( 1,077 per job)

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Main focus of venture capitalists and fund
managers is on net internal rate of return
Realised IRR for Selected Venture Capital Firms
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Huge gap between the supply and demand of
Venture Capital in the market segment between
20,000 and 500,000

• Access to Venture Capital for SMEs very limited
• Small number of VC firms aim to serve the market
  segment for early stage investments and even less
  actually succeed in doing so.
• Reasons
• Relative high transaction costs
• Unattractive risk-return ratio

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2.
MAIN BOTTLENECKS FOR VENTURE CAPITAL AND PRIVATE
EQUITY FIRMS IN AFRICA

• Financial management of the VC and PE funds
• Capacity of the local entrepreneur of the
  portfolio company
• Lack of macro- and socio-economic stability
• Currency risks
• Lack of affordable business development
  services,
• insufficient transfer of know-how and poor
  quality of market
• information

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There is a gap between the perceived risks and
the real risks of investing in Africa, which
tends to exaggerate the risks associated with
Africa.

• Lack of well-researched market information. Being
  well-informed and able to mitigate risks are
  important success factors, in Africa as
  elsewhere.
• Risks are higher in Africa than they are in
  Europe or the USA, but in reality not as high as
  one thinks.
• VC Funds expect a gross internal rate of return
  of more than 20 over 5-8 years (like in Europe
  and USA)

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3.
IT IS POSSIBLE TO INTEGRATE CSR PRINCIPLES
WITHOUT SACRIFICING PROFITABILITY, WHEN INVESTING
VENTURE CAPITAL IN AFRICA

• Mutually reinforcing process between commercial
  success in the short run and sustainable
  (commercial, social and environmental) results in
  the long run
• Only a few PE VC companies are aware or have an
  explicit strategy to this effect. No tools or
  indicators to measure impact
• DFIs and Venture Capital Funds with 100 public
  funding comply with legal rules regarding
  governance and transparency. No pro-active
  strategy for investment selection based on CSR

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3.
IT IS POSSIBLE TO INTEGRATE CSR PRINCIPLES
WITHOUT SACRIFICING PROFITABILITY, WHEN INVESTING
VENTURE CAPITAL IN AFRICA continued

• There is often a large gap between these
  investors in the North and the fund managers and
  SME entrepreneurs in the South, who are mainly
  focused on financial performance criteria
• CSR is often seen as something that is imposed on
  governments and entrepreneurs in developing
  countries. Many SMEs in Africa already practise
  some kind of tacit social responsibility

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4.
THERE IS A DEMAND FOR A BUSINESS DEVELOPMENT
SERVICES (BDS) PROGRAM FOR THE VENTURE CAPITAL
SECTOR IN AFRICA BASED ON CSR PRINCIPLES

• Business Development Services (BDS) offer crucial
  added value to investors and entrepreneurs in the
  process of establishing successful venture
  capital investment.
• Importance and success of BDS is demonstrated by
  the examples of Business Partners with its
  cost-efficient mentorship program and tight
  business model

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4.
THERE IS A DEMAND FOR A BUSINESS DEVELOPMENT
SERVICES (BDS) PROGRAM FOR THE VENTURE CAPITAL
SECTOR IN AFRICA BASED ON CSR PRINCIPLES continued

• New IFC initiative, in cooperation with
  Business Partners International. Project to
  establish SME Solution Centres, for low threshold
  finance and BDS for SMEs. The pilot is being
  rolled out in Madagascar, Kenya and a
  West-African country. (integrate developmental
  and commercial goals)
• Almost half of the VC Funds provide BDS, but
  there is still an unsatisfied demand. Mainly for
  market segments of start-ups, early stage and
  growth investments between roughly 25,000 and
  0.5 million.

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R E C O M M E N D A T I O N S
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Recommendations on promoting CSR in Venture
Capital and Private Equity firms

• Make CSR more practical and applicable for all
  stakeholders, develop appropriate indicators and
  stimulate awareness of sustainable
  entrepreneurship in Private Equity and Venture
  Capital firms
• Promote mutual understanding between investors
  North and fund managers and (potential) investee
  companies in the South regarding CSR

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Recommendations on promoting CSR in Venture
Capital and Private Equity firms

• New financial products and procedures and a
  different mind-set are necessary when investing
  according to CSR criteria and rules this implies
  awareness raising, information and capacity
  building for all stakeholders.
• National Governments should establish a healthy
  investment climate that is attractive to CSR
  investments by legal reforms and tax incentives,
  developing alternative financial sources and
  capital markets, apply CSR criteria in
  privatisation processes and stimulating Public
  Private Partnerships

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Recommendations on access to Venture Capital and
Private Equity for SMEs

• Multinational companies can play an important
  role in facilitating the access to venture
  capital for SMEs by cofunding VC funds in
  related business sectors and linking up with SMEs
  in supply chains set up from a CSR perspective
• (Inter-)national banks and other financial
  institutions can put their CSR strategy in
  practice by investing a certain percentage of
  their profit in VC Funds that focus on
  CSR-related investment in SMEs
• Macro-economic policies in developed countries
  can also play a role in reducing the risk
  involved in VC investments in Africa. For
  instance, access to markets in Europe, the USA
  and Asia, can be made easier by lowering trade
  barriers.

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Recommendations on access to Venture Capital and
Private Equity for SMEs continued

• Stimulate the development of a BDS programme
  aimed at increasing the access of SMEs to Venture
  Capital from a CSR-perspective. This could take
  the form of a self-sustaining facility that
  offers BDS to entrepreneurs, through a system of
  matching grants, vouchers or other financial
  instruments
• Special BDS program could be funded institutions
  like the IFC, public development assistance
  funds, large International banks and pension
  funds, local banks, large foundations and NGOs

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FINAL REMARK

• We take the view that CSR and sustainable
  entrepreneurship
• in Africa must come from within the African
  business partners
• themselves, especially the entrepreneurs. It
  should be a natural
• part of the business practise and fit in the
  specific
• African business environment.
• Awareness raising and capacity building can help
  entrepreneurs
• to develop their own strategy towards sustainable
  
• entrepreneurship.

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STATEMENT FOR DISCUSSION

• Venture Capitalists are not really
• interested in SMEs nor social returns
• on investment yet.