Where's all the money going?

Lots of time to think in Sri Lanka's tea plantations. Mostly... Has the "where's all the money going" story been fully told?

Basically, there's a lot of money coming into SSA private equity (and public ones too, I imagine, but there's some fact checking to be done there). It's coming from established forces that are raising larger commitments (Helios, EMP), big funds new to the market (Carlyle amongst others), local funders (PIC) and increasingly also private sources (Allen Gray is rumored to be starting something). This means a) that there's a lot more cash and b) it's coming from new sources.

But I'm beginning to doubt if they can spend it. Yes, some democratization is driving business climate improvement and yes, some valuations may be on the low side. But continued structural issues (strife, infrastructure and corruption) remain largely unchanged. Even if there are young hopefuls such as FHN or IHS they are still a) facing the same barriers as before (I'm sure Will can name one or two examples to add to the ones that spring to mind) and are b) still few and far between. Just look at Anders, who went from looking for pipeline to making it.

Can this change? Yes, of course. But it's likely to take far longer than a PE fund and its investors have the stomach for. Don't get me wrong - these investments can still do an immense amount of good. However, they're likely to have far more VC characteristics than investors seem to think, with all the risk, timeline, work, cost, and other challenges that go with them. Hopefully more money will bring a) (short term) valuation inflation that will benefit a few golden nuggets b) enforcement of higher management and corp gov standards c) give rise to a new entrepreneurial gold rush that can really help foster a deeper pipeline. But all that might not necessarily translate into profits now.

I hate to tell a bearish tale, especially in a bullish time for Africa during which international investors have little else to be bullish about. However, I've seen first hand how too much enthusiasm can backfire (haven't wee all in some way or another). Microfinance for instance was for a long time (over)-heralded as a saving force only to fall flat on it's face when empirical studies showed that it's output didnt match those lofty expectations. That's not to say that it does not do any good at all though that's another discussion. Fortunately the sector is still largely backed by public institutionals who move slowly and have longer term/non-financial objectives. The sector therefore has time to build a new brand or prove it's critics wrong. Given the 'new' funding base of African PE it's questionable whether the sector will have that luxury.

Development Finance: SMEs, Finance, Growth

This post has some interesting findings in the development economics/SME realm – in particular the impact of lack of finance for SMEs on exports and thus employment, innovation and growth. As in microfinance, the micro-level, anecdotal evidence differs from statistical analysis; Thorsten Beck et al previously found that although there is a correlation between SMEs and growth they cannot say that one causes the other.

Other interesting subjects include the benefits of diversified conglomerates in emerging economies – which they say is derived from internal capital markets, a phrasing which does not necessarily highlight their primary advantage; that of helping the company weather shocks.

In the same vein, but not mentioned in the blog, is the phenomena of clustering in emerging economies. Why do all the TV, scooter, book etc sellers in Hyderabad group together? Couldn’t they make more money by serving customers closer to their home and raising prices for the convenience? Surely, some entrepreneurial trader would have discovered the profit, so the answer is not only in tradition. Why does it take big corporate building malls to realize underlying value? Answers anybody?

Let the local guys help...

An evolving product of the ANDE conference, which I hope to write more about soon:

The growing number and capacity of local intermediaries in emerging markets is a success story of Small and Growing Business (SGB) investing. Yet, they have not found their space in the investment value chain. They are underutilized as a potential deal source and investment advisor, with investment funds relying on parallel structures to make investments. This failure to adapt to new possibilities is stunting the growth of SGB investing.

To read more, click here... opinions welcome!

CDC & its critics

While in the UK I read a Sunday Times article about the CDC inquiry at the Public Accounts Committee. It surprised me slightly because i always thought of CDC as a world-leading DFI. Now the combined effect of the economic crisis that has already triggered a witch-hunt of top managers, and some mistakes at CDC, Actis & co., has made them the subject of aggressive accusations, even slander. The good thing about this media hype is that CDC and its fund managers will be made to act. The bad thing is that many of these critics have a much greater goal: to bring the entire field of business-driven poverty alleviation into disrepute. 

The whole business was still a little murky to me, so i set about crystallizing accusations and the truth behind them. Ended up longer than I wanted so I cant really post it here, but if you're interested you could read the draft version.