The Barriers
 
 

 

We assessed the effectiveness of previous U.S.A. sponsored private equity funds in Africa. It appears as though three major barriers to success existed. The first was management from offices within the U.S. distancing management from the projects; the second was insufficient focus on the smaller businesses, which drive the economies in most countries and the third, no economic investment participation from the countries of Africa. We have found within the last few months that African countries want to demonstrate that they have a vested interest in the success of a new model for Africa where the countries have something at stake other than the funds contributed by donor countries. Additionally, there is an interest in more involvement of small and medium size businesses that can drive the economy. There is also the recognition that housing construction does contribute significantly to the economy. The potential investors have acknowledged that lower returns on capital requirements coincides with smaller projects with more management costs that is very likely to produce greater long term benefits to both the equity participant willing to stay for the long term and job creation in an expanding economy.  As of December 2007, returns from African projects have consistently exceeded 25% for many investment funds.

Currently a backlog of infrastructure projects including road, water and sewer to the townships and housing is being experienced in Sub-Saharan Africa. Historically, these types of projects have been performed by construction companies with little to no Black equity ownership. Sub-Saharan Africa recognizes the need for redistribution of the contracting opportunities, as noted in a paper written by Mary Sue Shore in 1999. There have been few effective training programs for the historically disadvantaged businessperson in Sub-Saharan Africa. This has translated into few individuals with the skills to successfully operate businesses in the infrastructure development arena or in businesses supportive of infrastructure development. This lack of management expertise and business acumen among the previously disadvantaged firms that will be the primary candidates to manage the non-traditional infrastructure projects may result in these projects having a lower initial rate of return. However, due to the training and greater broad based ownership, there should be exponential positive developmental benefit to the economic growth in Sub-Saharan Africa through the creation of an experienced black entrepreneurial class.

In order to increase the chances for reasonable equity returns for the investors in this fund, various government project financing will be used. The project finance vehicles can often produce two dollars of debt for every one dollar of equity for the projects financed. The mentoring activities through Mentor/Protégé relationships between large mainstream companies and small minority companies, allows for both project completion and skills transfer. Small and medium sized previously disadvantaged businesses as contractors and sub-contractors will participate in the projects with equity provided from the private equity fund. Mentor-protégé relationships and the faith community will be the cornerstone for success of this equity fund.

There is an opportunity to expand on the Black Economic Empowerment initiatives associated with current infrastructure projects in Africa. In addition to the construction jobs during project construction, we believe that sustainable businesses can be created. This information shows some of the value added by collaborating with MGW.  Several pension funds from the USA are now focusing on emerging markets for the potential of better returns.  As there have been good returns experienced in Africa in the recent past, more investors are looking to increase their exposure in Africa.  MGW is bullish on Africa.

 
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