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
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.