FISEA was originally allocated an investment capacity of €250 million euros as part of an ambitious strategy to support the development of Africa’s SME fabric. The initial aim was to help create or maintain 100,000 jobs throughout the Continent. This initiative, supported by Agence Française de Dévelop- pement (AFD), promotes a general approach, aimed at supporting sectors with high growth and human development potential in Africa. It currently has an investment capacity of €490 million and is fully aligned with the objectives of the Choose Africa initiative.
A FACILITY TAILORED TO FRAGILE AND LOW-INCOME COUNTRIES
Just like Proparco’s equity investment activity, FISEA has opted for two investment methods: intermediation, via investment funds, and direct investment in African businesses. Investments in private sector businesses must be profitable – this is an essential criterion that helps confirms the success and sustainability of the investments financed. However, while certain sectors or projects are potentially profitable, they may have risky profiles or delayed returns that make financing by the private sector, or even by development finance institutions such as Proparco, quite tricky. This is particularly true in less-developed regions caught up in conflict or post-conflict situations, with a destabilised or gradually stabilising political or macro-economic framework that can be collectively termed “fragile states”.
From the outset, FISEA’s activity was positioned on riskier operations than usual, either because of the size of the businesses or the maturity of the project, institution or country in question. It was therefore designed to round out the activities of AFD and Proparco by supporting private players developing innovative, high-impact projects - while opening up new investment horizons. FISEA sought out new types of partners and investment opportunities that differed from the traditional business pipeline – sometimes lacking in visibility and far removed from the processes of creating loans, mortgages or financial instruments - while also providing customised technical support. This dual investment offering was an important differentiating factor for AFD Group and enabled it to go further in developing and supporting the African private sector.
ANALYSING THE FIRST INVESTMENT PHASE
In 2019, ten years after the initiative was launched, a study conducted by the firm of Steward Redqueen assessed the impact of FISEA in terms of its initial ambitions. The report highlights the difficulties encountered in achieving significant exposure in fragile countries. Nevertheless, 32% of FISEA investments were channelled into low-income countries and 14% into fragile states. Although these levels are higher than the relative percentages of private equity flows captured by these countries, a larger contribution might have been expected, given the importance attached to this theme in FISEA’s strategy. This highlights the challenge involved in coming up with sufficient investment opportunities in these markets, while maintaining an acceptable level of risk in relation to the financial performance targets set by AFD. Moreover, while 32% of FISEA’s capital was used to support businesses from “low-in-come countries”, these accounted for almost 50% of the structures of FISEA investees.
This means that companies in these countries were smaller on average, and that support for small and very small businesses was much greater. By contrast, the 14% of capital invested in “fragile states” represented only 11% of the businesses supported by FISEA. The African Rivers Fund (ARF), managed by XSML, invested in debt, with investments starting from $100,000. This $50 million fund supports micro businesses and SMEs, mainly in the Democratic Republic of Congo. It provides entrepreneurs - often from disadvantaged backgrounds - with access to capital. To assess the facility’s “geographic additionality”,Steward Redqueen compared FISEA investments with global private equity flows to African countries, such as those tracked by the African Venture Capital Association (AVCA). For almost 70% of the “fragile or low-income countries” for which data was available, FISEA was more exposed than the market, in terms of amount invested – and in several cases, considerably more exposed (e.g., Malawi and Madagascar).
THE IMPORTANCE OF QUALITY DUE DILIGENCE
An analysis of the ten-year financial returns on these investments showed that the best latent financial performances in the FISEA portfolio were in Senegal where two large-scale projects boosted its performance, nicely demonstrating the existence of “bankable” opportunities in less advanced economies. Conversely, Namibia, Tanzania, Rwanda and Zambia did not perform as well. However, it should be stressed that these investments were made by the managers with the worst financial performance records in the FISEA portfolio. The financial returns on these investments were therefore influenced more by the quality of the management teams and investment strategies than by country-specific risks. This finding underlines the importance of the quality of due diligence within the investment process and of risk management in complex environments.
FROM FISEA TO FISEA+
With the benefit of these lessons, AFD and its line ministries decided to focus the strategy of the new phase of the initiative known as FISEA+ on more explicit and increased (direct and indirect) support for small and medium-sized enterprises operating in fragile countries. These now represent one of the facility’s four priority investment targets. Along with its partners (investment funds, entrepreneurs and local banks), Proparco has observed that micro, small and medium-sized businesses (MSMEs) have difficulty accessing local financing in the most fragile regions. This is due both to the risk-taking capacity of local banks, and to the fact that MSMEs’ balance sheets are not considered sufficiently robust (in terms of equity) to be able to carry senior short-term financing. Also, local bank financing conditions do not always match the needs of small local businesses (especially in terms of maturities).To consolidate their balance sheets and access facilities that match their financing needs, these businesses have to open up their capital or use debt funds such as those that FISEA invests in (ARF, FEFISOL, BPI).
Since 2021, FISEA+ has invested in countries such as the Democratic Republic of Congo, the Palestinian Territories, Sierra Leone and Madagascar. The revamped facility may be used – for limited amounts – in growth capital funds that invest specifically in the fabric of local micro businesses and SMEs, or in venture capital funds that provide preseed or seed capital. FISEA+ may also support initiatives that have a strong catalytic impact by setting up “junior tranches” in funds as a complement to “senior tranches”, to encourage established fund managers to invest in new strategies and geographies, while seeking to raise more capital for businesses in the most fragile countries. The technical support included in FISEA+ is designed to provide expertise and know-how tailored to the needs of fund managers and MSMEs. FISEA+’s investment credo, in phase with the Choose Africa initiative, is to continue to support the fabric of African MSMEs and to seek out projects with greater impact and eligibility criteria that complement AFD Group’s other instruments, particularly Proparco’s balance sheet. Ultimately, this strategy is designed to consolidate the economic and social impact of the initiative, while providing venture capital in fragile countries where it is most needed and can have the highest multiplier effect.