Last year one of the first Tanzania-based private equity firms launched with a US$200m fund. Private equity (PE) flows into East Africa have increased significantly in the last five years. And although some PE funds have sealed deals with Tanzanian companies, the funds mostly operate out of Nairobi or Johannesburg. Hence, the entry of Mkoba Private Equity Fund was greeted with enthusiasm in the East African nation.
Mkoba was co-founded by a team of Tanzanian professionals led by former World Bank vice-president Frannie Léautier and accomplished businessman and economist Jitesh Ladwa.
Financing solutions in a post-socialist state
Ladwa, who is CEO of the fund, tells How we made it in Africa that Mkoba was set up to respond to the challenges local entrepreneurs face in accessing capital.
“In Tanzania, and in most post-socialist countries, we are faced with a triple problem of capital. One is that the state banks, where we used to get money, are gone because of liberalisation of the banking sector,” says Ladwa.
“Foreign banks are primarily from South Africa and their cultural affinity is to lend money to their own people. Third is that even European financial institutions don’t give significant [amounts of] money to African-owned businesses.”
Ladwa explains that business people who did well in the 1970s and 80s in Tanzania relied on “political patronage” and connections to land their first job, and then earn enough money to grow their businesses. Mkoba wants to prove business people can receive funding and support from a PE firm to grow their businesses, based on their potential and not their social connections.
Betting on the youth
Although Tanzania has a group of successful family-owned businesses, Ladwa says most of these were established decades ago and are headed by older businessmen who may not be as innovative and nimble as the emerging crop of entrepreneurs in their 20s and 30s.
However, he notes a “cultural bias against giving money to locals” is making the entry into business of such young entrepreneurs more difficult.
“A decade ago we wouldn’t complain because there was not much economic opportunity in Tanzania. But today Tanzania is booming. There are a lot of young people with ideas but they can’t get money,” he says.
“The basic premise is that we want to give money to local enterprises. We want to build African equity and African management experience.”
Outside of Tanzania, Mkoba will invest in fast-growing countries undergoing liberalisation, as well as post-conflict states rebuilding their economies. These include Ethiopia, Rwanda, Mozambique, Democratic Republic of Congo, South Africa, Cote d’Ivoire, Liberia and Sierra Leone. The fund is focused on various sectors including agribusiness, services and manufacturing, urban renewal, financial services and innovative ventures in renewable energy and ICT.
Ladwa says Mkoba has already shortlisted more than 20 companies for funding it hopes to start this June. The companies selected will each receive between $5m and $15m, amounts he believes will propel medium-sized businesses to greater heights.
Ladwa says the selected entrepreneurs will receive capacity building and “hand-holding”, adding that the first two years of investment is the most “risky” period. In this period investees tend to look at the funding they have received as ‘their’ money and want to spend it on personal things like cars. By the third year they start receiving dividends, and no longer look at capital as ‘my money’.
Whilst others might see the countries Mkoba targets as high risk, the economist says a few cases of fraud is not a good enough reason to avoid giving money to deserving entrepreneurs.
“Surely in a city of five million people you can find at least five trustworthy young Africans who are enterprising and who will look after the money and make profits. If we make an example of 20 people whom we fund, and they grow into something bigger, then other investors will join in and they will give more money [to local businesses],” he says.