Private equity targets SMEs for social impact

Africa has in the past 10 years featured prominently as the world’s new frontier of private equity (PE) activity with Kenya standing among the top five leading destinations of investment.

A recent survey by consultancy firm Deloitte and Africa Assets shows that in 2013 alone, eastern Africa attracted 26 PE deals worth an estimated $163 million.
Kenya accounted for nearly half of the deals (12) worth $112 million.

The survey found that 85 per cent of fund managers expect their deal books to book more entries in 2014, especially involving SMEs in consumer-driven sectors.

Signs that this prediction is on course to becoming a reality are already showing with the entry of a new player, DOB Equity, in the market.

The Dutch PE firm has opened a regional office in Nairobi and has set its eyes on investing in companies that offer good financial returns while serving a social course.

DOB is especially targeting SMEs in energy, transport and vet medicine in the low-end market with funding needs of between €250,000 (Sh30 million) and €2 million (Sh238 million).

READ: Dutch private equity fund opens office in Nairobi

Top Netherlands-based officials of the fund were in Nairobi last week for the official launch of the East Africa operation and the Business Daily caught up with managing director Hedwig Siewertsen about the fund’s vision and what Kenya should expect from it.

You have described modest beginnings of this company in rural Netherlands to date when it is going transnational. How has DOB’s journey to Africa and particularly to Nairobi been? 

The founder of the company, JC de Rijcke, started with one shop in the 1950s which grew to more than 600 across Europe and 75 drug stores by the 1990s.

In the 90s the Family de Rijcke decided to do more for people with fewer opportunities in life and set up a foundation that initially gave grants to various courses.

DOB Equity was founded in 2007 following the realisation among family members that this was the best way to create a more sustainable society that they desired.

Why the change from giving grants to the impact investment model?

We basically picked equity investments to ensure sustainability. We also had desire to build partnerships with entrepreneurs who are the real creators of wealth throughout the world.

It is entrepreneurs who know what is needed. They are the ones who come to us with a plan, a desires and a dream that needs support. More important is the fact that financial sustainability is part of impact investing.

Many projects fail because they come from foreigners who may not have good knowledge of how things work on the ground. Most fail because no one asked for them and no one needed them.

Our shift to equity investments has however not killed our enthusiasm for grants, which are still important especially in humanitarian crises and where the donor feels some moral obligation.

Why Kenya and East Africa?

At first we were spread in the Netherlands, India and East Africa. Then with time, we realised that most of our activities were in East Africa. Besides, East Africa has five countries that want to do business together.

We have entrepreneurs in Tanzania who want to export to Burundi while those in Kenya want to do business in Rwanda. We thought that these two factors would be a starting point for setting a Nairobi office.

What separates DOB Equity from other private equity firms?

First, we have a single investor (Family de Rijcke), we are well capitalised and raising funds. That saves us a lot of time and effort.

Many fund managers are busy raising funds, they then have to invest the funds fast enough to make a return and exit. We are spared that kind of pressure. PE is new and it takes time, seven years is not realistic. It (investing) should be at the discretion of the fund manager and the entrepreneur and not the investor.

Most PEs have investment cycles that are too short. PE managers certainly need more time and more perpetual or evergreen funds to deliver their mandate. That would give the industry enough time to learn and exchange ideas.

What have you noticed about the PE industry in Africa?

PE is not about making deals or accessing capital but management of expectations. Most entrepreneurs are not ready for PE investment because they do not know what we expect — from projections, financial models to business plans.

This is new for them. Many fund managers sit in their offices and expect full deals to land on their desks. But it is not entirely their fault due to the heavy costs involved in deal hunting.

Second, investors want to pay a two per cent management fees for a small fund which is not possible in this market. In other markets there is readily available research on different sectors, but this is a new market and one often needs to do everything from scratch.

There is also the transparency challenge. Entrepreneurs and managers also have to become more transparent and talk about everything, honestly and openly to succeed. That is the success of any marriage including private equity.

Fund managers say that carrying out due diligence takes the better part of deal making, which ranges between six and 18 months, why so long?

It is like taking a seven- year journey where the driver is the entrepreneur and the PE fund is the passenger.

Before we get on board we would like to know who the driver is, does he have the experience, what is the state of the car (the company)? You have to know the state of the car if you want us to go for a seven-year journey with you and that takes time.

Briefly describe talent sets that are needed in the industry.

Talent develops over time. PE is about learning on the job. In this industry you cannot learn in the classroom. We should also speak when things go wrong so that we can learn from mistakes. Funds might not want to do this because they also need to attract investors.

How big is DOB Equity’s fund?

We are well capitalised.

What are some of the typical investments that you tend to look at?

It depends. It can be sales or earnings. We agree on key performance indicators with our shareholders but we also look at shareholders; employees, clients, suppliers.