Investisseurs & Partenaires (I&P) has been an influential investor in Sub-Saharan Africa for more than 20 years, focusing on financing solutions and support for small and medium-sized enterprises (SMEs) rooted in their local economies.
As part of a research project funded by C3, I&P analyzed its large pool of transactions, funds, and structures to identify how/when/why catalytic capital is used and assess the social and financial outcomes of those investments.
C3 checked in with I&P’s financial director, Alexis Thirouin, on the findings and what impact investors might learn from the project.
With two decades of work in Africa, I&P has a tremendous range of experience in advancing the aims of SMEs. What were your priorities in looking at that body of work through a catalytic capital lens?
AT: I&P had the opportunity to finance more than 250 SMEs since its inception in 2002. Nothing would have been possible without the entrepreneurs themselves, of course, who proved to be successful. These entrepreneurs have the greatest impact on their local ecosystems (employees and their families, clients, value chains, environment, etc.) and a significant, concrete, and proven contribution to the UN Sustainable Development Goals (SDGs).
However, access to finance is the main constraint they face in their development, and this is, even more, the case in fragile countries, where the level of risk in terms of economic/political stability, liquidity, and information availability or reliability is high. Nothing that I&P has achieved would have been possible without relevant investing tools to finance these entrepreneurs, and investors had to accept risk-profitability-liquidity ratios that are off-market, to reach this impact. The smaller the SME is, the riskier the country is, and the more catalytic the investment mechanism needs to be. We are convinced that bringing an appropriate financing instrument is key and can determine success or failure.
As our 20th-anniversary manifesto makes clear, we believe it is essential to “fuel talent by providing appropriate and relevant financing and support” if we want to accomplish our mission to serve African entrepreneurs. I&P’s strategy is based on four complementary lines of business, which allow us to respond to the challenges of access to financing and skills faced by African SMEs, depending on their profile :
- I&P Acceleration to scale up young businesses through seed funding and/or training programs
- I&P Development to sponsor a network of African funds to finance small companies with high potential for amounts between €50,000 and €500,000
- I&P Expansion to support and provide equity financing to mature SMEs and start-ups with financing between €500,000 and €5 million
- I&P Ecosystems to encourage the emergence of entrepreneurs and investors in Africa and foster the development of an environment conducive to their prosperity
Did anything in your research surprise you?
AT: In the research we conducted, we proposed ourselves as a case study, to demonstrate the impact we have through our activity, but also to explain why supporting African SMEs is often not possible via conventional investing, given all the constraints entrepreneurs and investors like I&P face. It did not come as a surprise per se, but this research really confirmed the impressive financial and non-financial performance of the SMEs we financed. This performance is just as good as what we can see in more developed markets.
What struck us was the number of constraints entrepreneurs and investors had to manage, which we never took the time to list. This amplifies, even more, the performance, tenacity, and grit of these men and women. The external constraints related to our activity explain why we need catalytic capital; this is not because of underperformance.
SMEs are responsible for an estimated 80 percent of all jobs in Africa, but they need appropriate capital to build and grow. Are there misconceptions about the sector that discourage some investors—even impact investors—from actively engaging? Do you think that better data and analysis can help bridge that knowledge gap?
AT: We think that many investors understand the impact they can support by financing African SMEs in terms of job creation and more (ESG standards, impact on local stakeholders and value chains, etc.). Unfortunately, some investors either do not have access to catalytic capital to invest in impact funds targeting SMEs and/or are not taking into account the difficulties and complexities of working in harder-to-reach countries and smaller companies. This leads many investors to look for financial returns that are out of touch with the context we operate in and the size of the companies we work with.
Some may mistakenly consider that not reaching these commercial returns can only be explained by underperforming entrepreneurs or fund managers. We strongly believe that better data, analysis, and education are needed to demonstrate that investing teams like I&P and entrepreneurs in Africa face challenges that are unique, and do not benefit from other public/market opportunities we find elsewhere. This clear understanding of the market, with its positive (impact) or negative (costs) implications, is key to managing investors’ expectations and eventually adapting their financing tools.
As you look at 2023 (and beyond), are the financing challenges for the sector mostly related to the scale of investment activity, or do they also require innovative approaches to fund structure, local outreach or public policy?
AT: We will need both.
The scale of investment activity is strongly needed, as, by 2050, an estimated 420 million young people will enter the African labor market. So it is time to scale as I&P, and other impact investors have piloted successful investment strategies.
More catalytic capital is needed to bring these approaches to scale. All the market-building work that I&P is doing—and others, including C3—will be helpful to increase the amounts that will be made available by investors.
We also think we need to keep on innovating on the investment strategies that can bring solutions to entrepreneurs and help them grow. Financing risky pilot programs, testing inventive approaches, and financing first-time teams are key to bringing other solutions to the challenges entrepreneurs face.
How about for I&P—is your research project influencing your long-term perspectives?
AT: This research is definitely contributing to I&P’s strategy, and specifically our more recent line of activities: I&P Ecosystems, which promotes the emergence of entrepreneurs and investors in Africa and fosters the development of a business environment conducive to their prosperity. Given the huge challenges that the continent is facing, we think it requires, not only the emergence of a new generation of entrepreneurs but also public and private intermediaries to accompany and finance them.
I&P Conseil, which is conducting this research, provides advice, training, and support to stakeholders in the African entrepreneurship ecosystem. I&P is also an advisor of the Mastercard Foundation Africa Growth Fund, a fund of funds that works through African investment vehicles to support early-stage, growth-oriented SMEs on the continent. It will invest catalytic capital in these projects that, in turn, support African SMEs. This line of activity also allows us to finance innovative initiatives. This research is very helpful in understanding the constraints of those teams and is definitely integral to our long-term efforts.