Baobab Capital sets sights on further international growth with the Baobab Growth Fund II
Namibia based Baobab Capital is raising $50m through the Baobab Growth Fund II to drive the growth of early-stage, fast-growth companies across Southern Africa. The fund will leverage off the success of the Baobab Growth Fund I which has successfully invested in eight companies in Baobab’s home market of Namibia.
The launch of the fund presents an opportunity both for investors looking to tap into the growth of early-stage African start-ups and for entrepreneurs ready to scale their business in the SADC region.
The first Baobab Growth Fund launched in 2016, with a focus on companies able to yield high returns in the Namibian market. In an interview with AfricaLive.net, CEO Jerome Kisting explained “We invested in eight portfolio companies in sectors including fintech (through payments processing) and manufacturing; from agro-processing to construction materials and pharmaceuticals.
“Namibia is largely a consumption economy, like many of the economies in Southern Africa. In consumption economies such as ours, investing in manufacturing can yield very high returns.
“These companies are industrial and agro-processing start-ups that have the potential to create jobs and contribute to food security. We plan to grow them into regional champions.”
Baobab’s success in Namibia can be attributed to combining effective capital raising with a hands-on management approach. Baobab’s investments are guided by environmental & social impact goals, a model which will be repeated as the Growth Fund II invests across the SADC region.
“We launched fundraising for Baobab Growth Fund II in July 2019,” says Mr Kisting.
“The fund will focus on the entire Southern Africa region because we have seen the potential that regional economic integration can have in supporting regional supplier linkages and value chains.”
Start-Up Challenges: African Start-Ups Are Often Set Up for Failure
Baobab Capital is meeting a significant funding gap facing entrepreneurs and SMEs in Namibia and across Southern Africa.
While Sub-Saharan Africa has experienced a boom in private equity funds, the focus of investors is firmly on medium to large scale investments.
Global impact investment funds have also increasingly put African investment on their agenda. However, investment focuses typically on large scale energy or infrastructure projects, with capital often remaining unlocked due to a lack of viable projects of sufficient size.
Meanwhile, entrepreneurs in the region struggle to access the capital required to scale their businesses. The impact on African economies is significant; Only 1% of micro-enterprises that have started with less than five employees have grown to employ 10 people or more, and Africa’s SMEs are estimated to face a credit gap of $135 billion.
It is in addressing the need for seed and growth-stage investment, and in unlocking available capital from a combination of sources, that Baobab Capital has found success.
Mr Kisting explains “In Southern Africa many start-ups fail because there is very little risk capital available.
“Namibian start-ups have historically tried to get off the ground using debt capital. This model of funding sets them up for failure. When start-ups have loans to pay back, there is pressure on cash flow and therefore management from the start.
“The blended finance model of financing start-ups has worked much better. Here start-ups are financed using a combination of grants and equity or debt financing. One of our portfolio companies is a successful collaboration with the Finnish government to invest in an animal feed business. The Finns provided grant funding to UNIDO (United Nations Industrial Development Organisation) to produce a bankable feasibility study.
“When the viability of the project was validated, the Baobab Growth Fund invested USD1m to procure the production plant. We plan to go into production during Quarter 1 2020.”
Access to capital is only part of the challenge in unlocking the potential of Africa’s early-stage businesses. Access to skills and mentorship is an equally significant problem for emerging entrepreneurs, a challenge which Baobab Capital addresses by taking a hands-on approach to enterprise development with its portfolio companies. Day-to-day hands-on support and capacity building is provided to all companies within the Baobab portfolio.
Mr Kisting says “Our approach is always to make investors understand that there will be challenges and surprises because we invest all along the venture capital funding cycle – from Seed to Series C.
“A significant portion of the risk is mitigated due to our active management approach which sees us involved in every aspect of the business at inception. This includes operations, finance, governance and HR. For example, because we stage our investments in the portfolio companies we sign off on all expenditure at the bank account. This ensures that the business plan is implemented according to the milestones set and that we stay on budget and on time.
“My experiences working for a Canadian impact investing fund exposed me to what is possible if we combine capital and enterprise development support to underserved communities.”
As a result of this hands-on management and mentorship approach, the Baobab Growth Fund is on course to achieve its 22% Gross IRR target, and has positioned Baobab Capital for expansion across the SADC region with the launch of the Baobab Growth Fund II.
Baobab Growth Fund II – Opportunity in Regional Supply Chains
Success for the portfolio companies of Baobab Capital has been built on accessing regional supply chains and allowing Namibian companies to scale up by trading cross-border.
“All the manufacturing companies are already developing relationships in South Africa and Europe for distributing their products in those markets.” says Mr Kisting.
“This is huge for our country because traditionally Namibia imports products from South Africa. Our portfolio companies have seen to it that value-added goods start moving the other way.
“Forty-four African countries have Economic Partnership Agreements with the European Union. If our portfolio companies can secure off-takers in the EU we will see tremendous growth that will have incredible supply and value chain impacts across the region.
“The need to strengthen our portfolio companies goes further than just business expansion and profit. A strong regional supply chain will protect us from external shocks as well.
“For example, a recent foot and mouth disease outbreak in South Africa made it difficult for Namibia to import sufficient dairy products from South Africa. Within 4-5 days shelves in shops started going empty as stock ran out. Investing in local manufacturing in each of our target countries and creating regional supplier networks reduces the vulnerability of countries in the region to external shocks.”
It is this opportunity to build regional supply networks and accelerate cross-border trade which the Baobab Growth Fund II will tap into. Intra-African exports still sit at just 16.6% of total African exports, as compared to an Intra-European trade rate of 68.1%. Growing the rate of Intra-African trade is, therefore, a priority for African governments and business leaders. The introduction of The African Continental Free Trade Area will see barriers to cross-border trade continue to fall, further facilitating the establishment of regional supply chains.
The Baobab team will identify high-growth potential companies in the SADC region operating in the ICT, fintech, manufacturing, industrial or lifestyle sectors and provide support to take the businesses to scale by trading across Africa and Europe.
The first close date for the $50 fund is June 30th 2020, with the final close 12 months later.
Environmental and Social Impact
Investors on the African continent increasingly look to ensure positive and social impact from their investments. The 2017 African Investing for Impact Barometer showed $428.29 billion in financial assets directed towards impact projects in Sub-Saharan Africa. Impact investing has become the norm, rather than the exception in African investment. However, directing this flow of impact funds towards the small and medium enterprises the continent needs to grow remains a challenge.
Baobab Capital’s investment team is enrolled in the UN Principles for Responsible Investment Academy and has extensive experience incorporating social and environmental impact assessments into investment decision making. Baobab’s investment approach is aligned with the United Nations Sustainable Investment Goals, and the UN PRI Academy facilitates the incorporation of environmental, social and governmental best practices into the decision making process.
Mr Kisting explains how social development sits at the heart of the Baobab investment philosophy; “Success to me would mean successfully growing start-ups that produce great financial returns while moving the needle on some of the more intractable social and developmental challenges we face in the region. If we, the Baobab Team, are able to look back ten years from now and say that our fund changed people’s lives for the better, then I will be happy.”
Socially responsible investment is now well understood to be the key to unlocking Africa’s economic potential. The challenge for investors is now to ensure that investment reaches into the business communities in need of growth capital and developmental support.
Baobab Portfolio Success Stories
Black Gold Engineering (Pty) Ltd is a Namibian LED light manufacturer and distributor, established in 2014. The company has a patented lighting solution called NamluxTM, providing 79,6% in cost savings compared to the traditional streetlight.
The environmental impact of switching to the Namlux product is considerable.
The light contains no lithium, phosphates, fluoride or sulphuric acids, therefore reducing water and soil pollution, and is 100% recyclable.
Doré Pharmaceuticals is Namibia’s most technologically advanced pharmaceutical manufacturer.
The company serves both the public and private sectors. Doré will produce seven drugs of which four at own-branded drugs, with three more manufactured under contract.
Dore is also involved in the production and distribution of anti-retrovirals (ARVs) – this is the major component of its public sector business. The Namibian government, through the Ministry of Health and Social Services, spends roughly N$1 billion on ARVs per annum.
Innervation is a Pan-African payment solutions provider.
The fintech company provides integrated payment solutions to retailers in South Africa, Lesotho, Swaziland, Namibia, Botswana, Zambia and Kenya.
The growth in digital financial services in Africa sees the company well-positioned to leverage off its strong consumer and banking relationships to continue growing across the SADC region.
Investment and Partnership Opportunities
Speaking of the type investors and partners best suited to the Baobab Growth Fund II, Mr Kisting says “There are a lot of risks involved in venturing into new territories.
“We, therefore, have a hands-on approach regarding partnerships. We have embraced a value addition partnership model that we plan to implement in each of the SADC countries in which we invest.
“Our fund is also quite particular on the kind of investors we want in the fund. The holding period for private equity investors in emerging markets is usually five years. Our holding period will probably average 7 years. We, therefore, target investors that have experience in the region and the relevant expertise in the jurisdictions we target.”