Local Capital: The key to the emergence of African women fund managers

With gratitude to the ARISE consortium – Criterion Institute, 2X Global, Global Affairs Canada – the WAI Group, Lelapa and ACfA are excited to share this report which sheds light on how women investors are mobilising local capital to introduce new investment models and funding instruments into the African market. These innovative models not only unlock fit-for-purpose capital for local SMEs – which is especially relevant to women founders – but also support women capital allocators to develop track record.

The key insights include:

1. Mobilising capital from individual investors is a widespread practice in the SME investment ecosystem and is catalytic for women’s participation in the African investment industry. Local capital pools also enable the type of investment models that are relevant for women-led SMEs in the transforming middle.
2. We identify six channels through which local capital mobilisation supports the emergence of women-led funds: 1) career transitions from SME advisory to investments; 2) investment track record building; 3) wealth and asset building for fund manager capital commitments; 4) testing investment model innovations; 5) career transitions between traditional funds and alternative vehicles; 6) reconciling an investment career with personal values and family commitments.
3. The structures through which local capital is pooled differ significantly from traditional fund structures. To distinguish them, we introduce two terms: “Red Circle” for traditional funds that are compatible with institutional funding, and  “Green House” for investment models that are not.
4. When Green House intermediaries such as angel networks, crowdfunded funds and invoice financing platforms mobilise local capital, they are able to offer patient risk capital to SMEs on terms that are not available at banks or Red Circle funds. These features include local currency, flexible instruments and small investment ticket sizes.
5. Green House intermediaries combine local legal structures, lean operations and embedded technology to maintain low transaction costs on small-sized deals. However, in most cases, there is some level of subsidisation of the costs related to SME investment-readiness and investor relations.
6. There are almost no bespoke regulatory frameworks in Africa that support the local capital mobilisation use cases of Green House intermediaries. As a result, they take steps to avoid licensing regimes that are prohibitively expensive and ineffective. However, the lack of standards and norms impedes long-term sustainability and scale

The key recommendations are:

1. The mobilisation of local capital from individuals should be a strategic area of study and work for initiatives targeting gender equality in access to capital for both fund managers and entrepreneurs in Africa.
2. Local capital strategies should be integrated into programmes whose impact outcomes include: a deeper pipeline of candidates for DFI gender lens commitments, a broader set of SME investment models in the market, greater volumes of risk capital for women-led SMEs and new pathways for female talent to enter and remain in the investment industry.
3. Legal reforms, tax incentives and enabling capital markets regulations are essential for local capital to play its catalytic role fully, as is the case in developed markets. This cannot be left only to government agencies in the current context of austerity. Grant-making organisations must therefore embrace the long-term work required to yield results at national, regional and pan-African policy levels.
4. Local investment-crowdfunding regulations should be carefully crafted to incentivise Green House intermediaries to move away from relationship-based operations toward structured investment products for local and diaspora retail investors.
5. Market support organisations should increase technical assistance to willing African regulators and in parallel leverage grassroots investor networks as a collaborative platform for public-private dialogue. This is necessary to convey the cost-sensitivity of Green House intermediaries to regulators and achieve frameworks that can be broadly adopted without compromising on financial inclusion of SMEs.
6. Where tax incentives for local individual investors are not politically feasible, catalytic financiers should design de-risking mechanisms which are operationally simple for intermediaries to implement.
7. Working groups between African peer regulators should be prioritised with the goal of regulatory harmonisation. If necessary, grant-making organisations should fund this work given the importance of harmonisation for the business model sustainability of Green House intermediaries.

This report was made possible by Aspen Network of Development Entrepreneurs’ (ANDE) ARISE research grant.

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