3 August 2014

Ethiopia: New Private Equity Firm to Boost SME Financing

The Fund, to be headquartered in Ethiopia, will be the second to provide financing to companies in the country

Eastern Africa's newest private equity player, Ascent, has raised 50 million dollars, the threshold equity level - aka first close - for the Ascent Rift Valley Fund (ARVF). This will enable it to begin making investments.

The recent fund, which enabled it to reach the minimum amount to begin investing comes in the form of a five million dollar equity contribution from the Kenyan Pension Fund, according to Michael Meba Selassie, principal and Ethiopia country director of Ascent Capital.

Ascent Capital is the manager of the ARVF - a 10-year private equity fund, which predominantly invests in growth capital for companies working in Eastern Africa with an average investment of four to five million dollars. The minimum investment size of the fund is one million dollars, while the maximum is set to be ten million dollars, according to Michael.

"We will invest in small and micro enterprises (SME)," he said.

Though the fund is generalist in its approach, industries that manufacture fast moving consumer goods with attractive business models will have the highest probability of success, according to Michael.

In addition to the contribution from the Kenyan Pension Fund, which amounts to 10pc of the first close equity raised, commercial investors, including local institutions and private international investors, have committed 70pc of the funds. Development finance institutions from countries such as Norway, through Norfund, and Austria has also contributed to the fund, an amount of which Michael is unwilling to disclose.

Focusing on consumer related businesses with the capital and competencies of fund managers who can contribute to branding, distribution, storage and consolidation, the most important target sectors for the fund will be healthcare, agro-processing and financial services.

The fund raised so far will be invested in eight to 10 companies across East Africa, according to the firm.

With its local office in Ethiopia, the first investment of the firm is underway, which will be announced within the coming two weeks, according to Michael, who refrained from identifying the beneficiary company on condition of a confidentiality agreement.

However, it was previously eying a 2.5 million dollar equity share in the International Clinical Laboratory (ICL), back in March, 2014.

Negotiations were underway between the two, which has taken a year and half. Based on this negotiation with ICL, there were plans to commence DNA testing for the first time in Ethiopia, for 300 dollars, according to Tamrat Bekele, general manager of ICL.

ICL, which is owned by Medpharm - a US-registered company, established in 2003 by three Ethiopian nationals living in the US - also plans to open new branches in East Africa, the first being Khartoum, Sudan, in six months time. In addition to the financial fund, Ascent will also cooperate on the expansion of the ICL branches in East Africa.

ICL, which opened its doors in 2004 with the aim of providing quality laboratory services all over Ethiopia, managed to expand its service throughout Addis Abeba and Bahir Dar (511km from Addis Abeba in Amhara Region), Mekelle (780km from Addis Abeba in the Tigray Region) and Hawassa (273km from Addis Abeba in the Southern Region).

The lower price of electricity and labour are part of the considerations made by Ascent, in addition to the growing size of the middle income group and the overall population. This is in addition to the continuous economic growth in Ethiopia, according to Michael.

Ascent is the second private equity fund in Ethiopia. The first private equity fund to buy shares in Ethiopian companies is Schulze Global Investment (SGI) - a US based investment firm run by Gabriel Schulze

SGI has engaged with National Cement S.C, Slipper Kindergarten, Bageresh Coffee Exporters S.C and Southwest Energy - a Hong Kong based oil and gas company owned by an Ethiopian.

Joining the market to target the small scale businesses, as opposed to SGI, Ascent has made its decision after thorough consideration of the viability of the investment, the future of which is yet to be determined.

"It has taken more than ten trips to Ethiopia to decide on the investment," Michael told Fortune. "A thorough market study has been made."


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