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FrançaisHow can African SME funds mobilise more capital? Data and lessons from pioneering LPs and GPs
Submitted by on Tue, 01/28/2025 - 15:36
In this new publication, "How Can African SME Funds Mobilize More Capital? Data and Lessons from Pioneering LPs and GPs" sponsored by the Argidius Foundation, Investisseurs & Partenaires (I&P) provides a comprehensive analysis of the fundraising landscape, fund models and return profiles of SME funds across Africa.
This report originates from an observation of a significant gap in aggregated data on SME fund returns and the relative success of various fund models and fundraising strategies. Over six months, I&P conducted an extensive quantitative and qualitative study, analyzing more than 135 SME funds and conducting interviews with over 35 stakeholders in the SME fund ecosystem, including both LPs and GPs.
The aggregated findings and insights presented in this report offer an initial set of conclusions on the financial performance of African SME funds and the current fundraising landscape. The analysis delves into key dynamics between LPs and GPs, shedding light on the challenges encountered and the innovative solutions implemented by these stakeholders to address them.
This report marks is essential step toward closing the data gap, focusing on SME funds targeting the lower segment of the 'missing middle'—specifically, funds making investments of less than $5M.
Download the Executive Summary
Key Takeaways
[1] The past decade has seen the emergence of a growing and denser SME fund ecosystem.
- The SME fund ecosystem has become geographically more diverse, now spans across asset classes, and is attracting more and more talent in stark contrast to 15 years ago.
[2] Starting and running a SME fund is a journey plagued with challenges.
- SME funds are most often pioneers in their market, operating with considerable additionality and being the first investors in the companies they target.
- It is structurally difficult for SME fund managers to deliver risk-adjusted market-rate returns to LPs due to high relative transaction costs, lower liquidity, and exposure to country or macroeconomic risk.
- It is structurally difficult for SME fund managers to sustain their own economics and retain a team.
- Emerging fund managers face very challenging fundraising odds. 45% fail to achieve first close. It takes on average two years to reach first close and then additional time to reach their final target fund size.
[3] SME fund managers are implementing solutions to these challenges.
- Their fund returns are improving. SME funds launched since 2015 have been delivering higher average gross returns than the previous generation of funds
- They better match liquidity with investor constraints (self-liquidating instruments in their strategy, innovative fund structures for their structure)
- They design more robust fund management companies (challenging fund terms, building alternative models for portfolio support, reaching economies of scale)
[4] In a difficult fundraising landscape, SME fund managers leverage new opportunities to mobilise more capital.
- Emerging fund managers triple the odds of achieving their target fund size by raising progressively or partnering with sponsors and platforms.
- They focus their fundraising efforts on specific pools of capital (impact funding windows, private capital from African corporates, African sovereign investors, Pan African funds-of-funds).
[5] There is much more research to be done on the performance of African SME investing, which can be achieved thanks to stronger collaboration in the sector.
The report was published thanks to the support of the Argidius Foundation
The Argidius Foundation, inspired by Catholic Social Teaching, aims to create a just and sustainable world by promoting human dignity through philanthropy. As part of the Porticus global philanthropic organisation founded by the Brenninkmeijer family, the Argidius foundation focuses on supporting small and medium-sized businesses to foster job creation and economic growth since 1956.