The traditional private equity fund model isn’t working – here’s an alternative

There is no shortage of interest when it comes to private equity capital going into Africa. The industry has grown significantly from the early days of direct foreign investment-backed funds (DFIs). It has now attracted bigger funds such Blackstone and Rocket Internet. So why is it still hard for new potential managers to raise and close private equity funds?

The traditional model does not offer enough flexibility to investors.

It may be due to the traditional private equity fund model. Due to logistics and term of tenure, it is usually three to five years. This has its pros and cons but it’s not really transformative when it comes to the vast majority of African enterprises. The traditional model does not offer enough flexibility to investors; the perception they have of African investment opportunities makes them cautious and overly selective.

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For those reasons and others, our team has been exploring what we call ‘alternative private equity’. This blends in some elements of venture building and traditional private equity funds but there is an emphasis on de-risking the propositions to investors by taking a proactive role in working with selected companies before an investment is made. This would be instead of simply waiting for good deals that can command large ticket sizes to appear.

So what’s the problem with the traditional private equity model?

The reason why private equity works well in some parts of Africa is because most funds that have been raised so far apart from the DFIs are closed-end funds which have a fixed life of ten years or more. Usually, investors will want to recycle those funds twice; that’s why the typical investment periods tends to be five years at most.

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The capital commitment made by the investor would be drawn down over a fixed period of time through capital contributions. Investors who subscribe to the fund through the different closings would have the same economic exposure to the same underlying investments.

The incubators and accelerators models have worked in the early-stage technology space but it is very hard to define or find the equivalent of YCombinator in private equity.

Our alternative private equity model puts an emphasis on working with the entrepreneurs for a period of six to 12 months to rebuild and reposition their business. We aim to reconstruct it using proven methods of operations. Most importantly, we work from an investor’s perspective; it allows us to give insider knowledge of what international investors want.

The incubators and accelerators models have worked in the early-stage technology space but it is very hard to define or find the equivalent of YCombinator in private equity. This model hasn’t been adopted by traditional private equity funds yet it has been transformational for the early-stage landscape across the world. We have seen this from our experience as angel investors as well as working alongside other institutional investors.

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As a financial development company, CAMSCORP is present in over 17 countries across Africa and we have invested in numerous operations–mainly in the soft commodities, finance, agricultural, and mining sector – so we have first-hand experience in implementing this model. That’s why we are scaling this into areas such as fintech, data processing, agroprocessing, luxury retail, new media and agritech.

That is why we are excited about the newly launched CAMSCORP Ventures Lab upscale programme. It is a non-residential programme that specifically focuses on scaleups that are either in Africa or diaspora and are seeking to raise US$1M-$50M. To be part of this unique programme please apply here.

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