Evaluation of the Africa Growth Fund : final report

limited partnership, with the mission of providing equity and quasi-equity financing to a small number of private enterprises in sub-Saharan Africa. Interim evaluation covers the period 1989-12/92. The AGF faces serious cash flow problems, and it is questionable whether it will survive the middle years of its planned 15-year operating life without further financial subsidy. The problems are attributable mainly to the fact that AGF was able to raise only $5 million of an expected $10 million in venture capital from passive limited partners. The shortfall was due to, inter alia: the narrow appeal of AGF's specialized issues; doubts about investing in Africa; and certain structural elements in AGF's prospectus, including a highly leveraged capital structure. This circumstance will profoundly influence strategies for managing the AGF. The combination of interest due on the $20 million U.S. Government guaranteed credit line, a $625,000 fund management fee, and debt sinking fund (principal) payments will create a cash crunch throughout the mid-1990s which will have to be addressed through less desirable financial options, including, possibly, renegotiation of the terms of the credit line -- an implicit further financial subsidy. On the brighter side, AGF's investments are developing according to or better than planned and some are showing indications of positive economic performance. AGF has committed approximately $14 million in 7 businesses in Ghana, Cote d'Ivoire, Kenya, and Botswana; AGF is expected to be fully invested by late 1993 or early 1994 with a total portfolio of 11 or 12 companies. AGF management is to be commended for its careful selection of investments, for creating productive synergies among the ventures, markets, and business relationships represented in the AGF portfolio, and especially, for making the best of a difficult situation -- the financial challenges facing AGF would test the most competent venture capital managers. Over 40% of AGF invested capital is in debt instruments versus equity positions, in part to generate operating income for the Fund in the years prior to equity positions maturing. If the AGF can survive its middle years, it may prove profitable in the long run. It is recommended that A.I.D. withhold judgment as to the replicability of the AGF model until a track record of profitable operations has been demonstrated. There is also a broader lesson to be derived from looking at the business of providing capital to small and medium-sized businesses in Africa. Even in the United States, where the AGF venture capital model (high returns/high overhead/professional investors) is the most highly developed, it provides only a small proportion of the capital needs of small and medium-sized businesses; it is likely that in African business environment there is an even smaller market for such instruments -- probably only a small fraction of 1% of African business have the size, market potential, sophistication, growth prospects, management, capitalization and risk/reward trade-offs to attract a formal venture capital company. To reach the heart of African business development needs, a mechanism is needed that can, on a self-sustaining private sector basis, deal with firms that are smaller, less sophisticated, need management and technological assistance, and have little access to formal commercial infrastructure.