The US Agency for International Development (USAID) has awarded catalytic funding to four investment vehicles to drive inclusive economic growth in Southern Africa.
As a result, R357-million ($24-million) in private sector investment will go towards supporting small and medium-sized enterprises (SMEs) and emerging farmers in the region.
“With these awards, USAID is supporting private investment into businesses across Southern Africa. This will help connect investors to Southern Africa’s vibrant community of entrepreneurs, driving long-term investment and helping local businesses grow,” says USAID Southern Africa acting mission director Rebecca Krzywda.
The four investment vehicles include SME growth financing company Creative CFO; nonprofit organisation Endeavour South Africa; revenue-based financing company Linea Capital; and smallholder farmer investment organisation ThirdWay Africa.
USAID's support of these vehicles through its INVEST initiative reflects a growing consensus that private investment is critical to inclusive, sustainable development. These efforts will complement and support current USAID policies and priorities, including the USAID Private Sector Engagement Policy, the US Government’s Africa strategy, and Prosper Africa.
“We look forward to working with our partners to build a more prosperous future for Southern Africa,” Krzywda says.
Creative CFO has launched the Creative Growth Capital Fund I to provide sustainable growth financing to impact-oriented SMEs in South Africa. The fund’s vision is to create a more financially inclusive world where SMEs in the Southern Africa region can grow sustainably and succeed.
USAID’s funding will lower the risk to commercial investors in the fund. The Creative Growth Capital Fund I will deploy a range of flexible financial instruments including debt, equity and mezzanine structures, tailored to SMEs’ specific financing needs in support of their unique growth trajectories, USAID notes in a media statement.
Further, Endeavor South Africa's Harvest II Fund will invest in high-impact entrepreneurs in the region, alongside lead investors. The fund will also provide ongoing tailored mentoring to these firms.
Over the past two years, Endeavor South Africa’s portfolio of 25 firms collectively generated R2-billion in revenue and created more than 4 600 jobs. The Harvest Fund II will build on this track record and invest in an expanded portfolio of high-impact firms in the region.
USAID support has allowed Endeavor to waive capital raise fees and limit management fees, thus enabling more attractive investment terms for private investors and accelerating the establishment of the fund. Twenty per cent of profits will be reinvested into Endeavour to help support the next set of entrepreneurs.
"Linea Capital is launching a revenue-based financing investment vehicle targeting growth-stage firms in South Africa. USAID’s funding will improve commercial risk-adjusted returns and help crowd in private capital."
Revenue-based financing provides a non-debt, non-equity source of financing and is especially important in emerging markets as limited access to financing at good terms often pushes high growth firms to take on onerous debt or dilute their ownership in the business through equity finance. Revenue-based finance ownership and the incentive to scale remain in the hands of the company’s founder.
Meanwhile, ThirdWay Africa has established permanent capital vehicle (PCV), the ThirdWay Africa Rural Development Corporation, to invest in smallholder farmers and help them scale into independent mid-size commercial farms that can compete on the international market.
PCV is an investment structure, which unlike a traditional fund operates for an unlimited period.
USAID funding will help ThirdWay Africa develop environmental, social and governance policies, set impact measurements and conduct outreach to private investors to raise additional funds to catalyse market-deepening investments in Southern African agriculture, USAID says.