Yesterday, CBO Investment Management (CBOIM), a West African focused Small and Medium Enterprise (SME) Investment firm, announced that former International Monetary Fund (IMF) Chief of Investment, Gary Steinberg will be joining its firm as Head of its Advisory Board. The announcement indicated that Steinberg will resume as soon as he retires from the IMF as Chief of the Investment Unit.
Steinberg has over 30 years of experience in the Investment industry. He joined the IMF in 2010 as Chief of the Investment Unit which manages a portfolio of approximately $20 billion. Prior to joining the IMF, Gary held several high profile positions including the Chief Investment Officer of Wellcome Trust, the world’s largest endowed medical research charity with £15 billion under management, and Chief Executive of British Petroleum’s UK £12 billion pension plan.
Ventures Africa had a chat with the Founder and Managing Partner at CBO Investment, Bex Nwawudu on the background of CBO Investment, which has been operating since 2008. Specifically, Nwawudu spoke about the role CBO Investment plays in developing the SME sector on the continent. Also, he outlines what Gary Steinberg’s arrival at the firm, means for SMEs on the continent.
Ventures Africa (VA): CBO Investment is currently in the process of launching its first fund of $150 million. What are the specific areas where CBO Investment concentrates its efforts towards SME development in Africa and what is the driving force behind the chosen areas?
Bex Nwawudu (BN): CBO Investment Management focuses on key growth sectors of the Nigerian and West African economy such as energy services, healthcare, manufacturing, education services, media technology, agriculture and food processing and real estate services. The fund has taken steps to make investments between $2.5 and $15 million typically within structured equity or mezzanine structures so as to de-risk the overall investment.
The selection of these sectors is driven by CBO’s in-house research capabilities, local presence and operational capabilities which give us an advantage in identifying SME opportunities often not covered or thought about by the broader market. The key is to provide growth capital for companies in these sectors whilst also providing technical expertise across the its operations in order to add value.
VA: You mentioned in your press statement that the SME industry in Africa is under-serviced. What proof do you have of this statement? How would you measure the current position of the SME industry on the continent?
BN: Small and medium businesses are key to growth in West Africa. In 2013, they accounted for 95 percent of African businesses and 70 percent of industrial jobs. Additionally, it is estimated that they provided half of the total number of jobs and half of the country industrial output. They are a fundamental part of the economic fabric in Africa and are projected to play a crucial role in furthering African growth, innovation and prosperity. They are also net creators of jobs in developing economies, much more than the large firms. Unfortunately, the SME track record has demonstrated mixed results partly due to a financing gap—they are strongly restricted in accessing the capital that they require to grow and expand, with nearly half of SMEs in developing countries rating access to finance as a major constraint.
Their main sources of capital are contributions from families and friends retained earnings, informal savings and loan associations, which are unpredictable and provide little scope for risk sharing. Access to formal finance is poor because of the high risk of default among SMEs, itself due to inappropriate financial products, and a lack of developmental support from the capital markets.
In view of all the aforementioned, in Nigeria (and indeed in most of the West African region), there is an immediate financing gap that needs to be filled by private equity and longer dated capital. This form of financing will release the potential of SMEs operating in the region as they will be less likely to be burdened by expensive debt financing. Technical and management value-add provided by locally embedded managers who have the experience operating in the region, with strong relationships and understand the terrain are also invaluable in the growth of any SME.
VA: Former Chief of Investment, Gary Steinberg, is stepping down from his position at the IMF to join the Advisory board at CBO Investment. What will his arrival mean for CBO Investment and by extension, African SMEs.
BN: Gary Steinberg’s fund management and investment experience with some of the most recognizable names in the industry will help considerably as CBO Investment seeks to build a leading investment manager for Africa. Steinberg’s institutional knowledge and credentials further enhance CBO’s institutional investment decision making process and environmental social and corporate governance (ESG) framework which CBO also implements within its investee companies.
In addition, Gary’s association with CBO will also highlight accessing African SMEs via Private Equity as an attractive area of investment for international investors. Gary’s expertise will prove invaluable as CBO seeks to raise a $150 million Fund from both international and local investors. Africa has attracted less than 1 percent of private equity allocations, however, [it] constitutes 4 percent of global gross domestic product (GDP). It is also the case that very few local managers are being developed to the detriment of the local markets and pension system. Gary understands this and also the process of introducing pension funds into new asset classes and sometimes newer fund managers. His ability to describe the big picture and real long-term risks will help gain investor confidence for the benefit of CBO and other Africa focused funds.
VA: Earlier, you mentioned the kind of SMEs CBO Investment has interest in, but what is the criteria for the selection of those sectors?
BN: CBO Investment targets scalable companies, regional champions and potential market leaders in the target sectors stated previously. CBO invests in companies with the following characteristics: strong sector and business stories, scalable growth patterns, and strong management operating with the highest level of integrity. CBO aims to have the fund’s investments provide developmental impact and economic additionality, while seeking commercial returns.
VA: Bidemi Ladipo, the Enterprise Marketing Head at Etisalat Nigeria, recently said being unique and innovative is the only way to ensure rapid growth for SMEs. What do you think about this and does this apply to agriculture?
BN: Of course, being unique and innovative should not be separate from the development of SMEs. Innovation is vital to SMEs operating in the agricultural sector as these businesses capture the entire value chain to food processing as opposed to just the growing of crops. This will help them accrue the most amount of value, not only to themselves but as a society in terms of job creation and capacity building. There are many businesses along the value chain that are smart and innovative in this sector ranging from food processing, transportation/logistics and packaging to name a few that are also ripe for private equity investment.
