The “Missing Middle” opportunity to reach SMEs and low- and middle-income earners through bank-investing PE fund

There is an opportunity in providing banking services to a “Missing Middle”, by focusing on financial services for lower- and middle-income groups in Africa, both individuals and growing small- and medium-enterprises. This is the thesis behind the Botswana-registered Summit Development Group (www.summitdevgp.com) private equity fund, which is currently in the process of raising $125 million and heading towards its first $40 million close.
CEO Peter Hinton told African Capital Markets News: “The Missing Middle segment in Africa represents a tremendous untapped client base for financial services. The World Resources Institute (www.wri.org) estimates that the lower end of the market (those with incomes below US$3,000 in local purchasing power) is worth US$429 billion in Africa (GDP in Africa is approximately US$1.6 trillion according to McKinsey Global Institute) and represents the region’s dominant consumer market, with 71% aggregate purchasing power and encompassing 95% of the population.
“Growing incomes have led to expanding lower and middle classes that are pushing consumer demand upwards, yet to date these groups have been inadequately served by financial institutions. Only 15% of SMEs in sub-Saharan Africa are able to borrow from banks and, according to the World Bank, less than 20% of African households have any access to formal finance.”
SDG operates from offices in Johannesburg and London and has a pipeline of over $300 million of potential investments across 37 deals in 16 countries that the team has selected as priorities. It is actively in discussion with financial institutions for 7 deals for $41 mln of investments with US$ 574 mln total assets in 6 countries and hopes to start finalizing the first deals in the first half of 2011.
SDG sees an exciting opportunity for investment into banks, since many banks need capital now due to changing regulations and increased minimum capital requirements, declining asset prices in the current environment, less competition as big South African and Nigerian banks concentrate on domestic markets and more management talent is available.
The SDG management team has extensive hands-on experience including running financial institutions in Africa, practical management of businesses in a wide range of sectors, and successful private equity investing in emerging markets.
The first investor is the African Development Bank (www.afdb.org), which has committed $25 million, and talks are progressing well with a range of other institutions. The AfDB said in a press release: “SDG will be managed by capable fund managers well qualified and experienced in private equity, having successfully managed financial institutions in Africa. Its commercial approach renders its model and delivery approach sustainable, replicable and attractive to other commercial players and more likely to have a strong demonstrative impact on the market.
“The project has tremendous economic potential benefits in employment creation, poverty alleviation and government tax revenue enhancement among other benefits. The Bank’s involvement in the Fund will help to deepen the financial sector as well as bring much needed long-term capital to SMEs, a significant sector of Africa’s economies and the unbanked. It will also help to improve Sub-Saharan Africa’s economic development.” The bank will add its own expertise from investing in a range of African financial institutions.
The slogan of the fund is “Commercial Returns, Development Impact”. The fund says it will use its tried and tested expertise to build capacity and capital at financial institutions and SMEs, to reach some 5 mln people who do not have enough bank accounts, finance 190,000 SMEs through its investee institutions, and create 1,000 jobs in financial institutions and up to 1.4 mln jobs in SMEs by 2020.
Hinton says: “SME finance is the next frontier: it can build off the momentum of microfinance to create sustainable economic growth.”

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