European Microfinance Week 2015

PRESENTATIONS

Georgina VÁZQUEZ of Calmeadow opened the session by welcoming the speakers and participants. She explained that the session would provide insights into the successes and failures of the first African MIV: AfriCap. She emphasized that there is little known about what is going on inside MIVs and their governance structures. Calmeadow recently funded a study on AfriCap carried out by Grassroots Capital to learn more about the governance structures of MIVs. The session aimed to share the study as well as the experiences from AfriCap board members and a board member of the company providing technical assistance (TA) to AfriCap.

The study was presented by Paul DILEO of Grassroots Capital. According to his findings, the major achievements by AfriCap were: 1) AfriCap fulfilled the goals of its Development Finance Institutions (DFIs) and founders to move first, be creative, and break new ground. 2) Clear commitment of the board members to AfriCap’s success. Board members were engaged and, in most cases, generous with their time and expertise. On the other hand, several important lessons were learned. Firstly, as a board you have to set clear strategic, financial and social priorities. As the structure changed from a closed end fund to an investment company and later into a holding structure, the strategy, staffing and governance should have been changed accordingly. Secondly, you have to match goals with adequacy of resources. AfriCap’s, overambitious goals led to a wide spread of investments. The fund had less than USD 50 million at its disposal but made 21 investments. In contrast, an average-sized fund would have only 12 investments. Thirdly, you have to address leadership challenges, especially if there is no dominant shareholder. The supervision of fund managers could have been better: with the goal of AfriCAP to transfer to local governance and management, the Board needed to carefully support the transitions. Fourthly, there was no feedback loop which measured performance and used outcomes to plan and take necessary action to address divergences.

Hany ASSAAD of Avanz Capital, who was involved with AfriCap from 2000 to 2007, provided more context on the development of AfriCap. The Development Financial Institutions (DFIs) wanted to invest in microfinance, while at the same time they stopped their private equity funds. As an exception, African DFIs were given the mandate to start a private equity fund, based on positive experiences of ProFund. Assaad then explained how the structure moved from a private equity fund to an investment company and then into a holding company. This would nowadays no longer be possible as it diffuses the boundaries of liability. The distinction of roles between investors, fund managers and board members changes with every revision of the governance structure. He stressed that within AfriCAP, roles of the board and fund manager were not always clearly defined, leading to chaotic meetings and unstructured decision-making. Assaad also stressed that nowadays the governance structure and strategy should be defined at the beginning. Finally, Assaad mentioned that currently the average number of investments of a fund is 12. AfriCap made 21 investments as a small fund, making it hard to effectively govern investments. In addition, the geographical scope, focusing on the entire continent of Africa, was considered too big.

Emile GROOT explained about the role of DFIs in MIVs. He raised the question what a DFI should do within the board of an MIV. Groot mentioned that, as a DFI, you have to take responsibility for your investment and focus on the long-term. Secondly, DFIs should advocate a decent remuneration structure in order to attract best qualified people and to achieve the set investment goals. Thirdly, DFIs should focus on environmental and social issues. Fourthly, as a DFI investment officer you should assign an independent person to represent you in the board after the investment is made. Taking part in the board of the investee yourself will lead to a blurring of functions. Lastly, as a DFI you should train corporate governance specialists that can help the board to run in a proper manner. Groot concluded that inappropriate MIV corporate governance structures were often the reason for MIV failures, observed during his time spent at FMO’s restructuring department.

Ira LIEBERMANN presented insights on the governance structure between AfriCap and the board of Fintech Africa, an affiliated company that provided technical assistance (TA) to AfriCap investees. Liebermann was part of the Fintech board. Fintech raised USD 8.5 million to support AfriCap investees. According to Liebermann, it was generally agreed that Fintech´s support was useful but that it is hard to measure the impact of the TA provided. However, Liebermann was able to raise several important issues regarding tensions with AfriCAP management on appropriate interventions such as choosing which IT system to use. Another issue related to transparency. Some investment agreements made by AfriCap included the delivery of TA of which Fintech´s board was unaware. Furthermore, Liebermann mentioned that it was difficult to get information regarding the performance of MFIs, making reporting on the MFIs difficult. Finally, he noted that TA support is only as good as the quality of the MFIs. He stressed that some of the weaker MFIs were unable to absorb the TA provided alongside AfriCap investments, making it much less effective.

DISCUSSION

The first question from the audience revolved around relations between the AfriCap and Fintech boards. The audience wondered whether Fintech was on the board of AfriCap. Liebermann replied that the president of the board of AfriCap was in Fintech's board, but not vice versa. However, in hindsight, this could have been a good idea. Liebermann stressed that Fintech's board had to be well aware of the developments within the fund's board to determine the investees’ ability to absorb the TA. The audience then asked if the fund should have focused more on a particular segment. Hassaan replied that this is not advisable as private equity funds look for risk adjusted returns and as such, should not become too specialised. 

Finally, a member from the audience commented that a TA company should aim to get a return on TA investments so you can reinvest in TA again. He then asked if the manager of AfriCap had the qualities to perform his or her tasks. Groot answered that there was a mismatch between tasks and capacities with the first fund manager while between the second fund manager and the board of AfriCap there was a mismatch in expectations of what the fund should invest in.