Impact Voices | October 24, 2022

Five considerations for weighing the risk and opportunity of investing in emerging fund managers

Susan de Witt
Guest Author

Susan de Witt

ImpactAlpha, October 24 – In Ghana and many other emerging markets, the Ukraine war has amplified the vulnerability of food and fuel supply chains. To shore up local food supplies to curb food insecurity, local fund manager Wangara Green Ventures invested $250,000 in agribusiness Wami Agro to enable more than 15,000 smallholder farmers to improve their yields and incomes over the next five years. 

The deal is an example of how local capital providers are channeling financing to economically-critical small and growing businesses that are otherwise deemed too small, unknown or risky from other formal sources of finance. 

Local capital providers like Wangara are real economy investors, often providing the first growth and working capital to small businesses that are finding and creating economic opportunities in their local markets. But local funders themselves struggle to raise capital because investors deem them too small, unknown or risky for investment. 

For institutional investors to achieve their goals of supporting economic development in emerging markets, they must understand how local capital providers fit into the landscape. Consider them an emerging asset class: a heterogenous group whose investment approaches often favor smaller vehicles and ticket sizes than average private equity and venture capital funds.

As an emerging asset class, Collaborative for Frontier Finance’s recent Local Capital Provider Survey illustrated five key considerations as to why the international development community should be paying attention to these local fund managers. 

Scalable business finance

On an individual level, local capital providers often fall below institutional investors’ financing thresholds. But collectively they represent a multi-billion-dollar investment opportunity and a scalable solution to the emerging markets small-business financing gap. 

The CFF survey identified 50 local capital providers in Africa and the Middle East that are looking to raise $1 billion. The capital could support more than 1,200 local small businesses. They have so far raised a quarter of their target. 

We estimate that the broader local capital landscape in Africa and the Middle East includes at least 200 local fund managers representing a potential $4 billion in assets under management if their fundraising targets are met. That volume of capital is on par with what local and international private equity and venture capital firms deployed into African businesses in 2021. 

Untapped pipeline

Local capital providers’ checks provide vital growth capital that is building a pipeline of investable companies for later-stage investors. Despite challenging fundraising environments, emerging fund managers are getting deals done. 

“Local capital providers are able to build the asset base of “bread and butter” companies in emerging markets so they become attractive to the follow-on investors in the market,” says Roeland Donckers of Iungo Capital.

Four in five local capital providers in CFF’s network are inking deals, even though just one in three have reached a first close on their funds. 

How are they able to do this? Many – 60% – are able to invest without warehousing deals because they are structured as open-ended funds: they can deploy capital as they raise it. 

Another advantage is that they have locally based teams. Nearly all teams in CFF’s survey have a local presence in the markets where they’re investing. We’ve also observed a 40% increase in Africa-based teams over the past two years. 

Rethinking fund economics

About 40% of local capital providers are raising funds of $30 million or less. Managers know that traditional 2/20 fund models don’t make economic sense at this size. They’re therefore innovating to demonstrate their investment theses before launching larger, more traditionally-structured funds. 

For example, local capital providers are using a mix of financing types, like self-liquidating instruments and SAFEs, to support businesses, generate cash flow and ensure exits. 

More than two thirds of local capital providers have raised some form of blended financing to cover set-up and operating expenses, and/or to mitigate risk for limited partners. Some also report that their LPs are setting lower hurdles where tangible impact can be demonstrated.

In South Africa, Africa Trust Group has developed a quasi-warehousing model that reduces its costs while supporting first-time Black female fund managers. “We benefit from their pipeline and capacity which supplements our operational budget, and they are able to help them build a credible track record without having to reach first close,” says Africa Trust Group’s Lelemba Phiri. 

As the market develops, clearer benchmarks are likely to emerge, similar to the microfinance market sector where borrower subsidies are now common, and the community development financial institution market in the U.S., which is supported by low- and no-cost funding from the federal government. 

Gender edge

More than half of CFF’s network of local capital providers are women, which signals that there’s a stronger gender-lens investment edge to be found in the small-business finance sector than nearly any other part of the financial ecosystem. 

Women-led funds have raised just 75% of what their male counterparts have, however, despite reporting marginally better revenue growth. 

Given LPs increased interest in gender-reporting in recent years, we hope to see investors directing more capital to this sector. Some, like Avanz Capital, are ahead of the curve. 

“There is a difference between what women and men present, I adjust perception based on that, but most investors don’t,” Avanz’s Hany Assad says. 

Community level

Local capital providers are creating jobs in more than 90% of businesses they have so far invested in. Despite the current economic turmoil, half are seeing job growth in excess of 10% across their portfolios.

Two-thirds of respondents in our survey are also seeing 10% or greater revenue growth across their portfolios over the past 12 months, despite challenging macroeconomic conditions. 

It’s important to put these figures in context: most local capital providers have been in operation for less than five years and they are actively monetizing their investments. For example the survey reports over 100 self-liquidating monetisations in the respondent cohort with 75% of debt funds having monetized in their current portfolio.

Development finance institutions, impact investing offices, and field building organizations have traditionally focused on the larger private equity and venture capital-oriented fund vehicles and local commercial banks. What is urgently required is a shift in prioritization and funding by the international development community to local capital providers. CFF and our partners are working to better understand this new asset class and its role as an economic driver and builder of resilient local communities. 


Susan de Witt is a director at the Collaborative for Frontier Finance.