According to the African Private Equity and Venture Capital Association, there were reportedly 158 private equity transactions in the East African region between 2007 and 2014, totaling approximately $1.5B (1). Now, with Ethiopia being the second most populous country on the continent with over 95 million people, one would expect for the majority of the capital to have been deployed to this country. Unfortunately, Ethiopia still has a ways to go. Only 4% of said 158 deals completed in the region took place in Ethiopia, accounting for only 7% of the impact capital distributed. Kenya, with less than half Ethiopia’s population, has attracted the majority of private equity transactions and has become known as the private equity hub of the region. In addition, according to the Global Impact Investing Network’s 2015 impact investing report on East Africa, “Ethiopia’s financial services sector – and particularly the financing options available to small and medium enterprises (SMEs) – lags that of other major East African economies” (3).
While it seems Ethiopia may have been receiving the short end of the stick in recent years, many in the investing world believe this will soon be changing.
FUTURE STATE OF PE IN ETHIOPIA:
There are several reasons why Ethiopia is becoming a rising star in the region, one being the country’s double-digit gross domestic product (GDP) growth rate over the past ten years, which is expected to continue over the next five years (4).
In line with Ethiopia’s economic growth, the country’s population is expected to continue to increase. If economic output advances faster than population growth, the country will see a broadening of its middle class. As real / disposable incomes rise, demand for higher quality goods and services will rise and the private sector will respond and compete for customers. The good news is that there are plenty of driven and professional Ethiopian entrepreneurs who are more than ready to meet this growing domestic and international demand by providing local value-chain addition across various industries.
The Ethiopian government is in favor of this new industry and has thrown its support and weight behind the small to medium sized enterprises that, with the right partners, could become the market leaders of tomorrow. The government’s Growth and Transformation Plan II seeks to make Ethiopia a lower-middle income country by 2025 through rapid (double-digit) economic growth, industrialization and structural transformation (5). The two pillars that will drive this major development will be manufacturing and agriculture.
Ethiopia is home to many promising investment opportunities in both of these key sectors, among several others, a fact that is not lost on international private equity investors. The agriculture industry is ripe with investment opportunities in major commodities such as coffee, honey, teff, sesame, flowers and livestock. And the manufacturing industry is just as plush with its ever growing market for fast moving consumer goods, textiles, etc. In fact, in 2014 a major private equity firm – KKR – invested $220M into an Ethiopian rose farm. While large deals by private equity firms and institutional investors are important and vital to the country’s continued growth, they unfortunately do not address the important issue raised before – Ethiopia remains one of the most capital constrained economies in the region for SMEs.
CUE THE RISE OF THE GLOBAL IMPACT ANGEL INVESTOR
High net worth individuals (HNIs) across the United States are looking to engage their personal wealth in ways that are different from the typical financial portfolio or fund. High impact (and at times higher risk) investments in frontier economies, such as Ethiopia, are increasingly becoming an important part of said investors’ financial goals. The reason? Investing in SMEs located in developing countries can provide investors with a double or even triple bottom line – financial returns, positive social impact and positive environmental impact. Every dollar invested has the potential to not only provide the company with the ability to scale, but also create jobs in the local community, pay workers a better wage, provide employees with healthcare, pay taxes, and so much more. Impact investing essentially combines the best elements of philanthropy and traditional investing.
Operating under the philosophy of “doing well, by doing good”, many governments and NGOs are seeing impact investing as the long-term development solution for emerging economies, as it sustainably contributes towards a country’s economic growth. In lieu of giving a hand out, investors and development organizations can, together, give these countries a hand up – empowering them to take over their own development stories.
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