Africa’s economy is dominated by micro, small and medium enterprises (MSMEs). According to the IFC, they account for up to 90% of businesses. Despite making up the vast majority of firms, financial institutions in the region are not set up to meet their needs. For formal MSMEs, there is a financing gap of $331B. Business that grow often must do so by reinvesting their cash flow.
When reinvesting profits is not enough, a company in an advanced market would have several options for getting the growth capital that they need. In Africa, MSMEs really only have one; the banks and the high-interest-rate credit that they provide. It’s not a recipe for success. “There are a lot of manufacturing businesses that fund Capex with 2-year money. You are not going to buy a house with a 2-year mortgage,” explains Adesuwa Okunbo Rhodes, the Founding Partner and Managing Director at Aruwa Capital Management. “You end up in a very difficult situation where you are just working for the bank.”
Aruwa Capital Management is a private equity fund focused on meeting the unmet demand for equity investments in West African SMEs. They are currently investing in Nigeria, where they are based, and opportunistically looking at Ghanaian companies. “A big part of our mantra is that we want to invest, we want to operate, and we want to empower these businesses so that long after we’ve exited, these are the success stories that we would be able to tell,” said Okunbo Rhodes
What makes Aruwa Capital Management special is not just that they partner with small businesses, but also that they bring a gender-lens to investing. For Okunbo Rhodes, this has two elements.
I can count on my fingers the number of women running funds in Africa.
The first is that Okunbo Rhodes wants her fund to be part of closing the gender investing gap. “I can count on my fingers the number of women running funds in Africa,” she said. She is striving for outsized returns so that in the future, investors won’t look twice before investing in a woman fund manager.
Secondly, the fund only invests in companies that either provide employment opportunities to women or make products that empower women. The fund’s first investment, Wemy Industries Limited, happened to tick both boxes. According to Aruwa’s website, Wemy manufactures “high-quality and affordable daily, disposable, personal hygiene products predominantly for women and infants, including sanitary pads, maternity pads and baby diapers.” They also employ women as distributors.
Adding productive capacity in this industry is important to Okunbo Rhodes. “We’re very happy that we’ll be able to improve the conditions for girls in northern Nigeria who may have never used a sanitary pad or women in rural areas in the east who are still giving birth on the floor with rags,” she said.
Many funds would pat themselves on the back and stop there, but not Aruwa Capital Management. They enforce what they preach. They have set a target with Wemy to double the percentage of women distributors in their value chain by the time that Aruwa exits. The fund invests their committed capital in tranches and not hitting a gender metric is as good of a reason as not hitting an EBITDA target for preventing or delaying the next tranche of funding.
Putting capital in the hands of more women is a very quick fix for the gender problem.
This is not charity. Okunbo Rhodes believes, and the research shows, that investing in women has better returns. If female-led funds have access to more capital, they will allocate more of it to women getting a better return to the fund and increasing the ability for that fund manager to attract more capital, continuing the cycle. “It is my point of view that until we change the balance in terms of the capital allocators, I don’t think much is going to change. Putting capital in the hands of more women is a very quick fix for the gender problem,” said Okunbo Rhodes. If we care about growth, equity, and building inclusive wealth across the African continent and around the world, it’s a problem we need to fix now.
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