AVCA Member Profile: Oasis Capital Ghana

AVCA is the African Private Equity and Venture Capital Association (AVCA). The mission of AVCA is to promote and catalyze the private equityand venture capital industry in Africa. AVCA is a member-supported organization, with members spanning  private equity and venture capital firms,institutional investors, foundations and endowments, international development finance institutions, professional service firms and academia.

Oasis Capital Ghana was founded in 2009, to provide capital to small-and medium-sized enterprises (SMEs) in Ghana. The firm is currently managing a $13 million Fund and is the process of its second fund, the Oasis Africa Fund, which is a $50 million               will target SMEs in Ghana, Côte d'Ivoire, Liberia, Senegal and operating in essential service sectors including private housing and hospitality, health and related services, services, and food services. We speak to Boadu Adjei, CEO of Oasis Capital Ghana, about the value of investing SMEs in Ghana and West Africa, opportunities they see, and the challenges.

Question:

Tell us about your investment strategy

Answer:
After nearly 20 years in investment banking and private equity investing in SMEs across Ghana, Sierra Leone and Liberia. I realized that there wasa huge unfulfilled  demand for SME funding especially in Ghana, where high inflation and interest rates were a significant  barrier to accessingfinance. We founded Oasis Capital to provide advisory services and patient capital to SMEs. Our strategy is to invest in SMEs that provideessential services to the growing middle- income segment of the population. We focus on five essential service sectors: private education, housingand hospitality, health and related services, financial services, and food services. For example, a family in the growing middle-income segment willwant quality education for their children, which may not be readily available in the public education system. The central theme of our investmentphilosophy is to target the estimated 300 million Africans who have access to growing income, and have the desire and capacity to spend theirdisposable income.

Question:

The majority of the investors in your first fund, Ebankese Venture Fund, are local. What challenges did you face while raising your first fund andhow did you overcome  them?

Answer:
We began raising our first fund in 2009 during the global financial crisis, which was a difficult time for fundraising globally. Through our strongGhanaian network, we were able to raise US$10 million from local investors including the Venture Capital Trust Fund, HFC Bank and Ghana UnionAssurance. We raised an additional US$3 million from two foreign investors,  P.C.Groenen  BV and Social Venture Fund. Raising capital locally wasstill challenging as the private equity industry in Ghana at that time was nascent and didn’t have a strong track record. The level of understandingof the asset class by local investors was limited. In addition,  some earlier  funds in Ghana had not delivered strong returns as they had suffered from challenging macro-economic conditions, including significant  local currency depreciation that adversely affected investor  returns. Duringfundraising, we focused on educating investors on the opportunities and advantages of investing in Ghanaian private equity and in our fund. One advantage  was the Venture Capital Trust Fund Act (2004) and the Internal Revenue (Amendment) Act (2006), which provided favorable tax incentives for investing in private equity and venture capital funds domiciled  in Ghana, such as exemptions from capital gains and corporate tax.

Question:

You are now raising a larger second fund with a broader geographic reach. Why expand beyond Ghana?

Answer:
We’ve always had pan-African ambitions.  From day one, we mapped out the countries that we wanted  to invest in and have keenly tracked theirprogress.  Political events in individual  countries reinforce the need for us to diversify and have a regional approach. We are currently West Africafocused, as this is a region, in our view, that is more integrated historically and has the political platform of the Economic Community of WestAfrican States (ECOWAS). These individual countries are small economies  and to effectively build businesses that are scalable, we needed  abroader ambition. These West African countries have fragile economies, and in spite of occasional systemic growth  and performance, they are generally less stable, and experience regular downturns and shocks, and therefore diversification provides a better  advantage  than being country- focused. For example, Cote d’Ivoire was historically a good success story until it unexpectedly went through a turbulent period, and Ghana also boasted of significant  stability but lately macro-economic factors, such as local currency depreciation, have not been favorable. All these factors show that there  is increased risk in operating a country fund as opposed to a regional or pan-African fund. However,  our thought process is not just focused on mitigating  risk, it looks at the opportunities, as the demand for essential services is similar across these countries. As a result, we are receiving significant interest from investors,  and expect a first close in Q4 2014.

Question:

How are you building internal expertise to invest effectively in these countries?

Answer:
We have transactional knowledge and strong contacts in these countries. One of my partners is Ivorian with corporate finance and advisoryexperience in Cote d’Ivoire and Senegal, who effectively provides core local knowledge; while in Liberia and Sierra Leone, we have priortransactional experience and know the environment. The need to have boots on the ground is essential.

Question:
What strategies do you use to drive value in your companies?

Answer:
Investing in SMEs is difficult and we take a collaborative, hands-on approach to working strategically with entrepreneurs. For example, we advisedone of our investees  to change his business model from a single school to a chain of schools. Two years into our investment, we have acquired2 more schools. This has been very impactful, significantly  increasing enrolment from 300 students to 1,300 students and revenue from 300,000Ghana cedis (US$ 190,000) per year to 2 million Ghana cedis (US$ 665,000) per year. We have significant  prior experience investing in our priority sectors, and as such we will bring- on an external consultant only if there  is a specific need. We look to partner with entrepreneurs who have agood operational knowledge of their business, or are willing to hire an experienced management team member  to supplement any gaps. Our viewis that the success of the business is a shared  responsibility between Oasis Capital and the entrepreneur.

Question:  

What challenges  have you faced when engaging with entrepreneurs?

Answer:
Typically in Africa, entrepreneurs see their businesses as a personal asset and intend  to bequeath it to their family. They generally do not want tosell their business. As such, there  is a natural resistance to private equity funding, but we are able to help them understand that our intention is tosupport business growth  and achieve their objectives faster. We also use instruments that are convertible on a case-by-case basis. In someinvestments, we’ve converted these instruments and taken an equity stake one or two years after the initial investment, due to the trust developedfrom significant performance improvement. This resistance is an ongoing problem and continuous education is needed  to help entrepreneurs better understand the value-add of private equity. We also believe that an increased number of exit success stories will convince entrepreneurs of thevalue-add of private equity.

Question:  

What are your potential exit options?

Answer:
Our investments are a mixture of equity and debt. The debt structures give equity-type returns but self- liquidate,  and in our equity structures weutilize put-options and look for trade buyers. A significant  portion of our current investments are via debt structures. Our strategy of using a mixtureof debt and equity structures minimizes the burden of exit via an IPO or trade sale but might also cap returns. We have found that this mezzanine-type structure provides stable earnings and provides an exit mechanism that works well for SME investing. We believe that for SME funds you don’thave to be speculative with returns and should target realistic return expectations. Simply put, our exit strategy is to grow a successful  businesswhile continually evaluating  exit options. We strongly believe that if a successful  business is built then exit options will be available. To date, wehave partially exited from two investments.

Question:  

Final words

Answer:
In a market  like ours, continual education of local investors and entrepreneurs is required. I’m surprised that financial institutions in Ghana do notdeploy more capital via private equity structures given the significant  tax incentives available.

In addition, although banks have not developed the best solutions  for SMEs, they have also not explored the potential to create value by working with private equity firms.