Opening the flow of capital to SMEs in East Africa
Open Capital Advisors is a financial intermediary focused on increasing investment in SMEs in East Africa. We provide the advisory and brokerage services required by SMEs and investors, thereby enabling SMEs to access capital and achieve growth, innovation, and social impact.
About You
About You
First Name
Andreas
Last Name
Zeller
Your Organization
Open Capital Advisors
Country
Kenya, NA
About Your Organization
Organization Name
Open Capital Advisors
Organization Website
Organization Phone
+254 (0)712 700 727
Organization Address
P.O. Box 24492-00100, Nairobi, Kenya
Organization Country
Kenya, NA
Organization Type
Private Institution
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Your solution
Name Your solution
Opening the flow of capital to SMEs in East Africa
Describe Your Solution
Open Capital Advisors is a financial intermediary focused on increasing investment in SMEs in East Africa. We provide the advisory and brokerage services required by SMEs and investors, thereby enabling SMEs to access capital and achieve growth, innovation, and social impact.
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
East and Southern Africa, including: Kenya, Uganda, Tanzania, Rwanda, South Sudan, Zambia
Region(s) your solution focuses on:
Africa.
Range of turnover in your target firms, in USD
$1-5 Million.
Average turnover in USD of your target firm
1,000,000
Number of employees in your target firms
25-49.
Average number of employees of your target firm
15
Specify the size, average and range of expected loans or investments in each target firm
Open Capital Advisors targets SME clients that are seeking investments between $200,000 and $2 million, with an average investment size of $700,000.
What stage is your solution in?
Operating for less than a year
Innovation
What makes your innovative solution unique?
Many solutions have been developed to serve SMEs caught in the “missing middle.” In Africa, the majority of these solutions have focused on providing private equity capital to invest in SMEs. This capital has been invaluable to increase liquidity in the market; however, funds have struggled to place investments.
Most SME-focused private equity funds in Africa are early-stage. Their tight margins often afford a small staff yet their investors have high expectations for returns and impact. To invest, funds must find high-potential SMEs that are prepared to meet the standards of sophisticated investors. However, many high-potential SMEs lack the resources to meet these standards and funds lack the capacity to prepare these SMEs. Thus, many high-potential SMEs remain uninvestible.
This market lacks a financial intermediary. In developed markets, investment banks fill this gap, preparing businesses for investment and brokering deals with investors. OCA brings this service to Africa’s SMEs.
OCA offers SMEs unparalleled experience to prepare them for investment. Our staff brings investment experience from top investment banks, private equity funds, and consultancies. Yet, unlike existing intermediaries, our services are accessible to a wide range of SMEs. By concentrating compensation on a success fee, we can offer premium services to the widest range of SMEs while sustaining our business on profits.
We believe most SME capital is still on the sidelines. Without an intermediary that combines a strong command of the regional SME economy with global financial experience, the bulk of capital will never enter the SME space.
How does your proposed innovation leverage public intervention in catalyzing private SME finance?
OCA and the public sector share a common interest: to prepare high-potential SMEs for investment and to make investing in SMEs easier and more economical. In Kenya and other African countries, public interventions have focused on providing training to SMEs and information and resources to potential investors. However, the public sector often lacks the private sector experience, particularly investment experience, necessary to guide these interventions. OCA provides the experience to assist in this area and has already partnered with the public sector in two instances: first on an SME initiative launched by Kenya’s ICT (Information and Communicative Technology) Board and second, on developing SMEs incubated by the University of Nairobi.
The first instance involves work with the Government of Kenya’s ICT Board, which recently launched a competition to award grants to the highest-potential SMEs in the ICT sector. In addition to making grants, the ICT Board was interested in providing resources to top SMEs to prepare for private sector investment. OCA’s experience has made it a strong candidate for this partnership. After meeting with the ICT Board, OCA expects to assist in providing training and resources to the 500+ Kenyan SMEs involved in the ICT Board competition.
In the second instance, OCA partnered with the University of Nairobi, a public institution, which has committed significant resources to develop a business incubator for its graduate students. At the time OCA became involved, the University had already incubated several highly-scalable SMEs; however, the University lacked resources to introduce these SMEs to the capital-raising process. To assist, OCA partnered with the University, offering a series of seminars to help entrepreneurs and faculty understand common investor requirements, methodologies for financial structuring and options for attracting financing. OCA management also joined a panel of judges, reviewing investor presentations made by a select group of SMEs incubated by the University.
OCA views its work with the ICT Board and University of Nairobi as examples of its broader strategy to leverage public sector interventions to achieve its mission. By sharing its expertise and resources to a wide base of SMEs, OCA hopes to develop a meritocratic, professional market for SMEs seeking financing. OCA expects this development to have a multiplier effect, attracting new investors to the SME market and increasing access to capital.
What barriers does your proposed solution address?
Asymmetry of information, Informality, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate.
If you checked any of these barriers, describe how your solution addresses them
OCA’s mission is to open the flow of capital to Africa’s middle market. These are the barriers we overcome:
Lack of SME access to skills / knowledge / markets and lack of financial capacity:
Many high-potential SMEs are not financeable because they do not understand what sophisticated investors expect of them and cannot access the support they need to meet these high standards. OCA provides end-to-end services for SME clients, from refining business strategy and preparing documentation to structuring investments and raising capital. In the end, OCA arms SMEs with the skills and understanding required for a sophisticated due diligence process and brokers relationships with the best-suited investors from OCA’s network.
Unavailability of financial products tailored to SME needs:
OCA believes that a wider range of innovative financial products would make SME investment more attractive to investors. As a result, OCA has advised SME fund managers, bankers and SME CFOs on term sheet structuring for equity and quasi-equity investments. Because we can partner with a large number of funds, we serve a unique role in sharing knowledge between investors and organizing investments with multiple investors. OCA frequently drafts term sheets on behalf of its SME clients, proposing customized financial structures which OCA believes best optimize risk allocation between the SME and investor pools. Applying this spirit on a larger scale, we have begun work with local financiers to design new structures for increased liquidity and optimal risk allocation, for example in the low-income housing sector. We believe this will attract new, more traditional investors to the SME space.
High transaction costs:
High transaction costs reduce returns on small SME investments and have been a major hurdle for investors in the most underserved SMEs. OCA makes funds more cost-efficient by screening and preparing SMEs before presenting them for consideration. OCA then presents SMEs to the most appropriate investor, sparing funds that are unlikely to invest the cost of consideration. This saves funds the time and cost of reviewing hundreds of investments to only commit to one or two. Over two years, OCA expects to lower transaction costs and increase deal volumes for funds in the SME market, resulting in higher returns which will enable funds to raise more capital
Lack of incentives for financial intermediaries to service SMEs:
Many finance professionals want to work with SMEs but cannot raise or join a fund. OCA’s success-fee-based revenue model allows us to serve SMEs and attract the best local and international talent to our staff. As the SME financing landscape grows larger and more complex, intermediaries will play a central role in the SME economy.
Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact
Over the last three months, OCA has worked closely with 30 promising SMEs and now receives more than two SMEs referrals each week. For each SME referred, we provide a free consultation, usually followed by meetings and an in-depth analysis of the SME’s business model and growth and impact potential. OCA then proposes engagement to SMEs that match its criteria. At all stages of this process, OCA provides feedback to SMEs, making introductions and recommending partnerships when possible. As a result, we believe our impact extends far beyond those SMEs with which we engage.
One example of OCA’s impact on SMEs is a current client, a Kenya-based manufacturer of feminine hygiene products who has developed an innovative process to manufacture sanitary pads from environmentally-friendly agricultural bi-products. When OCA was introduced to the client, the client had already prepared a production and distribution process, targeted to serve millions of East Africa’s poorest women. However, the client did not have the internal capacity to develop the commercial documentation required by investors. Despite significant efforts, the client had been unable to secure financing for the project.
Since our introduction, OCA has helped this client understand investors’ expectations. We have advised the client on corporate restructuring, recommended changes to the client’s growth strategy, and are working with the client to consider a pilot program to demonstrate market demand. Based on this work, we expect to find investors, structure suitable terms, and assist the client in managing a full due diligence process, concluding in a successful investment. With this capital, our client expects to serve millions of bottom of the pyramid women who currently miss weeks each year of school and work because they cannot access or afford pads.
Other examples of OCA’s impact:
• On a large affordable housing project, OCA recommended a new financial structure to create economical mortgages for slum dwellers while maintaining adequate security and acceptable returns for investors.
• For an off-grid renewable energy client with a revolutionary product, we are helping to develop a complete commercial strategy and arrange partnerships with product distributors and MFIs in OCA’s network. Using this structure, OCA has already received preliminary investor interest and intends to close financing soon. With this financing, OCA’s client will be able to distribute his product widely to rural communities, providing energy security, increasing household income and slowing deforestation.
• For an importer of coffee-processing equipment whose line of credit is exhausted, OCA is helping to structure new financing options, recommending quasi-equity products to focus on the company’s growth potential.
In these cases and many others, our clients have no other access to affordable financial expertise.
How many firms do you expect to reach?
Over the past three months, OCA has held advanced discussions with 30 high-potential SMEs and has selected 6 with which to partner. Through its seminars and work with the ICT Board, the University of Nairobi and other institutions, OCA expects to impact an additional 800 SMEs in its first year.
What is the volume of private SME finance you aim to catalyze?
We aim to raise over $10 million for our SME clients in our first year, rising exponentially in later years as OCA’s field offices open. Additionally, in our first 18 months, we expect our market research and frequent investor presentations to attract $50 million in new, SME-targeted capital to the East African market.
What time frame will be required to reach these targets?
We expect to achieve the above targets within the next year. Over the next three years, we expect to increase staff and establish a presence in Kenya, Rwanda, Tanzania, Uganda, and South Sudan. This expansion will allow us to increase exponentially the number of SME clients we will serve and capital we will catalyze. We expect to leverage client and investor success stories during our first year to attract significant new capital to the market in future years, allowing us to close investments more efficiently.
Does your solution seek to have an impact on public policy?
Yes
What would prevent your solution from being a success?
In order to realize our mission, we need to continually grow our base of potential investors, both in Africa and globally. Currently, OCA is able to leverage a wide-reaching network developed by its staff and advisors, which extends from Wall Street to the World Bank to major African corporations, NGOs and government bodies. Even so, OCA’s growth objectives require us to reach the broadest audience of investors who have never had access to African SME investment opportunities. OCA’s mission might fail if we are unable to continue developing our network and reaching this broader audience of potential investors.
In expectation of this challenge, OCA’s staff has been active in arranging new partnerships with local and global organizations and jointly organizing industry conferences. These partnerships allow OCA to share its research, news, and SME investment opportunities with a broader global network, which it hopes will provide the brand-recognition needed to expand its investor base.
This Entry is about (Issues)
Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact
OCA prepares East Africa’s high-potential SMEs for investment. Our clients provide essential services throughout East Africa that directly or indirectly improve the lives of some of the world’s poorest people. With comparatively small investments, these businesses can grow to serve populations larger than any charity could, even with the most generous grants. For example, one of our Tanzanian clients has developed an innovative solution to provide power to households without grid access. At the time of OCA’s engagement, the client served several hundred Tanzanian households. However, despite strong demand for its product, the client’s growth was limited by a lack of capital. Following several months of intensive pre-investment preparation and fundraising, the client is now close to closing an investment with a consortium of international investors. Post-investment, the client expects to immediately expand its service to 2,000 customers, growing to serve 10,000 more in its second year and 200,000 by its fifth year.
OCA’s work increases the number of investible SMEs in East Africa and creates efficiencies in the investment process by lowering due diligence costs, and raising funds’ rates of investment. This attracts new investors to the SME market and increases the efficiency with which capital is deployed in East Africa.
In the next two years, OCA will close more investments than almost all SME funds in East Africa. While to a fund expertise is often a trade secret, OCA shares its expertise with all investors to draw more capital into the market.
Investment in African SMEs has just begun. The intermediary function played by OCA is critical to bringing larger pools of capital to the African SME space. Ultimately, we plan to introduce managed fund structures that make SME investment from abroad easier and more liquid.
Sustainability
List all the funding sources that are required for the sustainability of this solution
As a private, for-profit social enterprise, OCA is self-sustaining. OCA was initially funded by equity from management, but is sustained by client fees from the successful close of investments. These fees allow OCA to expand to serve more SMEs in new geographies untouched by the growth in SME financing. However, the demand for OCA’s services has greatly exceeded expectations and, in order to expedite growth, OCA is considering funding to serve more SMEs faster. OCA would use this funding to hire and train local staff to serve more clients across more countries.
To achieve our mission, OCA depends on a network of investors for its clients. OCA has partnered with global angel investors, public sector funds, private investment funds and other capital sources that are interested in SME investment. As our expertise grows, we will expand our network of investors.
Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?
OCA is a private enterprise initially funded by management. OCA sustains its business with client fees, which are concentrated on a success basis and paid when investments close. OCA does not depend on public finance.
However, demand for our services has exceeded our initial expectations. Rather than wait on back-loaded revenues from success fees, OCA is currently considering opportunities for additional financing—including private investment and public finance—in order to expedite its expansion plans. This financing would allow OCA to expand its local hiring and training program, increasing its ability to service more SME clients in geographies still untouched by the growth in SME finance, and broaden its investor out-reach, attracting new investors to the SME sector in East Africa.
Demonstrate how your proposed solution will survive a potential loss of its largest private funding source
OCA is a private, for-profit social enterprise and is entirely self-funded. As a result, the biggest threat to OCA’s financial sustainability is the loss of clients. However, OCA considers this threat to be minimal since OCA works with a portfolio of companies across different industries and countries and is not reliant on any single major client.
Over the last months, OCA has realized rapid growth. As a result, OCA may consider seeking private funding sources in future to help expedite its expansion. Failing to secure such funding would only slow OCA’s expansion; it would not threaten OCA’s viability or existing business.
Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation
Partnerships are essential for the success of OCA. To date, OCA has established partnerships with venture capital funds, angel investor groups, NGOs and Development Finance Institutions, among others.
These partnerships have allowed OCA to access a broader pipeline of potential SME clients, expand its investor network, and leverage industry resources.
OCA is currently seeking new partnerships with the following organizations:
• SME capacity-building organizations
• Local financial institutions
• Multi-national corporations interested in expansion in Africa or Corporate Social Responsibility initiatives
• Local/international investor groups, particularly those focused on SME or “impact” investment
• Academic institutions, for example business schools and development think-tanks
• Industry experts focused on OCA’s target sectors
• Local service providers, including local counsel and accounting/tax specialists
Are there non-financial issues that could threaten the sustainability of your proposed solution?
OCA's sustainability could be affected by political, social, or environmental events that dissuade investors from East African markets. For example, following the 2008 election-related violence in Kenya, the country witnessed a significant withdrawal of funds by foreign investors.
Though negative shocks like the 2008 violence are always possible, OCA has taken great comfort in positive political developments in East Africa, including the peaceful passage of Kenya’s new constitution and the successful launch of a common market by the East African Community. These events have also been recognized by OCA’s investor network, many of whom have expressed comfort in East Africa’s stability.
Despite positive news in recent months, OCA recognizes that it works in a challenging region with high risk and high growth opportunity. When possible, OCA works with its investors and SMEs to structure investments which allow for maximum comfort in the event of unforeseen shocks. As OCA diversifies its client base across countries, country-specific political risk is less threatening.
Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically
OCA focuses on sectors in which it SMEs have the highest potential for growth and impact. To date, these sectors have included agri-business, healthcare, power (off-grid), base of the pyramid consumer products, information and communication technology, and affordable housing.
While remaining focused on the high-growth sectors listed above, OCA intends to expand geographically to meet demand for its services across East and Southern Africa. We find considerable demand for our services by SMEs based outside of financial hubs like Nairobi. Currently, OCA works with clients in Kenya and Tanzania and has received inquiries from potential clients in Uganda, Rwanda and Zambia. Over the next two years, OCA plans on expanding to better serve these countries, establishing joint ventures and/or field offices in Dar es Salaam, Tanzania, Kigali, Rwanda, and Kampala, Uganda. This geographical expansion will allow OCA to target a largely untapped market of SMEs in great need of its services. It will also allow OCA to better leverage the investors in its network, several of whom have already requested access to pre-diligenced SME investments in Tanzania, Uganda, and Rwanda.
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| 141 weeks ago Andreas Zeller submitted this idea. |
