Raising Capital in Frontier Markets: 101

Frontier

How To Raise Capital in Frontier Markets

This is perhaps the number one issue faced by investors anywhere, even in these “boom times” for frontier markets, unless you are already well established or independently wealthy then raising investment funds is nearly always a struggle. There are always plenty of projects, ideas and businesses crying out for money, some with great potential, others less so, but there is always a lack of capital.

So in the spirit of helping connect ideas to capital I have outlined some of the best avenues for raising funds across frontier markets. These are borne out of personal experience along with discussions with both investors and those hunting for funds.

The Spark

To start with you need a solid investment idea, either an existing or future venture, this could be a project – such as a hotel, car dealership or bottle making factory you have seen great potential in, alternatively you could be looking to invest across an undervalued sector in a frontier stock market, or perhaps you have found a profitable looking mining prospect which just needs capital to get started. You also need a solid business plan and pitch, this might seem obvious but I have seen dozens of poorly produced investment presentations which immediately lose credibility thanks to typos or strange designs. So get a second, third and possibly fourth opinion on business plans and presentations from trusted sources before you send them out.

Below are some ideas of who to approach for money, but first do some homework and make sure your investment is suitable for them (a small retail start-up will not interest the World Bank – but they may lend money to other institutions that would be interested). Then approach the right person and get your pitch correct for the target audience – try it out on colleagues and friends first and think about studying guides like this one.

What are the Options?

Development Banks

The IFC, Asian Development Bank, African Development Bank and plenty of others have a mandate to relive poverty or improve the economic conditions of less developed countries which means funding for the private sector in frontier markets. In many smaller countries they will be the single biggest investor in the private sector, they provide long term financing and can also often add on free technical assistance in the form of consultants or advisors to help with the setting up of the business.

What’s the catch? Well they don’t just give the money out for nothing, the usual financial due diligence and integrity checks will take place, plus they will want a good return on their outlay, if it is an equity deal they will be looking for a high IRR ~ 30%. These are not charitable organisations by any means. Also the process can be slow these are typically bureaucratic organisations which can see your project take months to go from proposal to approval as is moves through various committees and due diligence checks, but if all goes well you will get a stable long term partner in return.

Private equity Houses

There are now more and more private equity houses like Actis, CDC and Abraaj Group specialising in emerging and frontier markets, usually regionally focused, varying in size enormously, these funds have the money and expertise to make investments in these countries and they are seeking high growth companies which will see a rapid return on their outlay. So if you have a firm with a strong track record and fast rising revenues and which is also in a fast growing economy you could easily interest them. Depending on the nature of the investing firm you could also receive help and advice in running your venture or introductions which will help it grow faster. However beware as these firms hear a great deal of proposals and of course unfortunately the vast majority are rejected.

Wealthy Individual Investors

This can be a wonderful source of funding with potentially less interference and greater flexibility, or alternatively you could be faced with an micromanaging nightmare of an investor who will get angry and demanding if things are not working out to plan. Ultra wealthy backers are not going to be relaxed about their money disappearing into the black hole of your dodgy software start-up in Sri Lanka.

Unless you are au fait with a lot of rich people you are going to have to do some heroic level networking in order to get the requisite introductions and contacts. Even then you will have difficulties unless you are the right “fit” – ie. wealthy yourself. A bold direct approach might pay off, people can be impressed by a ballsy up and coming entrepreneur wanting funds for their project, but be prepared for rejection and embarrassment.

Crowdfunding

This is the newest and most exciting potential funding source which I cover in more detail here. Crowdfunding is taking off in a big way in developed and developing markets, so you would foolish not to take a look at this method of attracting money.

The Middleman Option

If you are having problems sourcing funds directly it could be advisable engage a broking company like Blackbridge Cross Borders or Sana Elias who can help find you funding for your project. They will almost certainly have a better network of contacts with serious money compared to you and can put that to work if they wish. But you still need to put the effort in pitching your ideas to them, they don’t want lose credibility to their contacts, plus they will want to take a hefty cut of the deal. But a less profitable deal is usually better than none at all.



Categories: Company Case Studies, Frontier Market Strategy, Frontier Markets

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