For many aspiring venture capital (VC) fund managers in Africa, raising that first fund is akin to climbing Mount Kilimanjaro in flip-flops. The journey is fraught with challenges, from securing initial capital to navigating complex regulatory landscapes. A new report, “Unlocking Capital for Emerging Female Investment Vehicle Managers in Africa,” sponsored by the German development agency GIZ, sheds light on the intricate mechanics of this arduous process.

The study, co-created by AWI and Maitri Capital, explores the experiences of both established and emerging investment vehicle managers (IVMs) across the continent. It paints a picture of a sector characterized by both immense potential and significant hurdles.

Findings from the Report

Operational Dynamics:

• Only 32% of established IVMs and 26% of emerging IVMs work full-time on their IVs.
• Many spend considerable time consulting or working for other organizations.
• IVMs heavily rely on their own capital and impact investors to start operations and build track records.
• Few receive funding from foundations, government programs, or commercial investors.
• Impact investors: Investors who aim to generate social or environmental benefits alongside financial returns.

Track Record Building:

Established IVMs:

• 70% built their track record portfolios without using specific facilities, indicating reliance on existing resources or networks and potentially smaller scale operations.
• 30% are using alternative facilities for building track records.
• Only 4% use open-ended funds, suggesting established IVMs might not yet have a proven track record to attract investors through this structure.
• Open-ended funds: Investment funds that allow for ongoing contributions and redemptions by investors. They do not have a fixed end date and provide greater liquidity but can be more challenging to manage due to continuous inflows and outflows.

Emerging IVMs:

• 70% are building a portfolio of track record investments.
• 50% have more than five track record investments.
• 47% use open-ended funds and special-purpose entities, while 53% do not employ any structure, suggesting direct investment into track record investments.
• Special-purpose entities (SPEs): Legal entities created for a specific, limited purpose, often to isolate financial risk. They are used to house specific investments and can provide flexibility and protection.

Investment Structures:

Established IVMs:

• 52% had raised one Investment Vehicle (IV).
• 65% use a fund structure; angel-to-seed stage investing is the most prevalent.
• 45% invest in early-stage enterprises (angel to Series A).
• Nearly 30% focus on growth equity, indicating companies are progressing beyond early phases.
• 26% provide debt or mezzanine capital, indicating a maturing market with diverse financing options.
• Angel-to-seed stage: Early stages of startup funding where angel investors provide capital for new ventures, and seed funding supports initial operations and growth.
• Mezzanine capital: A hybrid of debt and equity financing that gives the lender rights to convert to an ownership or equity interest in the company if the loan is not repaid on time.
• Growth equity: Investments in more mature companies seeking capital to expand or restructure operations, enter new markets, or finance acquisitions without taking control.

Emerging IVMs:

• Typically choose closed-end fund structures and focus on debt and blended finance stage investments.
• 50% focus on early-stage investments (angel, pre-seed, seed, Series A).
• Closed-end funds: Investment funds with a fixed number of shares that do not permit new shares to be created or redeemed after the fund is launched. They offer long-term capital and are not subject to the same liquidity pressures as open-ended funds.
• Blended finance: A strategy that uses public or philanthropic funding to attract private investment to projects that deliver social and environmental benefits alongside financial returns.

Gender Disparities:

• Male IVMs secure larger track record investments and have larger portfolios than female IVMs.
• Female IVMs take longer to raise capital for each track record investment, indicating systemic barriers and biases.

Geographic Preferences:

• For VC fund managers in Africa, Mauritius and Seychelles lead in IV domiciliation due to favorable tax policies, regulatory frameworks, and ease of conducting business.
• South Africa has a higher prevalence of locally domiciled and in-country investing funds due to its developed financial infrastructure and investor base.
• Trend towards registering IVs in multiple jurisdictions for operational efficiencies and capital deployment.
• Domiciliation: The process of registering a business or fund in a particular jurisdiction for legal and tax purposes.

Warehousing Facilities:

• Centralized warehousing facilities can provide liquidity, mentorship, access to networks, and resources to accelerate track record investments for VC fund managers in Africa.
• 62% of IVMs have taken more than 18 months to build their track record investment portfolio, with 44% taking longer than 24 months.
• Warehousing facilities can significantly reduce the time required to establish a track record and attract investor interest more quickly.
• Limited availability of warehousing facilities is a significant gap in the ecosystem.
• Warehousing facilities: Structures that provide capital for investment managers to build a portfolio of investments while they are fundraising, improving their chances of securing external capital.

Market Trends and Opportunities:

• Closed-end funds (58%) dominate for focused investing and long-term capital, while open-ended structures (21%) offer liquidity.
• Niche options like syndicates (11%) and holding companies (5%) cater to specific needs.
• Closed-end structures align with investors’ (LPs) exit timelines, suitability for illiquid assets, and foster long-term investment perspectives.
• Open-ended structures offer greater flexibility and less pressure to exit by a specific timeline.
• Newer structures like SPVs and warehousing facilities are gaining traction, though access might be limited by evolving regulations and availability.
• SPVs (Special Purpose Vehicles): Subsidiary companies created to isolate financial risk and manage a specific pool of assets or investments.
• Syndicates: Groups of investors who pool their capital to invest in a company or project, sharing the risks and rewards.
• Holding companies: Firms that own shares in other companies, managing their investment portfolios without direct involvement in operations.

Challenges and Support Mechanisms:

• High operational and setup costs influence IVMs’ decisions in building track records.
• A significant need for early-stage support and investment to bridge gaps and accelerate the path to success for IVMs.
• Dedicated warehousing facilities can help mitigate challenges by providing capital, operational support, and faster track record building.
• Existing mainstream warehousing facilities are underfunded, difficult to access, and have stringent conditions not tailored for emerging IVMs.
• Multi-investor warehousing facilities were non-existent until recently, highlighting a significant gap in the ecosystem.

Investment Timeline and Success:

• 70% of established IVMs transferred at least one of their track record investments into their IVs when they closed on capital.
• The other 30% did not move any track record investments due to misalignment with the IV’s investment thesis, exits, or lower returns/capital losses.
• Investment thesis: The strategy or rationale guiding an investment vehicle’s choice of investments.
• 50% of established IVMs accumulated more than 10 track record investments before raising funds.

The Bottom Line

The journey to raising a first VC fund in Africa is one marked by resilience and strategic navigation of the investment landscape. As the African venture capital market matures and regulations become clearer, emerging and established IVMs can expect improved access to a wider range of options for building their track record. However, the road remains challenging, particularly for female fund managers. With the right support mechanisms, such as warehousing facilities, and a commitment to overcoming systemic barriers, the potential for growth and innovation in the African VC market is immense.