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Is Africa Ripe For Crowdfunding?

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Ask someone for a large donation and the person is likely to balk. If considerate, a polite plea to mull it for a while might be made. Ask for something smaller, akin to pocket change, and there probably would not be much resistance to it. That is the underlying wisdom behind crowdfunding.

The network effect of the internet means small donations from a vast number of people can amount to a lot. Now imagine if, instead of a charitable course, the proposition is one of profit, naturally with some risk. It has the potential to attract many takers.

But how is that any different from the normal stock or bond issuance process? Do interested investors not similarly take as many units of a share or bond sale as they want or can afford? Well, crowdfunding avoids the regulators and transcends borders. Of course, these supposed advantages also come with risks. Even so, they provide an opportunity for small- and medium-sized enterprises (SMEs) to secure alternative sources of financing in difficult environments; especially in African countries where SMEs constitute more than 90% of businesses, according to the International Finance Corporation (IFC). SMEs also account for about 80% of employment in Africa. Top among their challenges is access to credit; which even when they are able to secure, is usually at exorbitant interest rates.

READ MORE: First Peace, Then Progress

Crowdfunding, a form of so-called “alternative debt”, is just one of a few new approaches to financing SMEs. Asset-based finance is already widely used. Approaches other than the typical bank debt are beginning to be used, with fancy titles like hybrid instruments and equity instruments, albeit limitedly, according to a report by the Organisation for Economic Co-operation and Development (OECD).

Crowdfunding is different in that it is mostly project-focused, as opposed to financing the entire business. Although still mostly debt financing, equity type financing is beginning to evolve. Whether it is via donations, reward or sponsorship, pre-selling or pre-ordering, lending or equity, not needing an intermediary other than the platform through which the financing is facilitated is a key attraction. And potential returns to backers need not be financial. For the reward or sponshorship type, an acknowledgement, service or token of appreciation suffices.

As the name implies, investors who back a venture in the pre-selling or pre-ordering format sometimes expect no more than the product they backed before it gets to the mass market; and may be at a much lower price. In the lending format, it is the typical payment of interest and principal that one finds in other credit environments that prevails. Alternatively, the parties could agree to share revenue and thus partake in the risk of the venture. And the equity form is no more than the investors buying into the venture via shares.

Global crowdfunding financing was $34.4 billion in 2015 and more than 70% of it was through lending, according to a 2016 report by research firm Massolution. How much of this went to Africa? A paltry $24.2 million, which is less than 1%. Most crowdfunding financing still takes place in North America ($17.25 billion) and Europe ($6.48 billion); about 70% of the global total.

READ MORE: Change The Rules And Be Rewarded

Since crowdfunding has so far been limited in Africa, what is the potential for indigenous platforms? A sense of this potential would first have to be inferred from current savings in African countries of about 15% of GDP, according to the International Monetary Fund (IMF). This is not ideal. What funds could potentially be put into such ventures are increasingly destined for ponzi-type schemes that offer ridiculously high returns. That is not to say there is no potential. In Nigeria recently, funds were successfully raised for the family of a deceased policeman via crowdfunding. But if the object is a business venture, without the sentimentality of a supposed noble cause, how easy would it be to similarly mobilize funds?

It seems the potential is limited – for now at least. – Written by Victor Mamora

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With “Room2Run,” AfDB Launches Securitisation Market For Multilateral Development Bank Sector

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➢ WITH “ROOM2RUN,” AfDB LAUNCHES SECURITIZATION MARKET FOR MULTILATERAL
DEVELOPMENT BANK SECTOR
➢ TRANSACTION IS IN DIRECT RESPONSE TO G20 ACTION PLAN FOR MDB BALANCE SHEET OPTIMIZATION
➢ AfDB COMMITS TO REINVEST FREED UP CAPITAL INTO NEW AFRICAN INFRASTRUCTURE
LENDING, MAKING ROOM2RUN ONE OF THE LARGEST IMPACT INVESTMENTS EVER
➢ TRANSACTION IS SUPPORTED BY NEW EUROPEAN UNION GUARANTEE TOOL (EUROPEAN FUND FOR SUSTAINABLE DEVELOPMENT)

OTTAWA, Canada, 18 September 2018 — The African Development Bank (AfDB), the European Commission, Mariner Investment Group, LLC (Mariner), Africa50, and Mizuho International plc today announce the pricing of Room2Run, a US $1 billion synthetic securitization corresponding to a portfolio of seasoned pan-African credit risk. Room2Run is the first-ever portfolio synthetic securitization between a Multi-Lateral Development Bank (MDB) and private sector investors, pioneering the use of securitization and credit risk transfer technology to a new and previously unexplored segment of the financial markets.

Structured as a synthetic securitization by Mizuho International, Room2Run transfers the mezzanine credit risk on a portfolio of approximately 50 loans from among the African Development Bank’s nonsovereign lending book, including power, transportation, financial sector, and manufacturing assets. The portfolio spans the African continent, with exposure to borrowers in North Africa, West Africa, Central Africa, East Africa, and Southern Africa. Mariner, the global alternative asset manager and a majority owned subsidiary of ORIX USA, is the lead investor in the transaction through its International Infrastructure Finance Company II fund (“IIFC II”). Africa50, the pan-African infrastructure investment platform, is investing alongside Mariner in the private sector tranche. Additional credit protection is being provided by the European Commission’s European Fund for Sustainable Development in the form of a senior mezzanine guarantee.

“Room2Run gives us fresh resources to invest in the projects Africans need most,” said Akinwumi Adesina, President of the African Development Bank Group. “Africa has the most promise, the greatest natural resources, and the world’s youngest population. But we also have the world’s most persistent infrastructure deficits. The African Development Bank has the strategy to address these infrastructure finance gaps—and Room2Run gives us the capacity to make it happen.”

Structured as an impact investment, Room2Run is designed to enable the African Development Bank to increase lending in support of its mission to spur sustainable economic development and social progress. In connection with Room2Run, AfDB has committed to redeploy the freed-up capital into renewable energy projects in Sub-Saharan Africa, including projects in low income and fragile countries.

“On the Impact scale, Room2Run is off the charts,” said Dr. Andrew Hohns, Lead Portfolio Manager and head of the Mariner Infrastructure Investment Management team. “Room2Run answers the call of the G20 for private sector participants to step in and facilitate development finance, providing a template for attracting significant private sector capital into urgently needed projects in developing economies.”

Raza Hasnani, Head of Infrastructure Investment at Africa50 commented, “Room2Run provides an innovative and commercially viable solution to the African Development Bank’s risk management and lending objectives, while paving the way for commercial investors to support and benefit from the growth of infrastructure on the continent. Africa50 is very pleased to participate in this landmark transaction, which is in line with our mandate to drive increased investment in infrastructure in Africa, and to create pathways for long-term institutional capital to flow into this space.”

Room2Run enjoys the support and participation of the European Commission with an investment from the European Fund for Sustainable Development, in the form of a senior mezzanine guarantee. “Only a few days after announcing our renewed Alliance with Africa for sustainable investments and jobs, I am very happy to announce that we are, together with the African Development Bank, launching Room2Run,” commented Neven Mimica, the European Commissioner for International Cooperation and Development. “This initiative is a perfect example of what we are doing to support investments in African low income and fragile countries through the External Investment Plan. Through Room2Run we provide
an additional protection to investments in the field of renewable energy. Through our Guarantee, investments under Room2Run will translate into extending supply to many people currently without electricity whilst creating much-needed new jobs.”

Room2Run also directly responds to calls by the G20 that MDBs use their existing resources to full capacity, as articulated in the 2015 G20 MDB Action Plan to Optimize Balance Sheets, as well as calls for greater MDB efforts to crowd-in private investment. The G20 has called on MDBs to share risk in their non-sovereign operations with private investors, including through structured finance, mezzanine financing, credit guarantee programs, and hedging structures.

The Government of Canada has been a global leader in advocating for MDBs to use their existing resources more efficiently and to mobilize private capital for global development. The goal of the G20 MDB Action Plan to Optimize Balance Sheets is to catalyze significant new development financing from the MDBs throughout the real economy in key development regions. “Attracting more private capital into global development efforts is critical to building economies that work for more and more people around the world,” said Bill Morneau, Canada’s Minister of Finance, “that’s why Canada and our G20 partners have been calling on multilateral development banks to use their existing resources as efficiently as possible, and to look for new ways to attract more private capital. We are pleased to see the African Development Bank come forward with a transaction that directly responds to both of these objectives. Room2Run is an innovative solution to a long-standing challenge.”

Juan Carlos Martorell, Co-Head of Structured Solutions at Mizuho International, adds, “Compared to other synthetic securitizations, a major achievement of Room2Run has been to ensure that ratings agencies, and in particular S&P, reflect the merits of the risk transfer into their rating assessments for multilateral development banks. AfDB’s leadership through this transaction has now set the stage for broader adoption of the instrument throughout the MDB community.”

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Fashion, Fame and Finances With SA Designer, David Tlale

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How would you say the African fashion market is growing?

We are starting to understand the business of fashion; how to create brands that are custom-made in Africa, which is what we need to be doing and I think more than anything else, we need local customers supporting local designers. Another thing we need to start seeing is retailers supporting proudly ‘made in Africa’ or ‘made in South Africa’ products because that’s the only way for us to become game-changers in the fashion industry. When you look at big brands in the US, Europe or anywhere else in the world, they work very closely with their local designers.

Your most expensive indulgence?

Fabric! When I go to a fabric store, locally and internationally, I am like a kid in a candy store. I would rather buy expensive fabric different to whatever is available locally [South Africa], to make sure I can still sell that to my clients. When it comes to fabric, I go all out.

David Tlale. Photo by Karen Mwendera.

What do you mostly spend your money on?

Shoes and handbags.

How have you maintained your brand over the years?

The only way for us a brand to grow is to continue reinventing ourselves every season. As a designer or as an artist, you are only as good as your previous collection. Also, don’t try and compete with anyone, but do and believe what ‘brand David Tlale’ stands for. It happens that from time to time we keep serving them the same thing, like the white blouse. Our customers also want it, but the question is, how do we reinvent it for the next season or the next collection?

The significance of grooming young African designers…?

It is realizing they are the future…the ones going to take the fashion industry to the next level making sure we still have brands from Africa to the global markets…It is important to expose them to the business of fashion because when I grew up, no one took me by the hand and said ‘David, this is how the business of fashion is’. We were told we have to showcase at fashion week but beyond that or before that, what happens? Now we understand that.

What was your first job and what did you learn from it?

I was a lecturer at Vaal University for four and a half years, just before I graduated. I was able to buy my mom new furniture and I bought myself some sewing machines. I am proud to say that my investment into that machinery has made us who we are as David Tlale. We now have a studio and a brand that is growing.

How do you diversify your investments?

What we have done as David Tlale, over the years, is to build the brand and invest everything into this brand. We are now starting to look at other investment portfolios so we are able to get different sources of income, not only from clothing; making sure we invest in the brand, as a lifestyle brand, it be accessories, handbags or perfume. We are working on a lot of things because we want to ensure that in the next few years, David Tlale is a holistic fashion brand.

READ MORE: Lessons To Learn From The Rich And Famous

What is your most recent acquisition?

A printing machine. It is a huge investment we have made for our business making sure that we are able to look different in the industry and can print our [own] fabric.

Your worst investment decision?

To believe in someone who did not believe in my brand…I suffered dearly from it but today I am better. We are on the journey to reposition David Tlale, ensuring we become a luxury brand proudly made in South Africa by South Africans [and selling to] the international markets.

 

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Investment Guide

A Serious Investment For A Funny Man

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How do you keep the crowd interested in your comedy?

Be honest, because they need to realize you are one of them.

What is your business strategy?

You need to be open to what is going on in the industry. There was a time where we were able to plan a year in advance, but we can’t do that anymore. Social media platforms are evolving so fast. You can’t drop the same images and messages on Twitter, Facebook and Instagram. You have got to do it differently… So stay current and on top of things. It is also more than just about the technology; there are networking opportunities springing up.

What is your investment philosophy?

I am a conservative investor. I go for short-term investments rather than long-term investments. I would like to keep it to the medium range of risk.

Financial discipline means…?

Knowing when to say no, no matter how good it feels.

How do you remain financially disciplined?

I struggle a lot.

How have you diversified your investments?

I own a couple of classic cars. I also have a couple of properties.

Your most recent acquisition?

I bought a piece of property on Long Street, Cape Town.

You most regrettable financial blunder since you entered the industry?

Starting the comedy club! It was difficult making a concept like a comedy club work in a conservative space five years ago when I started.

However, it became the best decision I ever made. At the time, it was a huge investment of energy and time to get it started. On one or two occasions, I remember thinking this was too hard. It has been a very bitter-sweet thing but in the end, the advantages are huge and the disadvantages just as staggering…The theory of business is basically failure till you reach the point of success. But failure is a very important part of success. You can’t have the one without the other.

Kurt Schoonraad. Photo by Casey Bertie

How do you decide your fee?

My personal fee is affordable. I think it is important to stay within range. It is very easy to price yourself out of the [market]. We need to understand that the universe has not made all comedians equal. My fee is about R35,000 ($2,600) for a 45 minute-to-an hour set.

How much is it to start a comedy club and what does it entail?

More money than you know how to come up with but you figure it out. It is [just] one of those things. There was no comedy club in Cape Town yet there was one in Johannesburg. It is a no-brainer that comedy needed a home in Cape Town…I had to sell one or two classic cars and my partner also invested heavily in my business. It is at the V&A Waterfront [in Cape Town] so the rent is extremely high. It was worth it because at least 30 percent of our audience is not from Africa. We would have not been able to call on that market had we not been situated where we are.

How do you strike a balance between being an entrepreneur and a comedian?

This must be the thing I am struggling with the most. By just opening up the comedy club, people assumed you have taken up the other side. In the early stages, I found out that there are very huge demands on the business side of things. I work during the day and I perform at night.

Money or fame?

Most definitely, fame.

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