Closing the Missing Middle

How Transaction Advisory Can Accelerate Africa’s Growth Potential

Frontier markets present special challenges to investors and entrepreneurs alike.  Investors often see promising investments, but are reluctant to invest because of perceived risks, lack of proper investment preparation, and disproportionately high transaction costs due to smaller transaction volumes–meaning a lot of capital is left sitting on the sidelines.  At the same time, entrepreneurs in these markets lack the capacity to develop bankable business plans – or the financial means to hire suitable expertise that can meet investor requirements and unlock the capital their businesses need to grow.  This leads to the so-called ‘missing middle’ problem whereby growth companies are unable to access the capital they need, leaving value on the table for investors and impeding the growth of frontier market economies.

In developed markets in North America, Europe and Asia, financial institutions have a much broader range of instruments at their disposal to quickly and efficiently assess credit risk. Instead of solely evaluating business plans, they are able to utilize proxies for creditworthiness in the form of individual credit histories and automated scoring systems (e.g. FICO scores in the US). These systems allow banks and other financial institutions to significantly reduce the transaction costs for applicants and thereby greatly increase the availability of SME financing. In frontier markets, however, such a comprehensive approach may still be years or decades away from implementation. Another common issue is the lack of capacity among entrepreneurs to assemble an investment package that meet international standards and rigor.

Beyond lowering transaction costs, there are other opportunities to support the broader ecosystem impacting the ‘missing middle.’ Transaction advisors play a critical role in addressing this issue. These individuals or firms provide entrepreneurs with the support and guidance they need, refining business plans, improving financial models and ensuring that their business plans are presenting the investment opportunity in the best light and that investors have all the information they need to make an investment decision. Unfortunately, transaction advisory services remain prohibitively expensive, particularly relative to the amounts being raised by MSMEs.  Here, donors, NGOs and foundations can play a role in developing the market by providing financial support for transaction advisors on behalf of promising growth businesses. Doing so increases the capacity of the entreprenuers, amplifies the businesses’ success, and lays the groundwork at financial institutions for other, similar SMEs seeking investment in the future.

Consider an example from Burkina Faso: a woman-owned commodities trading business, focused primarily on shea nuts.  The company’s owner is an accomplished entrepreneur and saw a tremendous growth opportunity in processing shea for both industrial use and human consumption.  Unfortunately, accessing growth capital in Burkina Faso is a challenge and the entrepreneur had difficulty meeting the demands of banks and potential investors.

Shea Nut Tree Branch

Thanks to generous support from USAID’s West Africa Trade Hub, the entrepreneur received transaction support from SSG Advisors.  Our investment team helped her navigate and assemble the details needed to approach investors, including the development of a new financial model, business plan, conducting an environmental impact assessment and market research as well as obtaining a letter of intent from a large buyer.  With these critical elements in place, the company secured $4.6 million in new investment from two investors for a new processing plant and critical working capital.  When complete in 2018, the new plant is expected to generate about 150 jobs and increase incomes for thousands of Burkinabes  – mostly women shea nut pickers.

Construction Underway on the Burkina Faso’s Newest Shea Processing Facility (photo taken by SSG Advisors April 2017)

Providing quality transaction advisory takes time to understand the business, build trust with the entrepreneur and help her/him to navigate the investment process.  By offering frontier market entrepreneurs access to quality transaction services, donors help level the playing field, enabling them to access an expanding range of investors.  In doing so, we are also attracting capital off the sidelines and crowd-in additional capital that will build momentum and contribute to closing the ‘missing middle’ in Burkina Faso and other frontier markets.