Patricof casts doubt on microfinance in Africa

The veteran venture capitalist said at a recent industry gathering that backing more mature companies is the key to successful African economic development.

Veteran venture capitalist Alan Patricof is adamant that microfinance is “absolutely not the solution for the developing world”.

Patricof made his comments at the 14th Annual Columbia Business School Private Equity and Venture Capital Conference on 15 February in New York.

[Microfinance is] absolutely not the solution for the developing world.

Alan Patricof

In his keynote address, Patricof, the founder and managing director of US venture capital firm Greycroft Partners, and previously the founder and chairman of European buyout firm Apax Partners, honed in on providing small and medium size enterprises (SMEs) with early stage financing as a key strategy for building African entrepreneurship. These businesses have long struggled to get off the ground due to lack of access to capital, he said.

Microfinance loans, currently a hot topic within development circles, are intended to serve as a jumpstart for entrepreneurs with no other access to money. In microfinance, the average loan is approximately $200 with high interest rates and high administrative costs, said Patricof. They are designed for high-turnover businesses with limited growth potential, such as vendor stalls, he argued.

By contrast, Patricof characterized SMEs as having a better “multiplier effect on employment.”

SMEs, he said, are the “missing middle” in Africa. These businesses require early stage financing which is largely unavailable to them in order to reach later financing rounds. The ability to launch a business in Africa has historically been limited to those coming from wealthy families, said Patricof. Loans in the developing world often have interest as high as 15 percent to 20 percent. 

Patricof encouraged students, alumni and professionals in the audience to support SMEs in Africa despite an underdeveloped exit market, and to be willing to both hold African investments longer and accept lower returns on their investments. 

Most current “venture capital” investment in Africa can be more accurately categorized as private equity, said Patricof. The businesses in Africa currently attracting investment are already established businesses with demonstrated cash flows as opposed to burgeoning enterprises in need of support.

Successful businesses launched by African entrepreneurs with private equity backing include mobile telecommunications company Celtel and corporate and public finance advisory firm Databank.  

According to Patricof, with adequate early stage financing, the market should see an increasing number of such successes. He said that the next Google may well come from the developing world.

Patricof serves on the Millennium Challenge Corporation, a US government corporation designed to work with some of the poorest countries in the world.  He has also served as an advisor to the IFC, focusing on SMEs and has served on the UNDP Commission on Private Sector & Development; in addition, he was vice chairman of the Commission on Increasing Capital Flows to Africa.