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What Can $698M Do To Innovate African Entrepreneurship?

The Carlyle Group is the first global private equity firm to close a fund that is focused entirely on building the middle class in Sub-Saharan Africa. It was inspired by the opportunity to completely transform the financial and economic opportunities in that region and obviously inspired others to share in that vision: it exceeded its original fund target by nearly $200M.

Alternative global asset manager The Carlyle Group recently became the first global private equity firm to close a fund that is focused solely on deals in sub-Saharan Africa. The fund, which opened in 2012, reached $698 million, almost $200 million above its initial target of $500 million.

The fund is earmarked for financial sector investment, though what specific direction is still being finalized.

Though the Carlyle fund was the largest of its kind in the region’s history, sub-Saharan Africa, particularly in young, high growth countries like Nigeria, have drawn increasing investor attention with an expanding middle class and focus on sophisticated entrepreneurship, particularly among those building a payments and commerce infrastructure for emerging markets.

Building A Payments Infrastructure

M-Pesa, Vodafone’s mobile phone based money transfer and micro-financing service, first launched in Kenya in 2007.  By 2011, less than five years, the service had signed up more than 17 million users in Kenya alone.  In Tanzania, where adoption has been much slower, 5 million users have signed on.

Today, M-Pesa is the most developed mobile payment system in the world. It’s reach is not only pan-African, it’s global - popping up in Afghanistan and India in the last few years, and Romania in the last month.  M-Pesa’s service set – allowing customers to use a mobile device and national ID card or passport to deposit, withdraw, and transfer money – has been particularly popular globally with unbanked or under banked populations who heretofore have lacked a convenient secure way to move money.

M-Pesa’s global presence has netted it the most recognition, but it is exists in a context of growing interest in developing sub-Saharan markets. In July 2010, Emerging Markets Payments Holdings (EMPH) made its first investment in the Mediterranean Smart Cards Company (MSCC), from Visa and other banks, according to Actis. Based in Cairo, it provided card issuer processing services to banks across Africa. The deal contributed to reducing time to market, freeing management capacity to focus on core operations, and reducing costs.

In August 2011, EMPH acquired 100 percent of Visa Jordan Cards Services (VJCS) for $87million.  The company works with both merchants and banks with the primary business being card payments at point of sale.

In February 2012, EMPH made its third acquisition of 100 percent of ACET Processing from First Data and management. Based in Cape Town, ACET Processing is the leading processor of credit accounts for retailers across the continent.

A Developing Entrepreneur Class

As money gets easier to move and mobile gets more popular, an entrepreneurial business environment has started to grow, and nowhere is this more evident than in Nigeria. The nation, after doing its first official GDP evaluation since 1990, has surpassed South Africa as the continent’s largest economy. Nigeria's nominal GDP was $510 billion in 2013, $190 billion more than South Africa's and 89% larger than previously estimated, according to the country's National Bureau of Statistics.

While there are debates about how substantive the increase really is, versus how much is window dressing and political reframing—some notable information does emerge. The percentage of GDP generated by natural resource extraction is diminishing, oil and natural gas represented 32 percent of the economy before the rebase, and only 14 percent after. Oil companies are scaling back their presence in the country, reports The Wall Street Journal, mostly frustrated by security concerns.

However, other types of business ventures are pushing up in that space—most notably Nigeria’s film, music, and mobile phone industries.

Nigeria’s population is also incredibly young—there are 85 million people in the nation under the age of 18.  They are also unusually mobile savvy, according to Jonathan Lawoyin.

“There's so much room for innovation," Lawoyin told Fast Company. "When you have a young population and everyone has way more access to information, education and technology than they used to, you can see why there's going to be a boom."

Lawoyin was raised in Nigeria but emigrated to the United States and is now a director of digital marketing for Ready Set Rocket agency and a thought leader on the RSR powers Nigeria Rising website.

The Nigeria Rising project focuses on showcasing the efforts on Nigerian entrepreneurs who are working to transform the nation’s long troubled marketplaces and international image. From a mobile payment-based recycling business to an e-Commerce marketplace aiming for a pan-African presence by the end of 2014 – the entrepreneurs all share a common enthusiasm for increased adoption of mobile technology and a determination to move the commercial marketplace away from a cash-based, payment on delivery model to a more fluid and investor friendly mobile marketplace.

Carlyle’s Buy-In

Carlyle’s recent over the top success with their middle-calls development fund demonstrates that some investors at least are taking notice.

The Carlyle fund will focus on investment opportunities linked to the growth of the emerging middle class across Sub-Saharan Africa with a particular focus on increasing access consumer goods, improved end-to-end logistics, more transparent financial services and enhanced telecommunications access.  The African Development Bank is one of the fund's cornerstone investors.

“When we’re talking about Africa we’re only talking about sub-Saharan Africa, which is 48 different countries,” Marlon Chigwende head of Carlyle told The Financial Times. “So you can imagine with the different cultures and doing business across such a vast continent, we have to explain to people what our strategy is and how we’re different.”

When Carlyle made its initial entry into the market place in 2012, investor sentiment was positive, buoyed by economic and government reforms over the past few years and increasing foreign investment.

“What people tend to focus on is a conflict here, or a political turmoil there,” he said. “There are actually positive stories in Africa, and this is hopefully one contributing factor in improving the profile of what is a generally positive trajectory.”

Initially, all of the investors were African, but they started to attract investors from other areas once they started to do transactions. This pushed the fund nearly $200 million above it’s original target of $500M to $698 million at its closing.

Represented in that nearly three-quarters of a billion dollars in investments are fund investors from North America, Europe, Asia and South America.

Carlyle’s has been active in emerging markets in the past. David Rubenstein, co-founder and co-CEO of The Carlyle Group says that the company was an early mover in markets such as China, India, Brazil and the Middle East/North Africa region. Based on the current momentum, the market in Sub-Saharan Africa will only continue to grow, Rubenstein believes.

“We are very pleased with investor interest in this strategy."

Catherine Armstrong, Media Manager of Carlyle, told PYMNTS.com that even though the company plans on working with financial companies; there is still no word on how that will be implemented.

“At this stage, we aren’t prescriptive about sub-categories within the sectors,” she said.

Carlyle is currently looking for investments around southern Africa, East Africa and West Africa, according to The Wall Street Journal. The company plans on announcing a few more investments over the next year.

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