Analyzing the Role of Equity Funds in West Africa's Capital Market Development

Introduction

Recent developments in West Africa's finance sector have drawn public and media attention, especially regarding the role of private equity in bolstering economic growth. Specifically, the International Finance Corporation's (IFC) decision to invest up to $15 million in CardinalStone Capital Advisers' Growth Fund II has sparked interest among stakeholders. This funding aims to support small and medium-sized enterprises (SMEs) in Nigeria, Ghana, and francophone West Africa, highlighting the critical need for structured capital to drive regional economic expansion.

Background and Timeline

The narrative begins with the establishment of CardinalStone Capital Advisers in 2016, a spin-off from the investment bank CardinalStone Partners. With a comprehensive strategy to back mid-sized, often family-owned businesses, the firm has focused on transitioning these entities into institutionally managed companies with broader regional reach. The recent partnership with IFC reflects an ongoing effort to bridge the gap in capital access for profitable SMEs struggling to secure long-term investment.

In September 2023, IFC committed to supporting CardinalStone Growth Fund II, a $120 million private equity vehicle targeting sectors such as consumer goods, healthcare, agribusiness, industrials, and financial services. The investment not only provides financial support but also includes advisory services aimed at enhancing governance, risk management, and operational efficiency across portfolio companies.

Stakeholder Positions

Key stakeholders such as IFC and CardinalStone have emphasized the importance of private equity as a mechanism for sustainable development. Yomi Jemibewon, Managing Partner at CardinalStone, expressed that structured capital is vital for SMEs to unlock their full potential, positioning them as central to regional economic growth. Meanwhile, IFC's involvement underscores a broader shift towards supporting mid-market companies that lie between early-stage startups and large corporations.

Regional Context

West Africa's capital markets face ongoing challenges, with SMEs accounting for a significant share of employment and output. However, these enterprises often encounter difficulties in accessing patient capital. As traditional bank lending tightens and public markets remain underdeveloped, private equity funds are increasingly viewed as pivotal in filling this financial void. They not only provide capital but also instill governance standards, financial discipline, and strategic support, fostering competitiveness and regional integration.

Forward-looking Analysis

The partnership between IFC and CardinalStone represents a model of how financial institutions can effectively deploy capital in emerging markets. This approach enhances operational frameworks and scales businesses across borders. Looking forward, increased collaboration between local managers and international investors could further advance the maturity of West Africa's capital markets. Additionally, the success of initiatives like Growth Fund II may set a precedent for similar investments, encouraging a more robust private equity landscape in the region.

What Is Established

• IFC has committed $15 million to CardinalStone Growth Fund II.
• The fund targets SMEs in Nigeria, Ghana, and francophone West Africa.
• CardinalStone Growth Fund II is a $120 million private equity vehicle.
• Investment includes advisory support for governance and operational efficiency.

What Remains Contested

• The long-term economic impact of private equity on local markets remains under scrutiny.
• The effectiveness of governance improvements in portfolio companies is yet to be fully assessed.
• The capacity of mid-sized African businesses to scale globally is still debated.
• The role of private equity in regional economic integration is evolving.

Institutional and Governance Dynamics

The institutional framework within which private equity operates in West Africa is characterized by collaboration between international investors and local managers. This partnership model leverages local market knowledge while aligning with global governance standards. However, regulatory environments may pose challenges, necessitating reforms to facilitate smoother transactions and broader financial inclusion. The confluence of structured capital and strategic advisory support may define the next phase of growth for West Africa's capital markets.