The Africa-focused responsible investor is putting together a new fund targeting founder-led SMEs to complement its larger fund series focusing on mid-caps.
Mauritius-based Adenia Partners started off investing in small firms and startups in Africa over two decades ago. Since then, backing for the impact-oriented investment firm from development finance institutions (DFIs) and other impact investors has helped drive fund sizes up from around $10m (€8.6m) for its first fund, to $470m for its most-recent fifth fund.
Mindful that its main funds have shifted away from an early focus on smaller firms, despite potentially attractive growth prospects in that market segment, Adenia has been putting together a new fund to fill the gap.
The Adenia Entrepreneurial Fund (AEF) aims to provide funding for African SME owners whose companies are too large for microfinance, but who struggle to find funding from traditional private equity.
“There’s been very good traction and we’re on track to get a first close by the end of the year,” Mack Schow, a partner at Adenia Partners told Impact Investor.
Adenia started fundraising for the AEF in March with a target fund size of $150m and a hard cap of $180m, which it hopes to reach in 2026, following a first close later this year.
Funding
The firm, which takes controlling stakes in the companies in which it invests, will be seeking to attract funding from the pool of impact investors that have backed its five main funds. These have raised a total of $910m.
Across its funds, Adenia has attracted investments from multilateral and development finance institutions including the European Investment Bank, the International Finance Corporation, DEG, Proparco, FMO and Canada’s FinDev, as well as impact funds, African pension funds, and family offices with links to the continent.
“We asked our investors if the Entrepreneurial Fund was something they would be interested in and we got a resounding ‘yes’, because these LPs are looking to deploy into the SME segment in Africa and they are looking to do it profitably with managers who are established and with a proven track record,” Schow said.
It is an area in which the firm has long-standing experience, having invested in 35 businesses, many of which were founder-led, in more than 20 industries, with 20 exits from that portfolio.
The idea is for the new fund to form part of a regular cycle in which Adenia alternates the launch of smaller-and-mid-cap funds with the launch of its established upper-mid cap funds. That would mean returning to market around every three years, rather than every six years or so, as has been the case so far.
Distinct pipelines
Deal sizes for the AEF are expected to be in the $10m-$25m range, contrasting with the minimum deal size of around $30m for the $470m Adenia Capital V fund, which closed earlier this year. That allows for investment in smaller firms, while also ensuring there is no overlap in the investment pipelines for the distinct funds.
“We decided that it made most sense for us to not to keep doubling in size with the next fund, but rather to grow deeper, and that was the genesis of the entrepreneurial fund,” Schow said.
He said there were multiple investment opportunities for the fund in Kenya, South Africa, and francophone West Africa, as well as the Indian Ocean region where the Mauritius-based fund manager focused its activities in its early days.
“We’re seeing a lot of companies with less than $5m EBITDA, which are founder-led and looking for a transition, or that are part of a conglomerate that is no longer focused on them. We are seeing management teams that have proven ideas but not enough capital,” he said.
The range of potential sectors Adenia considers is similarly broad. This is because flexible approaches are needed in relatively under-developed African markets.
High on the list of sectors seen as promising are retail, off-grid solar, light manufacturing, pharmaceuticals and healthcare, and distribution businesses. Some of these focuses are reflected in Adenia’s past investments such as the acquisition of Kenyan supermarket Quick Mart, made though its fourth fund in 2019, since when the number of stores in the chain has tripled to around 60, despite difficult business conditions for the sector in the interim.
Impact measurement
DFIs and other investors keen to make a return on their investment alongside impact generation are set to remain the mainstay of the investor base for firms like Adenia for the foreseeable future.
“We have to be honest about the state of the industry. We don’t see pure commercial, developed market investors looking at Africa right now,” Schow said.
In terms of impact, Adenia focuses primarily on the quality of jobs and levels of diversity, the sustainability of infrastructure and operations and also criteria specific to the investee company’s industry. For the latter, metrics could include, for example, quality and amount of food being provided by a catering business, or levels of clean energy provided for a solar business.
Schow said Adenia’s strategy of assuming control of its investee companies allowed data collection to be more straightforward and reliable. The firm creates a theory of change for each business it invests in to show investors how measures taken compare to outcomes achieved.
“As a control investor, you get a good, deep view into the impact that you’re having, and that’s important for our base of investors, of which about 75% have an impact lending mandate,” he said.
However, Schow said more could be done to inform the wider investment industry. “What we’re not doing well enough yet is communicating this and marketing it to the broader industry. Probably our next step is to think about how best to how best to share those outcomes with everyone,” he said.
