Ethiopia’s Mama Fresh is a small, family-run business that makes bread, the kind of company most private equity funds ignore, and exactly the sort of diamond in the rough Matt and Laura Davis’s RENEW looks for.
Based in Addis Ababa, RENEW is an investment and advisory firm with a mission: match angel investors interested in Africa with companies like Mama Fresh—small to mid-sized enterprises stuck in that “missing middle” between microfinance and large-scale private equity.
The investments come with plenty of risk, but they pay off. RENEW’s target IRR is 25 percent, and the Davis’s have skin in the game, investing $25,000 minimum in each of the fund’s deals. “Some of these companies will die, some will flatline and some will grow. But the ones that grow, they actually do much better than 25 percent,” Matt Davis says. That’s because companies in that part of the world need a high rate of growth to keep up with inflation, and because they’re able to expand rapidly in what are basically virgin markets.
Mama Fresh, one of seven Ethiopian companies RENEW has invested in since setting up shop in the country five years ago, is one of these. As a top commercial manufacturer and exporter of injera—the delicious (and gluten free) bread that is a staple of Ethiopian cuisine—the company employs roughly 100 people, 90 percent of whom are women. Acting as both an investor and advisor, RENEW moved Mama Fresh to a new manufacturing facility, helped the owners get an important quality assurance certification and helped them rebuild their financial management systems.
To do this kind of hands-on work means being part CFA, part coach and part Indiana Jones, Matt Davis says. “You have to put the hat on and learn how to flourish in the environment, and build trust,” he says. “You’re the first person who’s ever approached them about being an investor in their company. You have to do your due diligence, of course, but first it’s about getting to know each other.”
You also have to convince investors, with the first part of that equation being transaction costs. One of the main reasons that most private equity funds shy away from smaller deals is that it can cost as much to structure and close a $50,000 investment—which is about the size African SMEs need—as it does an investment in the millions. So RENEW uses a public-private partnership model, with transaction costs paid through international development funding, largely from the Canadian government.
The Davis’s backed into this structure in 2011, when they were still trying to get RENEW off the ground. They received a call from the U.S. Department of Defense about a project in Afghanistan: If they’d play the role of bringing private capital in to help rebuild the country’s economy, the DOD would pay the investment transaction costs. In the end, the project wasn’t sustainable, due to security expenses and travel limitations, but it helped the Davis’s discover a missing piece of their business model.
For social and environmental impact investors, of course, the other part of the equation comes down to how the companies succeed in leaving the world better than they found it. RENEW works with a growing network of angel investors, both families and individuals, from across the U.S. and around the world, and impact is important to them.
RENEW keeps it simple, defining an impact investment as one in any company that is growing and being led by an ethical leader—someone who takes care of their community, their employees and the environment. The fund’s portfolio includes dVentus Technologies, an energy-efficiency engineering company; Desta, a textile and apparel manufacturer; and METAD, a specialty coffee producer.
“So many of these impact investment firms can over-impact a deal to death,” Matt Davis says. “They’re narrowing down their potential pipeline to companies that don’t even exist. It’s really hard to make a profit anywhere in the world, anywhere, and to do it in a frontier market is really, really hard. Then to add all these other expectations, which are ridiculous even in the developed world, now you’re at multiples of hard. So we say let’s just build good companies, let’s grow the private sector.”
Next up, RENEW plans to expand to other African countries, most likely starting with Kenya, Uganda or Rwanda by the end of the year. The lofty long-term goal is 20 countries over the next 30 years.
