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A private nordic initiative helps fund high growth SMEs in East Africa

A private nordic initiative helps fund high growth SMEs in East Africa

Founded with the spirit of Nordic industrial growth
MTI Investment AS was founded in 2014 by Professor Trond Randøy (Norway), Pontus Engström (Sweden), Neema Mori (Tanzania) and Gibson Munisi (Tanzania), with the idea to seek investment opportunities in Eastern Africa. Beginning our journey out of the peaceful city of Dar es Salaam, Tanzania, we have built the relational infrastructure with key stakeholders such as universities, legal advisers, embassies, local investors, international PE-firms and local firms. Until today we have raised and invested approximately USD four million in six companies and are currently in a late stage discussion with another two firms. We aim to create a portfolio with at least ten companies near term, of which we expect one or two to perform exceptionally, five to six to perform ok, and the remaining two to be failing or need to be sold/written off. We are currently observing such a distribution among our investees. We now have a stable and mostly growing portfolio and we are now preparing for further growth.

MTI´s mission is to scale up small and medium sized enterprises (SMEs) to become regional East African champions.

Our aim is to be a listed Nordic company within 3-4 years and become a leading Nordic investment company with a special focus on East Africa, thus allowing investors to exit their investment, even though this should not be seen as a short-term investment play. We have a strong balance sheet, and our competence and regional expertise has made us qualify as a representative for a large Nordic investor and their investment in Uganda, which gives us a supporting cash flow. Our 2018 accounts shows that we are operating with a small profit, but our goal is to scale MTI to a level where MTI can be significantly profitable and sustainable.

Three pillars of investing
Our investment process relies on three integral parts, which have evolved over time. First of all, we are convinced that TRUST is an important pillar, just like the founders of MTI first initiated the first investments in Tanzania based on mutual trust among themselves. Trust is a form of a social contract which fills in the gap to legal agreements, and while a legal investment agreement is important to have, the idea is to never need to resort to it. Experience has taught us that trust takes time to build, and hence we avoid jumping on ideas to quickly and to instead make sure we get to know the entrepreneurial team well.

The second pillar limits our focus to University Educated entrepreneurs only. Research shows that human capital has a major impact on financial performance of firms, and in a context where the macro environment is less conducive and where informality is a rule rather than an exception, being university educated is even more important. While experience can teach an individual a lot of important skills, focusing on University Educated management helps secure that our firms operate with sounds business ethics, processes and that management is curious and interested in learning about how to be a better manager. We find that a good comprehension of all aspects of leading a business are key to success, in particular finance, accounting, human resource management, strategy and marketing.

Last but not least, we focus on investments which have the potential to achieve High Growth and become national champions.

In fact,“mti” is Swahili for tree – symbolizing our focus on growing companies, with the potential to bear fruit from our long-term efforts of investing, coaching, mentoring and monitoring our portfolio companies.

Diversifying to lower the overall risk in the portfolio
We are not limited to any one sector, but pursue investment in firms that have a potential for scale economy and development of market power through brand names and distribution capacity. We are seeking firms that can potentially be national champions in its area. Importantly, since talent is scarce we invest in a few firms with high growth potential rather than extending financing to many small firms, thus separating us from traditional microfinance investments and current development finance initiatives. While some of our ideas are influenced by Nobel laureate Muhammad Yunus, in that all persons have the potential to become entrepreneurs if given the tools to do so, we do not believe every person should be an entrepreneur. Instead, we believe some are more suited to be entrepreneurs whereas most are just interested in an income and a job. Our own research shows that financing microenterprises, typically with only one or two employees yields little long-term wealth creation. Instead, our research finds that financing small and medium sized firms, with university educated managers gives more return per dollar or krone invested. In fact, in many developing countries, there is a relative shortage of small and medium sized enterprises. The Center for International Development at Harvard University writes:

SMEs aren’t missing because they wouldn’t be profitable: they are missing because finance is not reaching them in an effective way. This shows that access to finance is a significant barrier, and that there is a massive profit opportunity for those who are able to successfully finance these firms. There is a one-hundred dollar bill lying on the table, it is just a matter of figuring out how to pick it up.

By capitalizing on this idea, we not only create significant economic development, jobs and household income, but also a competitive return on investment to investors over time. It has been shown over and over again, that donations and grants tend to distort markets rather than help society.

Local connections and know-how are key elements to success in Africa. In addition, to our five year of on the ground experience, we have also established highly valuable network of experts and other co-investors.

Future equity listing
We are preparing the company for a future stock exchange listing in a few years, thus making shares more tradable and liquid, to allow investor to easily re-allocate funds. Investments in the growth of Africa should however be seen as a long-term growth and momentum investment, because of the massive opportunity, rather than a short-term investment.

As they say in Swahili, “karibuni” (welcome) to the world of MTI,

Originally published on LinkedIn on August 15, 2019.