Rob Katz

Tom Friedman’s Perfect Column: Patient Capital in Africa

Tom FriedmanI really like Tom Friedman – I have since high school, when a summer program I attended assigned his book, The Lexus and the Olive Tree. I’ve also seen him sitting in DC cafes, running to catch cabs, and even met him in person at WRI’s 25th Anniversary Dinner. Nice guy. Smart, too.

Despite all this goodwill, I usually find at least one thing in his columns or his books that irks me. Maybe he’s exaggerating, or hasn’t gotten it quite right, or his sources are a little off. The point is, I usually take issue with him, just a little bit.

Not today. Today, Tom Friedman, you have written the mistake-free column. In today’s New York Times (subscription required), Friedman writes about mesofinance, the missing middle of investment that comprises the gap between microfinance and formal finance. He notes that there’s a huge opportunity to support bottom-up development in Africa by providing patient capital: longer-term, lower-interest loans and investments (versus venture capital). In his words:

Africa needs many things, but most of all it needs capitalists who can start and run legal companies. More Bill Gateses, fewer foundations. People grow out of poverty when they create small businesses that employ their neighbors. Nothing else lasts.

Whenever you read about capital flowing into Africa, though, it tends to be from big lenders like the World Bank, which have very strict criteria and work on big projects, or from microfinanciers, giving out $50 to a woman to buy a sewing machine. Microfinance has a role, but many people don’t want the pressure of being an entrepreneur. They want the stability and prosperity of a job created by capitalist risk takers and innovators. See India.

In some ways what Africa needs most today is more “patient” capital to spur its would-be capitalists. Patient capital has all the discipline of venture capital — demanding a return, and therefore rigor in how it is deployed — but expecting a return that is more in the 5 to 10 percent range, rather than the 35 percent that venture capitalists look for, and with a longer payback period.

Yes! We have talked about this before. Acumen Fund, Aavishkaar, Good Capital – it’s out there. And it’s growing. Next month’s Emerging Markets Private Equity Association annual conference is taking registrations and filling rapidly. The capital markets see this as an opportunity, an obligation to generate shareholder value where none is being generated now. And to maximize shareholder value – guess what – you need to make solid BOP investments. Ones with real social and environmental impact, because that’s what’s profitable.

Will patient capital solve everything? No way. What good is investment when the business and legal environments are so bad that you can’t guarantee returns? And what about the opportunity cost of capital? A VC won’t put money into a fund that’s offering 5 percent when he could find something that’s delivering 35. Remember – and many don’t realize – that Acumen Fund is a philanthropically funded non-profit venture fund. That’s not a bad thing – hey, they work – but it’s not all rosy, not yet.

Friedman’s on to something. Actually, we’ve been onto it for a while, and so have many others (check out Acumen Fund’s excellent blog for more info). But he’s got the podium. So thanks, Tom Friedman, for writing the perfect column. And kudos.

By the way, how about Nick Kristof covering Kiva one week, and Tom Friedman covering Acumen Fund the next? If BOP hasn’t arrived in the mainstream, I don’t know when it will.