Funding growth: A new development fund is putting small businesses on the map through equity investment

One of the first consequences of the Royal Initiative for Development of the Oriental Region was the establishment of a fund to invest in the region’s small and medium-sized enterprises (SMEs). The Investment Fund for the Eastern Region (Fonds d’Investissement de la Région de l’Oriental, FIRO) was designed to buttress governmental investment in infrastructure. While public spending has often focused on linking transport to connect the region, the establishment of the FIRO was geared towards enhancing the private sector and preparing it for future opportunities of the Oriental.

FOUNDING PRINCIPLES: The fund was set up with the initial target capital of Dh300m (€26.7m) to invest in local companies with growth potential but insufficient financial muscle. Its innovative public-private structure works with its fundamental objective of promoting economic growth in the region through the financing of local business capacity. “We must give the private sector the necessary tools to take advantage of the government’s investment efforts,” said Abdelkrim Mehdi, the director-general of the FIRO.

Accessing finance in any emerging market is a complicated task, but setting up an equity fund can be doubly challenging in a region of family-owned firms that lacks the higher level of financial intermediation prevalent in the kingdom’s central coast cities such as Rabat or Casablanca. However, the FIRO has been able to present an alternative financing vehicle for businesses that also need better operational and managerial structures. “Before the royal initiative and the heavy focus on the region, companies did not know what capital investment was. They were not even used to accessing bank credit,” said Mehdi. Banks in the region have traditionally accumulated capital in deposits, but not transferred it towards relevant amounts of credit issuances to finance the local economy.

A MIXED STRUCTURE: The multiplier effects of improving financing for SMEs, particularly in North Africa where they comprise the majority of businesses and account for much economic activity, are huge. Increased credit for entrepreneurs and long-established small family businesses can have an impact on the ability of local enterprises to trade with and expand into other domestic regions and foreign markets. Using both private and public money, FIRO’s capital is divided between national development agencies and funds, as well as an array of private banks and financial institutions.

More than half of the funds, 57%, comes from three public institutions: 20% from the Oriental Region, another 20% by Agence de l’Oriental and 17% from the Hassan II Fund. On the private side, equal 7.17% stakes were contributed by Attijariwafa Bank, Banque Populaire, Banque Marocaine du Commerce Extérieur, CDG Développement, Crédit Agricole and the Holmarcom Group. Governance is divided between an investment committee and a management committee, in order to avoid any political intervention in the form of investment decisions, and to assure the fund is focused towards regional development.

“More than half of the fund is government money, but we want to have a management style like any private fund,” Mehdi told OBG. Since its inception in 2005, the fund has been a key instrument stimulating private sector development. This is especially important considering that the unemployment rate in the region was 17.7% in 2011, according to the High Planning Commission, above the national average, and the majority of firms are small operations without the capacity to absorb large numbers of employees.

From the onset, investment into large-scale regional projects was not part of the agenda. “Big projects, such as the new roads or the new port, are the responsibility of the Hassan II fund and other dedicated public funding, so there is no reason to duplicate efforts. We are exclusively focused on SMEs,” said Mehdi.

STAKING IT IN: The FIRO capital invested in local businesses is between Dh1m (€88,900) and Dh30m (€2.67m) with total shareholder ownership from 10% up to 35% of capital. Since 2008 the fund has already participated in three SMEs with a total investment of Dh60m (€5.33m) of investment, a positive record compared with the achievements of the profession: 35 existent capital investment funds have signed 120 operations since the emergence of the capital investment sector in 1999 in the country.

SEEING THE CHANGE: So far, FIRO has acquired equity participations in three SMEs. First, in 2009, FIRO bought 30% of Oujda-based FIRO Microwarehouse, an e-commerce firm focusing on the sale of hardware and IT that has been operating since 2004. This investment allowed Microwarehouse to expand its store network.

Then, in 2010 FIRO concluded a shareholders’ agreement for its stake in Monlait, a dairy products industrial outfit based in Berkane that has been operating since 1999. The fund acquired 28.33% of the company and has been supporting its strategy of product valorisation and expansion of milk production. It was also the partnership with FIRO that allowed Monlait to gain support from a USAID programme to increase the competitiveness of the national economy. In 2012 the milk producer was awarded a Dh1.6m (€142,240) grant for the acquisition of new industrial equipment, helping to increase the yield and quality of its products.

The third equity deal, also taking place in 2010, allowed the Oriental’s development fund to invest in a 26.66% participation in Midi Peinture, a paint producer based in Oujda. The company has been operating since 1984 and has FIRO shareholder ownership of 34%. “Entering the capital structure of these three companies is quite a feat, given that there is resistance to the opening of the capital of SMEs. In the Oriental region the business culture is used to managing companies on a daily basis,” said Mehdi.

WIDER WINDOWS: This is changing with time and increased investment in the region. Governmental projects now under development, such as the Oujda Technopole, the Med-Est industrial park in Selouane, the Agropole in Berkane and the Saïdia Resort, are opening the door for more companies to establish themselves in the region. Newly available plots of land are adding opportunities for industries. This means additional SMEs with potential will be looking for investors.

Every company in which FIRO buys a stake must be a limited liability company, of foreign or domestic capital. FIRO investing guidelines also require a transparent managing structure and for financial information to be published. Shareholding agreements signed with the fund determine FIRO’s exit strategy.

According to Mehdi, a specific deadline for the duration of the equity participation is always established. “Of course the most desired output of an institutional investor like FIRO is the listing of the company in the stock exchange, proof that the investor succeeded in transforming the company into a structured entity that meets international standards,” said Mehdi.

FIRO has targets for additional capital investment transactions that would fund the shareholding structure of four other companies by the summer of 2013.