investments, especially in the mid-market, SME, impact, and venture capital spaces. Moreover, there is scarce data with respect to returns (i.e. IRRs) across the continent, especially outside of South Africa. Thus, while private equity is a known commodity in many regions of the world, there is a paucity of data on PE returns in many parts of Africa, which can lead to hesitance to invest capital.

# **F. Technical Assistance**

PE investors in emerging markets face challenges that their counterparts in developed markets rarely encounter, which often translates into a need to integrate technical assistance (TA) into their investment activities. In developing markets like Kenya, even established businesses often lack critical business tools, from management and financial planning to technology and management systems, that are common in developed market businesses. These issues are even greater for SMEs, many of which lack the resources or the know-how to develop these systems and processes on their own. Even when support services are available, they may be expensive and difficult to procure. As a result, technical assistance can help to address these challenges. Specifically, the range of projects that can be considered under the rubric of technical assistance include: financial literacy training, resource planning and budgeting, business plan development, finance and accounting training, marketing support and market studies, strategic planning, legal support, operational and process improvement, facilitating access to international supply chains, and information technology support.

Technical Assistance (TA), when partnered with private equity, can considerably enhance the ability of SMEs in emerging markets to raise PE capital. First, technical assistance provides funding that allows investment managers to extend their reach to smaller companies since they can make necessary improvements without impacting returns. Second, technical assistance mitigates risk and increases the probability for success by implementing targeted operational improvements at investee companies. Since SME funds often lack sufficient scale to fund such projects themselves, dedicated technical assistance facilities financed by third parties such as DFIs, governments, or other parties, have emerged to fill this critical need.<sup>31</sup> Table 16 presents the primary sources of funding for technical assistance facilities both globally and in Africa. Unsurprisingly, the same DFIs that play a large role as LPs in the East African VC/PE space also actively fund technical assistance facilities.

While technical assistance provides significant benefits, particularly for SME funds, excessive technical assistance could also lead to a form of governance distortion that investors must guard against. When looking at projects where technical assistance is working in conjunction with PE, donors are often sensitive to ensuring that they are not simply “subsidizing” private investors. For instance, where technical assistance is provided, investors must ensure that the funding serves primarily to increase portfolio value and build capacity for investees rather than indirectly elevating management fees for the fund manager. The latter could potentially result in incentives for the fund manager being skewed in favor of management fees versus performance incentive, thus resulting in a governance distortion.<sup>32</sup> If technical assistance is unevenly applied – such as dedicated technical assistance facilities accessible to only some PEVC funds, creating an unlevel playing field – there is potential for market distortion.

Technical assistance practices among fund managers can generally be classified into two different groupings: Technical Assistance Facilities and Ad Hoc TA. The difference between these two categories is

> 31 For more on this, please see April 2014 <u>WB Policy Research Working Paper 6827, “Private Equity and Venture</u> Capital in SMEs in Developing Countries: The Role for Technical Assistance” by Shanthi Divakaran, Patrick McGinnis, and Masood Shariff.

> 32 Note: For more on lessons from the use of technical assistance in conjunction with PEVC funds, please see the following <u>WB policy research paper.</u>

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