It is sad how our minds have been conditioned a certain way towards debt. We are told that debt is bad, but there is good debt that can work for an entrepreneur.
There are cases for and against debt. It was the Holy Grail that allowed the automobile, housing, banking and furniture sectors to become successful; it was also the curse that ushered the world into the economic meltdown in 2008.
So, what is good debt and how has it benefited those who know how to play the game?
In real estate, people use debt in innovative ways, like going to the bank to apply for finance for a new house. Once the bank approves, a tenant is brought in and their monthly rental is used to repay the loan. Then they go back to the bank as they still qualify for another property as their income at the time of application still remains the same. This qualifies them for another property, and the model is replicated while tenants service the loan, and their balance sheet increases.
Property developers use this model with a cluster of residential buildings, apartment blocks, and major developments. Developers identify the land, get the correct approvals and compliant paperwork in order, then they hire architects to draw the building plans. Once this is done, the properties are sold off-plan and this money is used to construct the infrastructure.
Another sector where people use debt, with less risk, to become successful is franchising. Firstly, franchises have a proven business model with high probability to succeed. Secondly, banks are more willing to finance new sites or buy an existing branch if the franchise has an established brand. With good management, the debt will be settled.
As entrepreneurs in Africa, we need to be savvy in gearing debt to work for us, and understand the power of leverage.
The recession hit when the US economy was over leveraged in real estate asset class. This is the same asset that many entrepreneurs use as their capital base. They approach banks to take another bond on their house to start a business, or grow it, at the risk of losing their primary residence should things not go according to plan.
Leverage is crucial when you are dealing with financial institutions, particularly banks. However, there is another avenue where leverage is not necessarily a physical asset; there are venture capitalists that fund a company on the perceived current or future value of the company. Others go further by focusing on the team behind the company, credibility and successful track records.
Above all, entrepreneurs need to be careful not to over-leverage themselves. When under-leveraged, the risk is manageable.
Start-up entrepreneurs are famous for bootstrapping their companies, until they produce a viable prototype or penetrate the market. An example of this is Fuseware, a successful African tech company founded by Mike Wronski before he sold it to Ornico.
This presents a challenge between two funding models: debt versus equity financing. Well-structured debt is preferable, provided the company can service the debt in the short term. This is best option for expansion purposes.
Equity is best for start-ups and growth-stage businesses. In this regard, an investor buys a stake in the company and takes on the same risk as you. The downside is that that the entrepreneur loses some control the moment an investor comes into a company.
Sooner or later, it is going to be necessary to approach capital markets to raise money. The fundamental reason for listing on a stock exchange is to raise money. Today, there are other reasons, but raising capital is the main one. A company’s share price is based on perceived value that might be influenced by its income, assets or track record. At the end of the day, the company is worth what the market is prepared to pay for and what investors agree to sell shares for.
There are many times when an entrepreneur’s personal debt overlaps with his company’s debt, predominantly in small to medium sized companies. If able, entrepreneurs should only deal in debt held by the company, rather than their personal accounts.
While debt is not entirely encouraged, any company that is going to be of global significance needs to be familiar with it.

How To Make Debt  Work For You

The economic and political transformation of a country directly correlates with the education level of its demographics. With national priorities like health care, infrastructure, housing etc, it’s impossible for countries to manage supporting the entire value chain of education, from primary to secondary to vocational and tertiary. Add infrastructure and skills-development to the need for integrated research-based learning synonymous with quality education and what you have is a glaring resource gap.
This dilemma is consistent across most countries in the world, particularly those with low GDP per capita. Rather than concerted efforts, governments have spread themselves thin trying to do everything with limited resources. This has unfortunately resulted in mismanagement, no accountability, corruption and disillusionment. The intangible destruction of long-term wealth creation is in excess of the annual financial allocation as there is a widening gap between skills needed and the output from the efforts.
A growing question therefore is: where does a government allocate its resources and how does it integrate private sector investments? The answer is complex and not a one-size-fits-all solution.
During my travels in Africa over the last ten years, I have interacted with heads of state, ministers of education, regulators, and educational faculty. The maze of bureaucracy, legislation and processes created using historic models of education is shocking. It’s small wonder no one is willing to grab the bull by its horns and bring changes to help Africa leapfrog into the future rather than dwell in the past.
I will reflect on the tertiary sector. Looking at Africa, South Africa excluded, one sees a lack of good quality universities. It’s no surprise to see some 400,000 students going abroad for post-secondary programs annually, with nearly 300,000 originating from sub-Saharan Africa. With continuing growth of populations, economic output, and school and post-secondary enrolment rates, it’s expected one in five outbound mobile students will originate from Africa within the next 20 years.
It’s evident the business models of universities globally factor international students as a revenue source. These students pay higher fees. The irony is poor African countries are in many ways subsidizing the education of students of developed countries. The most unfortunate impact of this dichotomy is less than half the students return to the continent to add any value to the country that not only paid for their education but also subsidized their peers and for their pains, suffer a
brain drain.
Let’s put this in the context of the future. United Nations’ world population projections see it increasing to 9.6 billion by 2050, up by 2.4 billion from the current population. More than 50% of this growth will come from Africa (source: The Size of it, The Economist; June 18, 2013). Africa’s population will increase from about 10% of the world’s population to over 20% by 2050. It will undoubtedly have the youngest population on the planet and if transformation in the education sector is not made on a war-footing, the outcome is going to be catastrophic.
To cater to the population and given the overflow in current institutions, there is need to establish between 450 to 500 colleges and universities in Africa over the next 10 years. This growth needs investments in billions of dollars that governments clearly do not have. Firstly, legislation needs to be amended for foreign universities to establish on the continent. This is just one step to build capacity.
There are multifold advantages of bringing quality education brands to the continent. Firstly, these institutions are highly-ranked and bring with them best practices, systems, faculty, research capacity and world-class curriculum. The model should entail that the quality of academic delivery and entry requirements on the African campus should be the same as the home campus. It should allow students to transfer freely between various campuses for a global experience. The accreditations of these institutions should be based on degrees being offered by the home campus.
Secondly, there will be a slowdown of students going abroad focused mainly towards specialized training and not routine undergraduate or post-graduate courses. This will help retain skills in the region and conserve the foreign exchange drain. Thirdly, over time, the African branches of foreign universities will attract global students. Given the lower costs, excellent weather and natural beauty of Africa, there is no reason why education cannot become part of the continent’s export ecosystem. This will become increasingly important as universities in developed countries find it difficult to invest in new facilities owing to costs.
Another step governments must institute immediately is an offset program. All large defence, infrastructure, energy, mining and other contracts given to international or local companies should require a contribution towards setting up an international university in the country either through direct investment or through a centralized education fund. Similarly, all students sent to foreign universities through state funding must require the beneficiary university to offer some of their programs.
The other vital need is innovation. Education is no longer going to be about land and building. Consumption patterns of education are changing and with technology and broadband infrastructure development will emerge the opportunity for African states to bring about the latest delivery platforms. Changes from innovations are already being implemented by well-established universities in developed countries. Partnerships with them will help shorten the learning curve.
These illustrations demonstrate the need for the education ecosystem in Africa to be catalyzed. This can only happen through proactive steps for dynamic reforms from our leaders.
&nbsp;
&#8211; Rakesh Wahi is Vice-Chairman and
Co-founder of ABN Group.

HIGHER EDUCATION  IN AFRICA  AND THE RESOURCE GAP

The exponential growth of Africa’s middle class has been heralded as a key driver of economic prosperity by many analysts. Their spending capacity and disposable funds are cause for optimism among investors keen to cash in on Africa’s economic momentum. But while the super-rich can splash out on palatial homes and properties, the underbelly of Africa’s middle class (many of them state employees such as teachers, police officers and health care workers), struggle to become homeowners. Their dilemma: they earn too little for banks to risk providing them with credit, but too much to qualify for state assistance.
This applies to countries such as South Africa, where the government provides assistance that enables people to enter the mortgage market. But one company, International Housing Solutions (IHS), has turned this cris-is into an investment opportunity. A member of the Emerging Markets Private Equity Association, IHS is the only private equity company that focuses on affordable housing in Africa. It partners with financial institutions, real estate developers and local government authorities to provide equity finance for housing projects.
“I have always believed that one can do good business while also doing good,” says IHS managing partner Soula Proxenos.
A self-styled ambassador for Africa, Proxenos has been in the affordable housing industry and development sector for 18 years. She believes that if you want the “big dollars” to roll in, you need to find a profitable business. Although she hails from South Africa, Proxenos is based in Washington DC, close to her investors.
As a woman in the mortgage and development sector, she is candid about prevailing attitudes towards her gender. She says the sector is “pretty male-dominated”.
“One is not invited into the room, while at the same time one is not exc-luded from the room,” she explains.
While many women are involved in the non-governmental sector in housing, Proxenos believes they are selling themselves short if they only work for non-profit institutions. “Women still say: ‘we didn’t do this for the money’.” They need to get over this, she urges, arguing that charity, while noble, is not always sustainable.
Her company is a pioneer in recognizing the potential of affordable housing (so-called gap housing) in developing markets. It has opened up a valuable new sector for investors. Simulta-neously, IHS helps thousands of families afford a home and start the journey to wealth creation through property ownership, the bedrock of sustainable middle classes the world over.
IHS’s first fund, the South African Workforce Housing Fund, has committed more than $230 million to providing affordable housing in emerging markets, while also generating superior risk-adjusted returns. Buoyed by the success of her South African venture, Proxenos is now venturing into the rest of Africa.
The International Finance Corp-oration (IFC) and South Africa’s National Housing Finance Corporation (NHFC) have also recently announced investments of more than $63 million in IHS’s second fund. IHS Fund II will support the development of affordable housing in South Africa and sub-Saharan Africa. The financial commitments are timely, and come as IHS prepares to expand its footprint.
“With our second fund, our thesis remains the same&#8230; Because of urbanization and the growth of the middle class in Africa, the need for housing across the continent vastly outstrips supply, especially in the category of affordable housing.
“In countries with a functioning mortgage market, that need translates into market demand. This offers investors the opportunity to achieve superior risk-adjusted returns.”
She says the second fund will consist of two sleeves. One will invest in South Africa and the other will invest in Ghana while also targeting other sub-Saharan countries.
“Demand outstrips supply in many markets in Africa, and where the right conditions exist, the sub-Saharan sleeve of Fund II will invest in some of these markets. Our main focus will remain South Africa, but the sub-
Saharan sleeve will start to proactively source deals in Ghana, Botswana,  Namibia and Mauritius,” she says.
“There are many great opportunities for affordable housing investments across Africa, and we’re optimistic that Fund II will deliver excellent returns for investors, as our first fund is showing.”
However, operating in Africa is never hassle free. Nigeria, the second-largest economy on the continent, presents particular challenges for the mortgage market. These include sec-urity of tenure and ambiguity around title deeds, which makes investors risk-averse, Proxenos points out.
Prior to the removal of Mohammed Morsi in Egypt, that country had to spend millions building out its systems, trying to rationalize land and property that had to be titled.
“In Egypt there is a 12 percent tax to have your property re-titled!” she exclaims. And in Nigeria, under former president Olusegun Obasanjo, some measures were introduced but they did not yield the required dividends, she says.
However, the opportunities in Ghana leave her optimistic. While much of the land is traditionally owned, it is also clearly titled. Ghana is stable and the rule of law is entrenched and respected, which makes it an ideal growth opportunity.
“We are excited about Ghana. In Ghana, 5.7 million rooms need to be added to existing homes. There is a robust mortgage market in many countries on the continent. Namibia, Botswana and Mauritius are all examples and Ghana is taking the same direction,” Proxenos says.
Quality housing is a key deliverable for many African governments, which are tying their infrastructure rollout programs to economic growth. But without private sector buy-in, governments cannot deliver on their promises.
Saleem Karimjee, the IFC’s senior manager for Southern Africa, says: “Providing affordable basic services, such as access to quality housing, is a priority for IFC in Africa. IHS Fund II offers an attractive opportunity for private investors to gain access to a fast-growing market with significant positive social impact. IFC’s commitment will stimulate investment growth and job creation in sub-
Saharan Africa, demonstrating that our support can help catalyze additional fundraising.”
So far IFC has committed $25 million to the fund.
On the South African front, where housing remains a challenge almost 20 years into democracy, the IHS Fund II could not have come at a more opportune time. The general elections are just around the corner and the country’s public and private sectors have come to the housing party, enabling thousands to share in the joys of homeownership.
Samson Moraba, who heads up the NHFC, says the corporation is committed to ensuring that all South African households within the affordable housing market have greater access to appropriate homes, in terms of both size and location.
“Our goal is to enhance the well-being and quality of life of the low- to middle-income households with the security of a home, as well as an opportunity to create wealth. We firmly believe that our deliberate strategic partnership with IHS will unlock the delivery of housing at scale, and ultimately lead to the creation of sustainable and attractive communities, where people can live, play and pray.
“We are delighted with this investment because not only will it accelerate delivery of housing, but it will also contribute toward foreign direct and private sector investment, as well as job creation,” he says.
Among global investors, the narrative about Africa’s middle class is one of optimism. Proxenos says there is a buzz about the continent in the world’s capitals, including London, where many investors are based. She is adamant that countries such as South Africa, where the market is “huge”, need to get the fundamentals right.
“Don’t score own goals! We need to put a united foot forward that includes the government and the priv-ate sector. The trust deficit needs to be overcome.”
Proxenos singles out South African ambassador to the US, Ebrahim Rasool, praising his efforts to get investors excited about Africa. Because, ultimately, she says, “you can’t close the deal without an investor”.

Tag: Housing

FORBES AFRICA SOCIAL MEDIA

How To Make Debt Work For You

HIGHER EDUCATION IN AFRICA AND THE RESOURCE GAP

Filling the gap in the housing market