Verdant Capital Hybrid Fund (VCHF), a new fund to support micro, small and medium-sized enterprises (MSME) growth in Africa, has reached its first closing with committed capital of $36m.

The fund is targeting high developmental impact, including job creation and income generation through SMEs and micro-entrepreneurship.

The fund is targeting two further closings with a targeted amount of $100m.

The fund will be investing hybrid capital and subordinated debt instruments into inclusive financial institutions on a pan-African basis.

The fund will target specialist banks, microfinance institutions, leasing, and factoring companies, fintech and other non-bank financial institutions.

A strong focus will be to ensure that the investments comply with high environmental and social standards.

KfW Development Bank, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), is contributing about $34m to the VCHF.

Besides KfW, the fund is benefitting from capital commitments of private investors including the fund manager of VCHF, Verdant Capital. 

Verdant Capital, an investment manager operating on a pan-African basis, has a successful track-record of advising and investing in the financial service market for MSME in Africa.

The fund is domiciled in Germany, yet most of the investment team is based in Verdant Capital’s offices across Africa.

The rationale for the fund includes addressing the gap in the market in terms of the availability of equity, equity-like or hybrid capital in the inclusive financial institution sector in Africa.

Such capital is much needed, including because the COVID-19 pandemic has eroded the capital bases of African lenders.

The investments by VCHF can be leveraged by traditional debt funding, thereby crowding-in other investors and ultimately expanding lending to MSME.

The fund also intends to broaden the use of such hybrid financial instruments in Africa and to contribute to the overall development of capital markets in Africa.  

The German Federal Government is providing an additional budget in the amount of $4.5m for accompanying support measures.

The VCHF Technical Assistance Facility will support African financial institutions in growing their MSME loan books, strengthening organisational capacities and improving responsible finance standards, and forms an important part of the fund’s post-investment value add strategy.