Private equity in Africa: Between a rock and a hard place

Jan 10, 2013
Private equity investment in Africa has been a hot discussion point in the global financial industry in recent times. This has been spurred by the continent’s mouth-watering growth prospects, and obvious low correlation in the developed world - which has suffered a shortage in growth opportunities.
This has undoubtedly been good news for private equity fund managers in Africa. The spotlight on the industry means managers are now speaking to a slightly wider investor base, some of which have little knowledge of Africa.
The discussions are, however, turning out to be more challenging than originally anticipated. A Johannesburg-based fund manager recently shared his surprise at walking into a meeting with a potential US-based investor who was eagerly waiting for him. The investor wanted the manager to show him exactly where he planned to invest the money.
Educating global investors
Indeed education must now be embraced as a core part of fundraising for Africa. For inexplicable reasons, some global investors are still grappling with the concept of Africa being a continent with at least 50 countries, with differing dialects, cultures, and therefore styles of doing business. For some even, Africa is one country.
As such, some global investors need to be educated on the different political systems across the continent. Fund managers often find themselves having to say: “No, we do not think that the Arab Spring will spread to Sub-Saharan Africa, as that is more of a Middle East and North African affair. The dynamics are not the same.”
It is therefore of no surprise that the bulk of the fundraising discussions get nowhere. After expensive and long fundraising trips abroad, many return home with promises of “We will look into this further and get back to you. Don’t call us, we’ll call you.”
Tapping local capital
Needless to say, there should be less dependency on global investors, as Africa is well endowed with wealthy pension funds, insurance companies and private individuals.
So why does not Africa follow the footsteps of Brazil for example, which has done exceptionally well in raising funds from its local institutions?
The short answer is, raising funds this way is a tumultuous journey. Those that have succeeded have done so after a lot of longwinded discussions, with managers again finding themselves in the role of education providers.
For this group of investors however, the lessons tend to be more around the basics of the private equity asset class, since knowledge of this investment vehicle is still not very widespread in Africa.
The bulk of local pension funds have also been struggling with government regulations that limit investment into the asset class, or discourage investment in funds that would be allocated in part, outside their home countries.
However, some say fund managers are also to blame for their struggles to raise money locally. When setting up their funds, a good number rush to structure their vehicles to suit non-African based investors, totally ignoring the recommendations of local institutions. By the time managers think of raising money locally, it is too late – as the fund structures would have already been fixed by then.
Navigating governmental challenges
Furthermore, a good number of African governments have a lot of work to do to encourage the growth of the asset class. South Africa has been at the forefront with efforts to reform, followed by Rwanda, Botswana, Namibia and Nigeria. However the bulk of governments in Sub-Saharan Africa are yet to muster the political will to make it easier for local institutions to partake in private equity. For some reason, a number still rely quite heavily on financing from donors and development finance institutions (DFIs).
The reluctance to grow beyond DFI funding seems to stem from a lack of adequate knowledge of private equity operations – and again we find a new type of actors with a need for training. The murky knowledge of the asset class is reflected in a recent statement made by a vice president of a Southern African country: “We do not want private equity investors, because they are speculators. We want investment from the development finance institutions.”
Needless to say, such mutterings are worrisome. Firstly, private equity capital follows a long-term investment strategy, which makes it difficult to be speculative. Investors tend to hold companies for at least four years, and in Africa, even longer. During this holding period, managers work very hard to add value to the company, as they would be looking to exit with a profit.
The statement by the vice president also indicates a lack of awareness that DFIs are actually the backers of most private equity funds in Africa. DFIs invest in private equity funds in order to develop robust capital markets. DFIs are structured to be the initial risk takers, and are not meant to be the primary investors in any one country in the long-term.

Overcoming deal-making woes
In addition to fundraising challenges, managers also have to deal with deal-making woes. Fund managers find themselves struggling to close deals, particularly for the much sought-after deals of more than $50 million. Deal-making this year has been less than spectacular, with a dismal number of mid- to large-cap deals transacted. Small-cap investors seem to have had more success, but even they struggled to convince entrepreneurs to abandon their majority stake.
The bulk of the problems can be attributed to competition between financial and strategic buyers. Increasingly, competition has been coming from large global companies, looking to tap into Africa for growth. As these purchases are strategic for them, they are usually prepared prepared to pay higher prices for acquisitions. Local companies have also been quite competitive, case in point being the group Tiger Brands of South Africa, which recently acquired 63.5% of Dangote Flour Mills.
Perhaps managers seeking large deals should go back to their roots and consider how Celtel was created – a company which continues to be the foster child of private equity in Africa. As opposed to waiting for a readily created platform, maybe managers need to roll up their sleeves and look at creating businesses from scratch.
A good example of a company born this way is Helios, which created a Pan-Africa telecommunications tower-sharing platform Helios Towers Africa.
Fund Managers also bemoan the fact that they have to spend a lot of time educating entrepreneurs on the workings of private equity, before they can convince their prospects to share with them fairly. The challenge does not seem to be that entrepreneurs do not know what private equity is, but that a number do not fully understand what needs to be in place to accommodate private equity funding. Managers estimate that over 90% of the companies they look at are not ready for investment.
Creating a strong foundation
There is no doubt that the lack of publications on African financial industries means that the broader entrepreneurial base is less educated on the asset class. A number still look to bank loans to finance their growth. One wonders if there should not be a broader strategy by governments and investors to develop a strong information support system, which will not only educate the pension funds and private investors, but also the entrepreneurs.

Needless to say, developed countries have proved that a strong information support platform is central to the efficiency of a financial industry. This creates a platform of informed industry participants that fund managers can tap for both funds and deals.
This will also allow a conduit for global financial journalists to accurately report on the continent, educating global investors that are less familiar with Africa. Until then, fund managers seem to have to continue to live between a rock and a hard place:
having to educate investors and governments on one hand, and entrepreneurs on the other.

Gail Mwamba is the managing editor of Private Equity Africa, a UK-based financial publication that covers private equity fund and institutional investing in Africa. (
Her academic background includes a Masters in Business Administration in Finance (MBA Fin), specializing in financial risk management and Mergers and Acquisitions (M&A). Her financial journalism career includes roles at specialist financial publications covering private equity, structured products, FX and risk across Europe, Asia and the US.
She has also covered key topics for Africa-focused publications such The Financial Times This is Africa and the Africa Investor.

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