Worldwide: Private Equity In Africa: Report From AVCA Conference 2015

Going Together, Making Money, Doing Good And Growing In Africa
Last Updated: 9 July 2015
Article by Raj Kulasingam and Nicholas Plant

On the Eurostar to Paris

I am on the 0935 high-speed Eurostar train from London to Paris to support the Dentons Paris office for its Invest in Africa event at the Medef Centre on 22 May. As I fire up the laptop to finish off this month's article, I wonder whether I will ever sit on a high-speed train in Africa....

Private equity as a force for good in Africa

As my past writings may have alluded to, private equity is a space that I am passionate about. I love the idea that you can use money, expertise and relationships to grow businesses - surely capitalism at its most raw. However PE has had its share of detractors.

For example, in the US, critics say that PE makes money the wrong way - buying "target companies", making people redundant, piling on debt and selling the remnants in tidied up boxes - which by then are doomed to fail. To make matters worse, PE firms get tax breaks, paying 15 percent on profits instead of 35 percent.

But the industry and its defenders say it is a strong creator of jobs and value, and a vital source of ambitious and diversified returns for pension funds, university endowments and other investment pools that serve ordinary people.

Africa is at a different stage of growth to the developed world and growth capital is what Africa needs and PE provides. Africa needs all forms of capital so PE capital in Africa has been welcome and has not had much of the criticism (at least so far!!) that PE has had in the developed world.

A plug for AVCA

So PE in Africa is different to PE in the developed world. And this difference is epitomized by AVCA (African Private Equity and Venture Capital Association) - the pan-African industry body that promotes and enables private investment in Africa. I got involved in AVCA when Dentons became a member a few years ago. Its mission statement is that:

"AVCA plays an important role as a champion and effective change agent for the industry, educating, equipping and connecting members and stakeholders with independent industry research, best practice training programmes and exceptional networking opportunities."

I have been involved with many trade organizations and business clubs, and I think that the key to success for a club is creating the right inclusive environment and making members feel that they are part of a family. AVCA seems to have found the formula for this.

Africa PE is young and fun

The Africa PE industry is still young and this youthfulness comes through in its members and their attitudes. The attitude that I like the most is that, whilst there is obviously competition between PE houses, advisers, funders and other professionals, there is still a sense of camaraderie and cooperation with all involved. I think Runa Alam (DPI) hit the nail on the head when she opened theA VCA conference by quoting the African proverb:

"If you want to go quickly go alone; if you want to go far, go together"

This diverse membership is united by a common purpose: to contribute to Africa and be part of the Africa growth story. That's what excites me about working on the continent compared to other regions. And perhaps overlaying all of this is that the Africa PE industry knows how to have fun.

I met Robbie Brozin (the founder of Nandos from South Africa) recently and heard him talk about how he grew Nandos from one small restaurant to the global chicken piri-piri giant of today. An inspiring story. He had some great one-liners about doing business and the one that stuck was:

"My vision was always to have fun and make money and if you are not happy in your job you should just....do something else!!!"

AVCA in 2014 into 2015

After AVCA 2014, Nicholas Plant (Head of PE at Dentons) and I produced an article on the key points from that conference. Click here to read the article.

An excerpt of this with an update from 2015 is set out below:

  AVCA 2014 AVCA 2015
1. Huge enthusiasm and an industry that is focused on taking a company from one stage in its development to the next, rather than financial engineering. No change.
2. Private equity is a bifurcated market in Africa. On the one hand the large ticket deals in energy, telco and financial services transactions with deal values in excess of US$100 million. All other businesses typically have deal values of between US$1 million and US$30 million. There is very little in the middle. No change. A theme in 2015 is the need for more venture capital funding to grow these smaller companies into the PE deal size companies of tomorrow.
3. Five key issues that PE investors must take into account when investing in Africa:
  • Availability and desirability of double tax treaty relief
  • Availability of bilateral investment treaties
  • Existence of exchange controls
  • Local content ownership requirements (especially in the oil and gas sectors)
  • speed of incorporation of the corporate structure
Larger transactions use acquisition structures that variously include Dutch or Mauritius entities and sometimes also Luxembourg and Cayman entities.
Structure and diligence are key to doing deals anywhere and there is no difference and no change for Africa.

However, the overarching issue for PE investors is quality of the management team and alignment with the entrepreneurs.

AVCA 2015 - not a conference but an industry gathering

There were so many key points at AVCA that it has been difficult to choose which ones to highlight. In addition, I had meetings midway through the conference so I missed some of it including (by all accounts) a great presentation by Miles Morland of Blakeney Capital. Reports of his more memorable quotes can be found on Twitter including the following controversial one:

"I would rather trust a Nigerian on a handshake than an American on a signed contract. "

My notes and key takeaways from AVCA 2015 are set out below:

Issue Headline from AVCA Notes Key take away
General outlook Investing in Africa has got easier. In the 90s you were often negotiating with counterparties that did not understand where investors were coming from and heading to.

"You were often negotiating with yourself" – Jurie Swart, AIIM.
Competition for deals has increased so investing is harder from that perspective.

However the flip side is that the competitive processes have got better.
Relationships and patience are key.
Money There is US$3.8 trillion of PE in the world but only about 1 percent of this goes to Africa.

"More money is being raised for PE in Africa more than $22 billion raised since 2007" but we have a long way to go to make a dent in global PE terms.
More sovereign wealth funds and local and international pension funds (e.g. New York State Common Retirement Fund and City of Baltimore Retirement Fund – both attended AVCA) are investing on the continent. There is no shortage of money. Lots of people are looking for yield (Mark Mobius). However this is for mid-large cap deals and there is still a dearth of capital for smaller deals (the VC end) and for underserved sectors (e.g. agriculture which employs 70 percent of Africans) and geographies.

Co-investing is still popular but many LPs don't take up co-investing rights for a variety of reasons including capacity issues.
GPs/Fund Managers Numbers of GPs/Fund Managers investing in Africa are increasing every year. This has resulted in greater expertise and knowledge about PE. Africa is a big market so there is no issue on overcrowding yet.
PE opportunities The number of PE opportunities is increasing in many regions of Africa.

You just need to look harder and know how to find them.
Outside South Africa, East and West Africa dominate the PE landscape. PE opportunities are there but to find them you need to be on the ground, show up, be open, and look to partner with others.
Sectors GPs are investing across a variety of sectors. Africa needs investments in all sectors. Stakeholders need to work together to make each of the sectors structurally attractive for investors (including PE).
Exits Exit routes are broadening and there continues to be an influx of trade buyers plus increasingly seeing secondary exits (PE to PE), though LPs are not keen on PE to PE exits. Exits (cash to cash) in Africa take longer than exits in developed markets.

There is no difficulty for an investor to exit a well-run company.

There is a perception amongst LPs that GPs chasing secondary market deals are just lazy.
Finance and credit funds There is still a massive opportunity for financial services investments in Africa.

Opportunities are not in first tier banks but in the second and third tier banks.
Technology will play a big part in the growth of the financial services industry in Africa, pushed by the capital requirements of Basel 3 and the retreat of the availability of traditional sources of debt.

We will see an increase in private debt/credit funds as they move in to fill a gap in the market.

Africa PE funds are looking to leverage at fund level (in addition to asset level) to boost returns.
Risks Risks can't be considered in the abstract. You may choose to accept certain risks if returns are high enough (i.e. revenue growth or earnings growth or both). E.g. the GDP of a city or region may be markedly different to the GDP of country.

Currency movements can kill returns if you don't keep an eye on them
You can't generalize about risks and need to do proper and intelligent due diligence.

Due diligence and market awareness is an ongoing process and you should have regular reviews of your investments and the applicable market (e.g. Abraaj reviews its companies annually at a minimum and semi-annually at fund level).

So where to for PE in Africa?

Of course, PE in Africa is not all a bed of roses. There will always be the good, the bad and the ugly in all parts of the world. It's being able to see beyond the hype and the myths that is key.

Ultimately what is driving growth and PE in Africa is that what Africa wants is what the world wants. Africans have the same aspirations as anyone else. What is needed is the investment to match these aspirations, which is where the opportunity is.

The good news from AVCA is that the overall outlook for PE in Africa is positive but the question is whether this can be sustained to match the ambitions of Africans. Finishing on a positive note .....

"We always believe in Africa, [that] our investments can make money there" - Johnny el Hachem, CEO, Edmond de Rothschild

Growth needs investment, which needs stability, leadership and the right economic and regulatory framework and policies. That's the challenge for Africa.

This article was first published in the February 2015 edition of Financial Nigeria magazine, a monthly development and finance journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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