Africa PE Insider: Educating Investors About African Private Equity
African private equity attracts a lot of attention, but its weight in the global private equity market is still small. Last year, funds focusing on the region raised $4.2 billion, over twice the annual average of the preceding five years, according to the Emerging Markets Private Equity Association.
But global private equity flows totaled $486 billion in 2014, according to Preqin, meaning that the African market represents less than 1 percent of the total. The market is thus still small, but many would argue that there is a wealth of opportunity.
Potential investors are taking notice, but going from interested to on-board requires more than a story of economic growth: in a sense, it requires an education in the unique factors that characterize African private equity.
“Africa is a complex region in which there has been very little success achieved by investors relative to other markets,” George McPherson, managing director of Global Environment Fund, told AFKInsider.
That can make the region a tough sell for asset consultants and investment managers looking for a name-brand or a level of predictability, especially if they haven’t had prior experience on the continent.
That said, for McPherson, it’s mostly a matter of time before African private equity becomes part of the mainstream for American investors.
“Once investors begin to see realizations/returns generated from the investments that have been made in recent years, private capital targeting the region will steadily increase,” he said.
“The early supporters of private equity funds and transactions have generally been the Developmental Finance Institutions (DFIs). Ideally, their capital will provide the ‘proof of concept’ that private investments in the region can be sourced, structured, negotiated, monitored and, most importantly, exited profitably.”
This evolution of investor interest can be found in other funds, too.
“We are seeing growing demand for exposure to Africa-focused private equity,” Patrice Backer, chief operating officer of AFIG Funds told AFKInsider.
Backer said that their second fund, AFIG Fund II, has drawn interest “from a much wider spectrum of foreign investors [relative to the first fund], including pension funds, endowments, and money managers.”
The unique characteristics
Most investors new to the region learn that private equity functions rather differently in Africa compared to the larger markets of Europe and the US.
Rather than pursuing large structured buyouts, which are few and far between, private equity players on the continent generally take a longer-term, more growth-oriented approach.
This might involve providing growth capital to small and medium family-owned companies or participating in infrastructure development projects. The former typically requires a facility for implementing better corporate governance and operational systems, the latter a knack for navigating the myriad interests and competing agendas involved in public works.
Both strategies also demand patience, as they operate on time lines far beyond that of a classic private equity buyout transaction.
These types of deals are far from simple — especially when prominent investors also want to see meaningful externalities in addition to financial returns.
“DFIs are the most dominant LPs on the continent, and these emphasize social and development outcomes in addition to financial returns,” said Backer.
African private equity success thus requires another, complementary skill-set; namely, the ability to both encourage and measure the greater social benefits that can be gained from an investment.
For many Africa-oriented funds, then, the Environmental, Social, and Governance (ESG) impact of deal-making are simply part of routine performance reporting.
“General partners need to be prepared to navigate these issues and provide regular reporting to LPs on how they are addressing these issues,” said McPherson.
Social good isn’t just for the socially-minded investor, though. One could easily argue that it’s simply a sound business strategy. Firms with better governance controls, for example, can scale into more attractive targets for an eventual takeover or sale.
ESG measures are thus part of the DNA of African private equity deals — especially given their time and complexity. After all, in the relative absence of quick exits, one needs other ways of measuring whether a given investment strategy is working.
And if an acquisition requires seven to ten years to grow enough to go public or be sold to a conglomerate, there is a level of sustainability and suitability required.
That is not to say that unscrupulous deals and investors do not exist; only to note that the very “weakness” one might perceive in African private equity might also be a source of strength, and, one hopes, a source of sustainable, long-term financing for companies that desperately need capital.
Perhaps this is what makes African private equity so attractive to DFIs — one hopes, though, that it will increasingly make the region attractive to the flock of private investors looking for something a bit more ambitious for their portfolios.
Anna is the founder and principal of Augury Consulting, a communications consultancy which helps asset managers deliver their message to investors and the public with clarity, impact, and authenticity. She regularly contributes to the financial press.