A number of countries including Mozambique, Kenya and Nigeria have benefited from the surge in private equity investments in Africa in recent years; now it’s Zimbabwe’s turn, according to an opinion piece in ZimbabweIndependent.
Most of the private equity funds surging into Africa excluded Zimbabwe because of policy uncertainty, political risk, and sanctions. This is likely to change with the removal of sanctions and greater political stability in Zimbabwe, according to Ritesh Anand, a London-based economist, fund manager and columnist.
Private equity investment grew in sub-Saharan Africa from less than US$1 billion in 2009 to more than US$4 billion in 2014, and the trend is likely to continue because global private equity funds see Africa as the final frontier, Anand said in a column in ZimbabweIndependent.
Anand worked as a fund manager for First Mutual Asset Management in Zimbabwe before moving to London. On his Twitter page, Anand said he has a passion for investing in Africa. In 2010, Anand founded Invictus Capital, a financial services company that focuses mainly on Africa.
Here’s what private equity investors are looking for, according to Anand: they want local businesses seeking to expand regionally or globally that have strong management teams, a dominant market share, and solid cash flow.
Such businesses are difficult to find and often require patience on the part of investors — more than five years, the typical investment period for private equity, Anand said in the ZimbabweIndependent column. Some investors resort to a holding-company structure, which adopts a buy, improve and hold strategy. Typical investment period is 15 to 20 years.
As much private equity as there is pouring into Africa, it represents just 1 percent of global private equity and it’s not being spread around, Anand said. Too much money is going into too few funds, with everyone after the same few big deals.
The recent collapse in commodity prices, greater political unrest and weaker currencies across Africa, will likely see private equity flows decline in the short-term.
Some fund managers say this is not such a bad thing, Anand said. It will bring down the prices of overvalued businesses in some areas and scare away fair-weather investors.
What Zimbabwe needs is clarity on its investment policies. The country has huge investment opportunities and could benefit from the next wave of interest from private equity investors.
Zimbabwe needs more than US$25 billion across all sectors of the economy in the next 10 years. The country needs to focus on creating an enabling environment to attract long-term capital to ensure robust and sustainable growth, Anand said.
“Private equity is a form of equity investment into private companies not listed on the stock exchange. It is a medium to long-term investment, defined by active ownership. Private equity builds better businesses by strengthening management expertise, delivering operational improvements and helping companies to access new markets,” according to the Anand’s column in ZimbabweIndependent.
This form of equity has grown steadily over the past five years and is likely to continue growing.
According to the World Bank, Zimbabwe needs more than US$14.2 billion for infrastructure development alone. Such investments need long-term capital, which is best suited to private equity, according to Anand.
Global investors turning their attention to Africa include Helios Partners, which recently announced its Africa-focused private equity fund closed at US$1 billion. Abraaj Capital is expected to follow suit, Anand wrote in ZimbabweIndependent.
Global private equity firms such as U.S.-based TPG and Carlyle Group have contributed to Africa-focused funds. Carlyle raised US$698 million for its inaugural Africa Fund.
Much of the early investment went into businesses based on fixed assets, such as mobile phone towers. Now restaurants, payment systems, retailers and packagers are attracting investor interest, Anand said.
ECP invested in Nairobi Java House in 2012. The Kenyan coffee house chain and has since helped build Planet Yogurt, a group of frozen yogurt outlets.
U.K.-based Helios bought 1,600 franchised Shell service stations across sub-Saharan Africa in 2013, not just to get into the gas business, but also to develop convenience stores attached to the stations.
African entrepreneurs are starting to appreciate how private equity can help their businesses expand as well as improve corporate governance and internal processes to make the businesses more robust.
Often, African firms bought by private equity were being operated relatively well by their founders, Anand said. Several were family-owned with poor corporate governance records.
Private equity investors can often boost their performance by improving corporate governance and refining the measurement and analysis of data. They can also provide cash to make the businesses more efficient and modernize them, Anand said in his column in ZimbabweIndependent.
