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Dentons’ report from the 12th Annual AVCA Conference positions Private Equity as a force for good in Africa
Private equity in Africa is thriving, says a report from global law firm Dentons following the 12th Annual conference of the African Private Equity and Venture Capital Association (AVCA), the pan-African industry body that promotes and enables private investment in Africa.
Private equity is an asset class of equity and debt in operating companies that is generally not publicly traded on a stock exchange. At its most basic, Private Equity (PE) is about how you can use money, expertise and relationships to grow businesses.
Private Equity – Costs and Benefits
PE, as an asset class, is not universally seen as a good thing and has had its share of detractors. In the United States, for example, critics of PE describe the investment as one that makes money the wrong way; buying “target companies,” making people redundant, piling on debt and selling the remnants in parcels which by then are doomed to fail. To make matters worse, private equity firms get tax breaks, paying 15% on profits instead of 35%.
But the industry and its defenders, say it is a strong creator of jobs and value, and a vital source of outsized and diversified returns for pension funds, university endowments and other investment pools that serve ordinary people.
Private Equity in Africa
Africa is at a different stage of growth to the developed world and growth capital is what Africa needs and PE provides. Because Africa needs all forms of capital, PE capital there has been welcome and has not so far faced the same degree of criticism as has been seen had in the developed world.
The different approach to PE in Africa is is epitomised by AVCA(African Private Equity and Venture Capital Association) and the organisation’s mission to play 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. AVCA’s success in promoting private equity in Africa comes out of creating the right inclusive environment and by making its members feel like they are part of a family.
PE – A Young Industry in Africa
The Africa PE industry is still young and this youthfulness comes through in its members and their attitudes, says Raj Kulasingam of Dentons. 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.
RunaAlam (DPI) alluded to this when she opened the recent AVCA conference by quoting the African proverb: ‘If you want to go quickly go alone, if you want to go far, go together’.
This Association’s membership is united by a common purpose: not only to make money, but also to contribute to Africa’s development and be a part of continent’s growth story.
AVCA in 2014 into 2015
After AVCA 2014, Raj Kulasingam and Nick Plant, Head of PE at Dentons, produced an article on the key points from that conference. 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 focussed 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$100M. All other businesses typically have deal values of between US$1M and US$30M. There is very little in the middle | No change... A theme at 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 :
Larger transactions use acquisition structures that variously include Dutch or Mauritius entities and sometimes also Luxembourg and Cayman entities. |
Structure and diligence is key to doing deals anywhere and no different and no change for Africa.
However, the overarching issue for PE investors |
AFVCA 2015 - not a conference but an industry gathering
Key points on the Africa story from AVCA 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 competition processes have got better. |
Relationships and patience is key.... |
| Money | There is $3.8 trillion of PE in the world but only about 1% of this goes to Africa.
More money is being raised for PE in Africa (more than $22billion 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...lot of people are looking for yield ( Mark Mobius). However this is for mid to 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% 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 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 it. |
You can’t generalise 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). |
The Future of PE in Africa
Of course, PE in Africa is not all a bed of roses, says Kulasingam. 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.
But, 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.
Top image by Chris Kirchhoff, www.mediaclubsouthafrica.com
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