After decades of receiving scant attention, the Africa private equity opportunity is now a hot topic. Why is Africa drawing private capital and talent, and how should this vast continent be understood?
Privcap has assembled a panel of African private equity experts – including Hurley Doddy of Emerging Capital Partners, Graham Stokoe of EY, and Runa Alam of Development Partners International – to discuss the opportunities and challenges of a fast-changing continent. This program, “Continent of Opportunity,” is the first of three that will focus on private equity in Africa.
In this discussion, moderated by David Snow, our experts detail the demographics, debt levels and geographic diversity of a vast continent. They describe the difference between the relatively mature South Africa market, the robustness of Nigeria, the Middle-Eastern ties of North Africa, and the growing phenomenon of pan-regional corporations. They also answer questions often voiced about private equity in Africa regarding political risk and corruption.
David Snow, Privcap: Hello and welcome to Privcap, I’m David Snow, founder of Privcap. Privcap brings you smart conversations about private capital. Our conversation today is about private equity in Africa. We will be giving you an overview of the African private equity opportunity. We’re very fortunate to have a panel of experts in African private equity. Joining us today are Hurley Doddy, Co-CEO of Emerging Capital Partners, Graham Stokoe, Associate Director of Ernst and Young and Runa Alam, co-founding partner and CEO of Development Partners International.
This program is sponsored by Ernst and Young.
African private equity is not a term that maybe five or even four years ago was on a lot of people’s minds but, it’s grown tremendously in part due to the activities and the successes of all of you in the region. Let’s start with a very high level overview of private equity in Africa. When you are talking to someone who is, perhaps less familiar with private equity in Africa but feels like they should really get up to speed very quickly what are some things you talk about? So, for example, Hurley, why private equity in Africa now? What is the main selling point for this strategy and this geography?
Hurley Doddy, Emerging Capital Partners: That’s a good question. I mean, one thing, I was going to start by saying it’s changed a lot. I think ten years ago in the very beginning people. . . would almost hear your story and say, “Wow, you’re actually investing in [Africa?] What can you possibly buy there?” I think now there’s been enough interest and articles and all about Africa that people are getting the message that there’s some growth going on and that Africa might be interesting.
When people now are looking at African private equity and getting an introduction, we’re typically talking about the size of the market, what type of deals we do, the fact that African private equity, most of it is not a buyout-type of business, we’re not getting some bad companies or restructuring them and selling off, breaking them up or something. We’re really investing for growth and therefore we’re talking about the growth in Africa. And it’s gone from, in people’s minds, we’re the left behind continent, the hopeless continent. A lot of what we do and what we’ve done over the years is just talked about the growth. How it’s actually one of the faster growing places in the world and. . . it’s on track to do that for the next decade.
Snow: Runa is that your experience? When investors are asking you about Africa, especially investors who have not previously allocated to African private equity, what are some of the questions they have? What do you find yourself explaining again and again?
Runa Alam, Development Partners International: Sure, there are a couple of common questions. One is, what we tell investors, the thing to understand is Africa’s not one country. It is a collection of 53 countries with different cultures, different languages, there are also regions. So the Musgrave region is different from Francophone Africa, different from Eastern Africa, different from the SADC countries which are kind of working around South Africa. So, very important to understand that and that also goes to differences of the sort of deal that we have in Africa. So, more family owned companies in East Africa, more professionally managed and larger companies in Nigeria, although there are family owned companies there too.
So there are those differences. The other things are what sort of deals do we do in Africa? And again, because of the regions and the different parts of Africa, they are different. But, as Hurley said, they tend to be, what I call 1980s type, classic private equity and maybe it’s even 1960s type classic private equity where, in Africa we haven’t had much debt, so, because of that, when one looks at where do we make our returns? it’s in buying less expensively, it is also in growth, so our companies are growing 25 percent to 100 percent per year; and it’s in being creative in the exits. But it’s not about financial engineering and not about debt. Although in South Africa there’s more debt available and we can do 50/50 debt to equity there sometimes, but in general, on average, our debt to equity tends to be closer to 10/20 percent.
Doddy: Africa’s got a lot of people, but also a young population, a growing population. We don’t have retirement; we have more and more people entering the workforce. And if you’re a long term investor you’re thinking about the next ten, fifteen, twenty years. That is fundamental to growth in a vibrant economy. And we talk about demographics, we talk about debt. That’s another thing that is a headwind for the whole development market. You know, if you look at the US, you look at Europeans, they’re going to be raising taxes, they’re going to be cutting spending. . . it’s just going to be, as far out as the eye can see, going to be a headwind. It’s not in Africa. Relatively low debt levels, if you look at the continent, maybe 45 percent debt to GDP, if you look at maybe half of what it is to a third of what it is in some countries. The other thing is commodity prices in a world where many commodities are tightening up and it looks like that’s going to be something that’s going to be happening as more and more people are in economies, Indians and Chinese, that are growing. Africa is going to be supported by its natural resources and its [arable land]. Its ability to increase agriculture. So if you just really think big picture, why the next 20 years? Africa’s got some good things going with it while Africa’s advantage is the growth that it’s had for the last ten years over the developed markets will continue. We pointed as well to those three factors.
Runa Alam: Again, responding to Hurley, 2008 and the crises in the US and Europe has shown that very clearly. That’s why Africa’s been the fastest growing region in the world. Yes - off a lower basis, but you’ve got the continent growing at 5 percent, 6 percent a year. You’ve got certain countries like Ethiopia and Angola growing as fast as China. You’ve got Nigeria growing at 8 percent with 150 million people. So that is really a very interesting reason to look at Africa for investment.
Graham Stokoe, Ernst & Young: You’ve got seven of the top ten green companies in Africa. I think on Doddy’s point, I guess one thing people may misconceive in Africa is that it is resource-reliant and I think it’s becoming less resource reliant. It’s getting a more urbanized population which is a good thing for private equity and I see a lot more industries and support areas being a lot more relevant and private equity is doing a lot to bring those to the front.
Snow: And Graham, keeping in mind obviously that Africa is a remarkably diverse place and within that diversity has a diverse set of private equity opportunities, what would be a fair way to roughly divide up geographically the opportunity in Africa for private equity investors?
Stokoe: Runa alluded to that. South Africa’s not a mature private equity market but a more mature private equity market than the rest of Africa. I think there’s more private equity competition in South Africa, there’s higher leverage, so you generally, with slightly different models, even though you’ve still got a growth factor, it isn’t as growing an economy as the rest of Africa. But, you can invest in South African companies that have a growth strategy, into the rest of Africa.
Alam: And that actually has been a theme in our fund, which is, we are more interested in companies that are in South Africa and are very good at what they do. So good management, profitable, is a proxy for a good business plan, and taking them North to make acquisitions but also grow organically in East Africa, Nigeria, etc.
Snow: To what extent should investors understand North Africa as a Middle Eastern opportunity and its fortunes rise and fall with the Middle East and to what extent should they understand North Africa as a African opportunity?
Alam: First of all North Africa has, again, several countries in it and so each country is different. Traditionally Egypt has had the biggest private equity deal flow anywhere in Africa. A lot of that comes from money coming out of the Middle East. So I guess there it would be tied a lot to the Middle East. But if you go West of there, you go to Tunisia, Morocco, Algeria, I think it’s more African. Africa is interesting because you start with Arab speaking in the North, some countries are French speaking and they’re tied to Francophone Africa, so Tunisia and Morocco. Companies we see there are doing a lot of business in Cote d'Ivoire and Senegal and other Francophone countries, whereas Egypt has been more down the Eastern seaboard, down to Ethiopia, Sudan, Southern Sudan and Kenya, Uganda, but less so. Fewer companies doing that than what I’ve seen in the Francophone Western North African countries. So, in answer to that, is, it depends. It depends on the country.
Snow: I’m interested in where all of you have been spending a lot of your time and energy recently given the size and the diversity. Hurley, where has your firm been especially active recently within Africa?
Doddy: Well, we have a pretty good presence across the continent so it’s kind of where we’ve traditionally been active. As we’ve discussed, Nigeria’s just. . . the size of the country is so big that it’s going to be an important player. We have offices up in the North in Tunisia and Morocco and those are important for us. Francophone West Africa, you know, really Cote d'Ivoire and Senegal are important places for us and we have a lot of business. And more and more East Africa, you know, focused on Kenya, Uganda, and Tanzania is integrating, more the opportunities to build regional businesses in East Africa have grown significantly over the last three or four years.
Snow: Graham, where have you seen some hot spots within Africa, keeping in mind of course that South Africa is the most developed of all the markets, the private equity markets in Africa?
Stokoe: I think most of the activity we’ve seen recently over the last three years has been more Nigeria than in the rest of the African markets. A small deal we attempted to support in Zimbabwe didn’t go through but, you know, hopefully Zimbabwe comes alive again at some point. East Africa is still topical, I haven’t been involved it in too much. I guess private equity has been generally a little bit quieter on the actual transaction front in the last two to three years but it’s livened up quite a bit, probably in the last 12 months. Like I said a few deals in Nigeria, a couple in South Africa. But I mean, from the firm-wide perspective we’re investing quite a lot in our Nigerian business, Angolan business, and then we’re busy buying a business in Cameroon and the Central African Republic. I think we’re probably in about 80 percent of the African countries now. So, even ourselves, we’re also investing in growing our footprint across Africa.
Snow: I’m hearing a lot of different places, so it sounds like, you know, there’s no stand-out area; it’s very busy across the continent.
Alam: That’s absolutely right. We are committed to delivering investments throughout Africa, diversification to our investors. We also have country limits, so really we have to do deals throughout Africa. The interesting thing is that there are deals everywhere in Africa and although there is a bit of a slowdown in Egypt and obviously Libya, Tunisia, we expect them to come back within six month to a year. The rest of Africa’s thriving, and if you go to the North, Algeria and Morocco - still deal flow there. And then the rest of Africa, lots of deal flow.
The other interesting thing is the trend of companies moving across borders. So a lot of our investments are actually multi-country deals. So if you look at a map of Africa and where are our deals, where’s the footprint, it’s all over Africa. Not always all over Africa in that we have, let’s say a company in Rwanda, but all over Africa in the sense that several of our companies are in Rwanda or have expanded there, so, really everywhere in Africa.
Stokoe: Yeah, that’s probably a bit of a change. I would’ve expected that there’ve been more single country companies, but I’ve seen a lot in the last three years where there have been sort of multi-country. . . if I think of Helios’ assets - a lot more multi-country assets these days. Actis - a couple of investments they’ve done [have been] multi-country, more in the last couple of years. It’s almost a second phase to private equity in Africa and it’s gone beyond the one great play in a single country, which shows you potentially have the benefit of providing equity in taking a strong country player and making it a regional player.
Snow: Is there a certain country that tends to be a headquarters for the multi-country play? Is it South Africa? Is it Nigeria? Or is it not that straight forward?
Doddy: It would be regional from that standpoint. I mean, East African companies would tend to be Kenyan and then out from Kenya, West Africans tend to be Cote d'Ivoire and going out from there, Nigeria’s a bit of a market to itself. There is kind of a Anglophone, West Africa, so you see Nigerian companies naturally wanting to go into Ghana. In the North, probably Tunisia to the extent there’s any one place, but Algerians really are doing their own thing in Algeria.
Stokoe: I mean if you look at a couple of the most successful South Africa listed companies, you know, probably number one in the banking sector, Standard Bank, they’ve expanded more across the rest of Africa than anyone else. The number one cell phone company in South Africa, probably MTN and they’ve expanded across Africa more than everyone else. Tiger brand is busy expanding food and beverage, so you can see some number one stars, not in the private equity but just in the listed space in South Africa. They’ve been the leaders - Shop Rite, in the retail sector.
Alam: I will say though there are some companies that develop in the larger-by-geography but smaller-by-population countries. We have an investment in a company Letshego, and they’re in the consumer credit business. It started in Botswana, have very strong market share there, and have moved to seven other countries, in Eastern Africa, etc. So, you can have smaller countries also incubating certain interesting and different business models.
Having said that, there’s uniqueness to Africa. I’ve also worked in Asia and while some of the very large companies [there] went across countries, I didn’t see as many companies just going across countries [as in Africa] and part of the reason for that is a lot of economies in Africa are quite small. So, a company has a choice, become a conglomerate, be in lots of different businesses to grow, or stay focused on the single-business area and go outside the country. And in Africa it’s been the latter model that I’ve seen more than the former model.
Snow: I want to ask one more question and that’s back to possibly some of the questions that you tend to get from investors who are less familiar with Africa, and that’s the phrase ‘political risk.’ To what extent do you analyze political risk in some of the countries in which you invest. Or is that really not the primary risk? Is really the primary risk, you know, the risk of the management team or the risk of the market or the risk of the business plan? And political risk is just not something that ultimately is likely to affect the outcome of an investment?
Doddy: Well, it is a question that we’re asked, and it’s not something that has been an overall a big factor. A couple of reasons; first of all the direction is pretty clear in Africa, and it’s toward less involvement in the state not more. So you don’t have the Chavez-type of, put some troops around your factory because they’re taking it over - that’s just not the direction. That’s been tried long ago, that’s been rejected. The other thing I would say is, there are 54 countries, and there are a lot of elections. There’s an election somewhere every quarter, basically. When we pick deals, you know, we want to be in deals that are not political. We don’t want to get in with the ex-prime minister, who got you some special deal. Because when he’s gone and his party’s gone, someone else is going to be there. We are long term investors. We want to be in companies [where] it’s clear how they got their concessions or their licenses and that’s recognized and it’s through that type of selection, through partner identification that you can reduce some of that risk.
Now, anywhere you go you of course have risk of changing policies, changing taxes and regimes. It’s no different, no better or worse, in Africa than in Europe today. So, I would say that that’s another factor. And for us in general the challenges of managing growth are bigger. The other thing that I was going to add, corruption and these things, there’s a self-selection process there as well. You know, typically a company that’s bought into having a private equity firm, an international private equity firm, especially many of our firms have money from multi-lateral agencies or from the governments, they have bought into the fact that I can bring these players and they’re going to help with governance, help me grow my company, make it into something bigger, I’m going to be a regional champion. . . You know, if your plan is to do some funny business or something, we’re just the wrong guys to bring in. You should go find someone else and do something else. There is that self-selection. There is a fine pattern to be rich, build a big company - we’ve done it, we can show you the examples, people know the examples and that’s what they’re buying into when they bring in the private equity players.
Alam: I do get asked about corruption a lot. And in eleven years of working in private equity in Africa there really hasn’t been a case and I suspect that it is the self-selection process. Because otherwise we’d be asked all the time, and it just doesn’t happen. There is a term in Africa called the new-generation managers and these are managers who really, some of them are Western educated, some of them are actually not Western educated, are African educated, but these are managers who know that the money for their businesses today and tomorrow are coming from firms such as ours. And they very much work in the private sector. They very much run a shop very similar to, you know, a company anywhere in the world and anywhere in the world with good corporate governance.
The other thing I will say is African companies that we work with have a hunger for firms like us to engage with them not only with money but with our expertise. To bring better corporate governance, better management systems, better accounting. It’s like pushing open a door for us to do that. And that makes it a self-selection process. That’s the pool we work in. It’s key to understand in that pool that the growth of private equity is very much dependent on growth of the private sector. And the private sector has now developed in Africa independent of the government. So, you have whole industries that may have a license but then very little connection with the government. Or they may not have a license, like an FMCG manufacturing company, and, very much exist in the private sector and very much exist in the space where they know that they’re going to behave properly.
Snow: Well this is a fascinating topic. I think we should return to it again but for now, we’re going to pause. Thank you very much.