July 30, 2013
Interviewed by: David Snow
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Africa: Home of the PE Exit

Want to understand the exit market in South Africa, North Africa, and across the continent? Tune in to our three experts, who detail the African trade-sale and IPO markets for private equity investors. This Privcap series is informed by an EY and AVCA study on African PE value-creation, available here.

Want to understand the exit market in South Africa, North Africa, and across the continent? Tune in to our three experts, who detail the African trade-sale and IPO markets for private equity investors. This Privcap series is informed by an EY and AVCA study on African PE value-creation, available here.

Private Equity Exits Across Africa

Investing in Africa

David Snow, Privcap: Today we are joined by Ziad Oueslati of AfricInvest Group, Sandile Hlophe of EY, and Ngalaah Chuphi of Ethos Private Equity, gentleman welcome to Privcap today, thanks for being here.

We are talking about creating value and exits in Africa, I think a lot of people are aware of the Africa investment opportunity, they might not be aware, that actually there have been quite a few exits to show that private equity actually works as an asset class in Africa and all of you have been very involved in creating value and helping clients create value so I’m fascinated to hear your stories.

Ngalaah, at Ethos Private Equity, which is one of the more established private equity firms in Africa based in South Africa, you’re firm has gone through a number of exits over the years, I’m wondering if you can talk about the current environment for monetizing private equity investments compared to possibly previous cycles in the African private equity market?

Ngalaah Chuphi, Ethos Private Equity: Right, maybe to begin and help the audience understand the final answer to that question is give a little history of how we evolved. We came out of a bank, maybe 25 years ago and by that time we were doing only minority investments, then back in 1996 we raised third party money and that included money from overseas and we started a strategy of making control investments, which is the current investment strategy that we are executing in the current fund and over the last three funds.

Because of that, you’ll find South Africans are very sophisticated market from a financial markets stand point and over 50% of our exits have been to train buyers, about 25%  into a secondary buyers and the balance of 10% is about IPO and the rest is some sale back to management. So the exit environment in South Africa is actually not an issue, if there’s any one thing that has not kept me awake at night in private equity is worrying about how will I exit? Because if you have a good quality asset and you have control because of the strategy that we have more than likely is going to be attractive toward trade buyers.

South Africa has also been experiencing an interesting dynamic right now, it is being seen as the gateway into the rest of the continent, so if you have a South African platform, which has strong growth possibilities into the continent foreign buyers also come into the frame. So an example, we used to own a tire manufacturing business in South Africa that had operations in Zimbabwe, in Zambia, and in Nigeria, we exited that through a southern Indian strategic that was looking to use South Africa as a platform to grow into the rest of the continent.

Snow: So if it’s a good company and it’s in South Africa, someone’s going to want to buy it?

Chuphi: Somebody’s going to want to buy it right.

Snow: How about just brief follow up question, you mentioned the public markets have tended to be only about 25% of your exits, do you see that mix between strategics, secondaries and IPO’s changing as the market changes?

Chuphi: I think the trade buyers will continue to play a role where at least 50% of the exits in private equity is to trade buyers. People like them because they pay premium to a lot of the comparables on the market, but I think with private equity as an asset class also maturing there will be an increase in secondary buyouts, so as other private equity groups come in and buy assets from private equity ourselves, where we are being a larger fund, we have tended to buy at some point, one or two deals from the smaller private equity groups that lead that particular company to a level where we can actually participate in it.

Snow: Ziad, you also invested across Africa although you’re based more North Africa in Tunis, I’d love to hear your perspective on sort of the evolution of exit opportunities for your firm and maybe what the exit market looks like today?

Ziad Oueslati, AfricInvest Group: Yeah, thank you for that question, actually it’s little bit different maybe from the picture in Southern Africa and South Africa, first of all I mean we do mainly minority investments, so the difficulty of exiting at a later stage is higher, when you look to a situation where you control, you fully control the company. But we’ve been through several stages so we’ve started in ’94 so that was a long time ago and initially most of the exits were done through sale back, we’re talking about minority investments here, so sale back with shareholders agreement that will preset, let’s say, I mean the multiple or the minimum value that we should be getting, and it has evolved slowly to strategic sales, so we’ve seen a lot of strategic sales in the early 2002-2003, that went on until I would say 2007 and then, what we’ve been doing, it’s a mix of everything but mostly

I would say also going on some stock markets like mainly North Africa on the twin stock market, on the Casablanca stock market but those we’ve been able to exit on the Nigeria, on the latest one and on the Nairobi stock market. But each case is different and in some of our deals, whenever we can manage to do self-liquidated instruments that does not require this strategic process to sell shares or to either back to the owner or to a strategic buyer so that’s something also that we prefer, I mean if we can get liquidity through instruments but also have the outside return kicker as if it was an equity investment, that’s something also that we like to do.

If you look at what we’ve been doing, I have been able to do, I mean since 1994, actually, most of the exit but that’s also linked to the vintage of the funds, I have taken place starting 2006 I would say that 2/3 of the exit that we’ve made we’ve made around 50 exits out of 100 portfolio companies have been made since 2006 and 1/3 was done through a sales back to a trade sale and around 25% through listing and the remaining second result. Going back to your question secondary results are coming, are starting because I mean there are funds that are coming, that are looking also for to make investments and sometimes, I mean they will buy back from companies like us, from funds like us. So the exit is a reality in Africa, especially in North and South Africa but also in the sub-Saharan region, and the returns are also there. If I go back to pre-2006 and post-2006 our multiple was around, the average one was around 1.7 afterwards it was around 2.5, so you see also even in terms of return that things have been improving.

Snow: So as larger private equity firms want to get involved in Africa, you said come on in, it’s one more potential group that we might exit some of our companies to?

Oueslati: Exactly and it will make the market I mean more mature if you compare for example, let’s say North Africa – Morocco to Tunisia – the fact that there are much more players today in Morocco has made the market more liquid, I mean the prices went up, especially in terms of sale and I think the more and more families are because we’re talking about SME’s I mean that’s what we target so family owned companies, I’m looking forward, I mean to have funds to invest with them. So that’s also part of the learning process and for us we don’t fear competition, to the contrary, we welcome them.

Chuphi: Right, I think the interesting point to make is that the private equity model despite well proven and it’s good that it’s five and five, but from an exit standpoint, sometimes that puts a limitation, it means you have to exit where you think they still value that could be had and actually company riches where it’s ready for its next value extraction phase, which means then on a secondary buyer can definitely take it for the next ride. It shouldn’t always be viewed that a secondary sell isn’t appropriate for a transaction.

Sandile Hlophe, EY: But what’s interesting right in the forum I think you said a third strategic and they probably choose to measure back, and only 25% IPO’s so it shows that there’s a lot more opportunity in Africa to a strategic plus the sort of buy back option is what you seeing a bit more and as PE enters more into the market you’re getting more the secondary gain beginning to pick up.

Oueslati: But again, the strategic of the trades sales, I mean more and more are coming from groups, African groups which is also very good news and we want to see, as a front manager targeting Africa, I think what we want to see also is make the African companies sustainable and make the African group, I mean even larger and being able to be regional at the continent level, that’s what we’re looking for.

Snow: Sandile, you’re firm, EY, recently did a big study about exits in Africa, do what Ziad and Ngalaah say about their own exits and the mix between IPO’s and trade sales, does that jive with what you learned on this study?

Hlophe: Yeah, there’s a very big correlation in our recent study we released in early April and technical study also did show that there’s definitely a lot more trade cells to strategic buyers and interestingly the biggest majority of that is what we called regional strategic. So this is the company’s expanding permanently out of South Africa for them to even know that even some East African companies are expanding further and North coming down. So strategic sort  buyers either regional or so global strategic tend to be the sort of number one form of exit, then closely followed by a lot of secondaries. IPO’s tend to be lower in the lesser in terms of tops of exits. So it’s showing an interesting growing story in terms of available exits and interesting, our study went over five years, from 2007 to 2012, which interesting as Ziad said, that’s when we had the biggest birth of exits, so of 118 exits in that five years space, we studied 62 of those to get our trends.

Snow: Ngalaah you mentioned South Africa as being a popular base of operations for the African, the pan African presence and does that attract a certain kind of a trade buyer and, Ziad, being more in North Africa do you tend to find maybe more Middle Eastern or Indian groups that want to kind of get into Africa from that direction?

Chuphi: I think South Africa is a very corporatized destination over 60% of other companies actually it’s a huge corporate kind of environment as opposed to where you have lots of businesses that are family owned. So that in itself creates a different dynamic in that. There’s a lot of this debate between core and non-core, which takes place at the corporate level and manager will decide this particular division is not for us, we like to look at those and see how we can grow them and when it’s time to exit they also become to somebody else. So while South Africa is being seen as a potential gateway from the south into sub-surrounding Africa, a lot of the cells is to actually South Africa strategics who themselves are looking to grow because suddenly an asset that we own has  become “to the operations”. So for example, quite recently we get numerous unsolicited approaches for companies in our portfolio where South African strategics have interest in, but clearly there’s a private equity manager will try to identify the appropriate time to really exit, because that’s the only chance you have to exploit maximum buying for investors. So the time to exit for us is quite crucial.

Snow: And then what’s the sort of strategic mix in North Africa?

Oueslati: We don’t see, unfortunately though people would think that the Middle East would be coming and looking at the North African markets, it’s not happening. We’re seeing more European and European I think will have much more interest into North Africa than the Middle East and I mean given also the history and the trade, I mean over 70% of the trade of North Africa is with Europe, it’s not with the Middle East, so that makes I think the difference. But also local groups, so what we’ve seen is mainly European and local either tradition groups or Moroccan group trying to buy out but also Egyptian groups, we’ve seen many Egyptian groups trying to have a foot into the western part of the North African region and we’re seeing this momentum and even after what we call the Arab spring, we’ve seen European and Arab in two things. I mean the Arab springs but also the crisis that Europe is living, we’re seeing still an appetite, I mean for larger companies from Europe I mean to buying companies in North Africa I mean the latest one we’ve done was an FMCG, I mean company that was sold to a major Swiss player and even despite all what happened, I mean we got a decent multiple and a decent price on the sale.

Snow: We’ve heard a lot about interest in Africa from Chinese groups, are Chinese buyers on the horizon? Is it important exit social private equity?

Ngalaah: Right, I think the Asian phenomenal is real phenomenal in to Africa if you look into the interest side where as investors look at investing the funds, for instance, we see more and more of that taking place and on the exit side a lot of the Chinese companies at this particular moment in time are more interested in the resources sector so putting money into kind of minds and stuff like that, we haven’t seen as much into the commercial sector, we’ve had the stories not quite the same from the Indian companies where you’re seeing more and more, especially in the Indian healthcare groups, Indian retail kind of companies looking for platforms in Africa that they could buy as a way for them growing.

Hlophe: Even in the west we see that train, so I think you find a lot of the, what do you call it, continental buyers they tend to focus on particular sectors so China’s more the resources and infrastructure, hungry type investors whereas India’s more your consumer based retail type businesses and interestingly the emergence of a lot of the regional strategics, it’s mainly because a lot of the time that you’re buying a business that wasn’t generally known to the market, where you’re doing a caveat of a division South African doesn’t know to the market, which is why you tend to find that there’s more buyers from the local market that suddenly say, hang on, this is a good company that makes strategic sense to my growth story, so  all of a sudden they can confirm they are by far  the largest and most return was derived from regional strategic buyouts in terms of the sort of exit mechanism.

Expert Q&A
Sandile Hlophe: EY &  AVCA’s African Exits Report

What are the key findings of the report on the African private equity and venture capital landscape?

Sandile Hlophe, EY:  Our latest study in exits, we called it ‘Harvesting Growth’ and really, to use the analogy in terms of for you to harvest any growth, you need to invest, put a bit of effort, fertilizer and growing and watering that seed. So some of the key insights that our study shows, was that all the exits in Africa happened to be to strategic buyers, more special regional strategics and then number two, the value-add of ESG is always very important because a lot of the companies are doing investment in environmental source a lot of governments issues particularly gave better returns in terms of those exits and some of those models were even better than what they had JAC index would deliver from a return over a five-year period.

What did the report discover regarding PE exit activity and regional performance in Africa?

Hlophe:  We looked at five year period between 2007 and 2012 because typically, we find most PE firms have an investment horizon of between 5-7 years and in the beginning, we thought that the exits would be centered in the mature market of South Africa but interestingly, there is a very good spread, so we came in with a total of 118 exits over a 5-year period that we identified and we studied 62 of those, and all 62 have got a very good spread between east, west and southern Africa so there’s been a good multitude in spread and different sizes from between north to 20 million U.S. between 20 to 50 and above.

How does your firm provide tailored services to private equity investors in Africa?

Hlophe:  So we work hard with private equity and primarily our services are broken down really into three categories. The first one would be around the pre-exits, so working with private equity companies in our system and identify potential good targets and assisting with having those initial discussions around looking at the business, what’s the best entry model and where do you source that exit from, that buy from? Number two, during the investment period, we do quite a lot in supporting the private equity firm in creating a lot of that value, in terms of assisting and deferring, typically they need to change their CFO and network of various service providers and also connecting our other businesses and most likely in the exit. Part of that work is in helping management in the PE firm prepare the company for an exit in terms of saying what is the exit strategy, who are they going to target and how do you actually dress up the bride and actually prepare it for the exit?

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