December 27, 2013
Interviewed by: David Snow
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Exploring Exits in African Private Equity

New research explores the issues of value creation and exits in African PE. Michelle Essome of the AVCA and Mike Rogers of EY explain findings of a joint study.

New research explores the issues of value creation and exits in African PE. Michelle Essome of the AVCA and Mike Rogers of EY explain findings of a joint study.

Exploring Exits in African Private Equity

With Michelle Essome of AVCA and Mike Rogers of EY

David Snow, Privcap: We are joined today by Michelle Essome of African Private Equity and Venture Capital Association and Mike Rogers of EY. Welcome to Privcap today, thank you both for being here.

Both of you are at work on the second iteration of an important African value creation and exit study, I would like to hear more about that but maybe we could start to the background to why a study focused on exit across the African continent in particular was important. Can you, Michelle, paint a picture of what the need was when the first iteration of this study was first created more than a year ago?

Michelle Essome, AVCA: Sure, I think we were really keen to partner with EY, EY have a long track record of doing this in other regions so we felt like there was a template we could slot in and really deliver kind of inaugural piece of research that was innovative on a pan African basis. So that was the first thought process, and we were really glad they said yes and I think overarching, when we talk to LP’s, we are frequently asked, “Have there been any exits in Africa, is it possible?” So that’s what we wanted to answer in this collaboration.

Snow: And maybe, stupid question, but I take it there was not a lot of research or data about African exits given the relative maturity of the continent vis-a-vis other markets.

Essome: Yes, that’s something that Africa as a trade association – it is a gap we really need to fill. So there is a lot of research in South Africa, peer associations, AVCA has been doing a lot of research on the South African market for over a decade but there was a gap in terms of Pan African research. So having this piece, which has been widely quoted and it seems every time we talk to an institutional investor they have read it or they want to hear more about it, really helped and I will say in right sizing the perception of Africa private equity.

Snow: Mike, can you talk a bit about the work EY has done in other markets with regard to private equity value creation and exists and maybe how you are plugging it into the African opportunity?

Mike Rogers, EY: Thank you, David. The opportunity for us that we saw to get involved is really an evolution of the studies. We started in with a UK based EMEA study about eight years ago, graduated to the US market, and within the last couple of years based on investor interest by client interest we have taken on a study project in Latin America and also just embarked upon the African study as well. And I think the unique aspect of this as Michelle mentioned, there is investor driven demand here so we have been overwhelmed really with the amount of interest in this project and so it get’s us excited about the forthcoming years.

Snow: Can you talk a bit about what you have learned so far from the study, maybe some of the headline findings?

Essome: Sure, I mean I think there are many of them. I think we went in with a question we wanted to answer, and we got more than we expected. For example, we uncovered about 118 exits and again this is inaugural. I am sure there are many more that we will uncover in the years to come. It was surprised in that period 2007-2012 that there had been 118, I think there was good diversification across sectors, but it also shows consumer, the Africa consumer story is a lot of them. Another thing we talk about environmental social and governance risk, and we really uncovered that was additive to the returns. And just in general that the returns were really strong relative to the index that we used. Things that we know about doing business in Africa, the importance of relationships, networks, and really just the different elements fund managers were using to drive value were all kind of valuable takeaways.

Snow: Well EY and AVCA are now embarking on the second iteration of this study, what are your goals and how is it developing so far, what can you tell us?

Rogers: Well, I think a couple of the themes Michelle mentioned will be critical for us going forward, we talked about the consumer driven entry and exit values in terms of those discussions as well, but we also found out a lot about the financial side of the business, that there are many financial entries out there. We found out that people are going to go in with minority positions in many cases and so that adds complexity to the market place, but we also found that the returns were stronger than the public markets and there was a lot of opportunity there. So I think as we go into it this time around we are going to look to broaden the survey, we have the ability to ask some more unique and focused questions this time around and try and improve on the knowledge base we pull out of it. But I think some of the themes we saw there we expect to continue but I think just building our database, and this is what we found in other surveys as well that we have done in other parts of the world. As you build a database the information that you provide becomes more relevant and more pertinent for the local investors.

Essome: We just recently did a trip in East Africa and there was a lot of interest and hunger about the data but also wanting to see it sliced in different ways so that’s really interesting. Hopefully in this next iteration we will be able to carve out East Africa or southern Africa results so that the users can actually use this information to speak to their investors around relative performance or drive us to value creation.

Rogers: And I think, David, to add to that, what we are finding is the GPs around the world are really taking a strong interest in Africa so this is very timely from a market positioning standpoint. I think if you go back a few years, a lot of the GPs were looking at each other and internally considering what’s going to be our China strategy what’s our strategy for going into markets outside of the more developed Europe and America’s markets. And now you hear literally the GPs talking to us about how we need to develop an Africa strategy. We need to understand this so it has been as much our interest in developing the story as it has been the pull and demand from GPs around the world saying we need to understand this more. We need to get better at it and this is a vehicle that I think is very unique and proprietary, what we have done here, to be used around the world.

Snow: I take it Michelle you are also seeing that? The larger global private equity firms are increasingly focused on Africa?

Essome: Yeah, and I think it is fantastic from a signaling standpoint that we have arrived, that they will be considered influential for another class of investors, it helps to build out the eco system. And over and over again we hear that there is so much opportunity in Africa so please, bring us your money I will say, hopefully not too crudely. I think it is really good that people that have done successfully in developed markets and other emerging and frontier markets now think Africa is a viable destination.

Snow: And of course as the big guys come in, the established local guys have yet another exit route to sell their companies to, right?

Essome: Exactly, and we hope that the global buyouts that want to do the large deals are coming but also that there will be a continuation of smaller GPs focusing on the SME’s. So we have this full pipeline, and by the same token, the fund to fund market continues to deepen and a secondary market and there are more co-investing opportunities because it is just in line with the industry growing.

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