January 9, 2013
Interviewed by: David Snow
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Hot Spots in African Deal Flow

Business is booming in a number of key sectors in Africa; our three experts discuss private equity deal flow and investment theses in financial services, agribusiness and telecom.

“Hot Spots in African Deal Flow” is the third of a three-part series on private equity in Africa with Hurley Doddy, Managing Director, Founding Partner and Co-CEO of Emerging Capital Partners; Fash Sawyerr, Director, Africa for Actis; and Graham Stokoe, Associate Director, Transaction Advisory Services for EY.

Business is booming in a number of key sectors in Africa; our three experts discuss private equity deal flow and investment theses in financial services, agribusiness and telecom.

“Hot Spots in African Deal Flow” is the third of a three-part series on private equity in Africa with Hurley Doddy, Managing Director, Founding Partner and Co-CEO of Emerging Capital Partners; Fash Sawyerr, Director, Africa for Actis; and Graham Stokoe, Associate Director, Transaction Advisory Services for EY.

Hot Spots in African Deal Flow
David Snow, Privcap: Today we are joined by Graham Stokoe of Ernst & Young, Hurley Doddy of Emerging Capital Partners, and Fash Sawyerr of Actis. Gentlemen, welcome to Privcap today.
We are talking about private equity in Africa—hot topic—and I’d like to dig a bit deeper into the sectors that all of you find to be particularly interesting right now. Obviously there’s all kinds of sectors in Africa that are drawing private equity capital, consumer, et cetera. But I’m really interested in your thoughts on specific plays in specific sectors.
Why don’t we start with Hurley? Your firm has recently been looking very carefully at Telecom Media. Can you talk about some of the key drivers there that might spell opportunity for private equity?
Hurley Doddy, Emerging Capital Partners: Sure. First, there’s been already a lot of progress, a lot of money made in that area in Africa. When ECP started investing 12 years ago, there was something like 16 million phone lines in the continent for 900 million people. That’s already grown to 550 million lines.
So, huge progress in there. A lot of investment went in there. And now those cell phone companies are quite big, and probably too big for private equity investment. But there’s a whole new wave of investment that can be done in the telecom sector and, increasingly, in the media sector.
Now some of that is around shared infrastructure—fiber optic cables that are connecting the cities in rings. Also, cell phone towers is a very interesting deal area for us at the moment now. Cell phone tower model has been done in the developed countries. It’s been done in a number of developing countries. And we see some particular advantage of it in Africa.
One is just the size of the place. It means that there’s room for a lot of towers. As there’s more data coming in over these networks, so they need a denser network of towers.
But also, the problems with power in Africa mean that it’s a slightly different business. Typically in a developed market, you just plug the tower into the grid. In Africa, you probably have to have, in many places, two generators, a big tank of diesel, a guard around it. And for a telephone company, they could end up with a couple thousand generators and guards and trucks moving diesel around.
This isn’t really their core business. It makes even more sense for them to sell that, free up valuable capital, and have an expert who just runs these towers. We’ve had a chance to get in this business, and very good margins. When you hang the second antenna or your third antenna on those towers, it’s really a win-win situation for everybody.
Another area that’s quite interesting is both broadband and pay television. Now, while those cell phone penetration rates have really increased to over half the population, the number of people who have access to broadband, the number of people who have pay television, is still very, very small—1% and 2% in many of these countries. And we see this as an area that’s just bound to get bigger.
We can see how that relationship has been in other emerging markets, and fully expect a similar trend line in Africa. So we have invested in companies that do that business to bring broadband to people. And just like people everywhere else, it’s in high demand. If you can build it, people are going to want that service.
Snow: Any questions, gentlemen, for Hurley about his views on the telecom and media space?
Fash Sawyerr, Actis: Just in the towers business, is it always the sort of outsourced model whereby these are always kind of owned by the telecom companies and then the deal is to carve them out? Or is it… Or once that’s done, is it actually a case of putting in the infrastructure and then kind of selling that additional infrastructure and the services back into the telecom companies? How does it work?
Doddy: Typically, you might start by buying their portfolio of towers, and then after that, it’s very much a build-to-suit business. There’s so much demand, there’s very little actually speculative building. You would typically go out, get the order, and they would say, “Look, we need 300 towers, and this is where they’re going to be.” You would look at their list and then see which of these are interesting, that you think you can get a second operator on. So that’s generally the way it works, and there’s certainly a lot of run room for that business there, as they’re all looking to expand.
Sawyerr: That makes a lot of sense.
Snow: Fash, you’re from Actis; invests across the world in emerging markets and across many different sectors. You have been spending a lot of time recently thinking about financial services in Africa. Can you talk about what you see as being some particularly interesting opportunities in financial services?


Sawyerr:
Yes, thank you. Financial services in Africa is an incredibly exciting, exciting place to be. When you look at the statistics, only 10% of Africans are in the formal banking sector and linked to the massive growth that we’re seeing in consumer disposable income. What’s going to come along with that is the need for people, individuals, to have financial services—to save, to be able to borrow money, to be able to deal with more sophisticated financial products. So that 10% of Africa’s 1 billion population, we think, is going to grow rapidly in terms of the banked part of the population.
So the financial services arena overall is a really attractive growth space in Africa. And there are a number of different ways in which you could play that financial service. Obviously you could invest in banks.
Actis has quite a long track record of investing in banks. We’ve acquired and successfully exited banks in Rwanda, in Uganda. We’ve got a bank investment in Egypt right now, in Nigeria. So that’s a very attractive place to invest in.
But the most recent focus of ours has been in the electronic-payments space. Electronic payments—what I’m talking about here is the services for banks whereby companies do the issuing of debit or credit cards—which, much like the telecom situation that Hurley talked about, a lot of banks don’t want to have to have all the infrastructure in-house to issue debit or credit cards or, indeed, to run some of those electronic signal movements that kind of monitor the flows of this money. So that’s a really interesting space.
We’ve recently… In 2010, we did an investment, and we’re building a platform company called Emerging Markets Payments Holdings. And the idea is to create a pan-African champion in the electronic-payment space. So we’ve done three acquisitions under this sort of buy-and-build banner, the first of which is a debit and credit card issuing company. And that business is headquartered in Egypt, but it actually now serves 120 of the 300 largest banks in Africa.
The second part of the of the platform is what we call point of sale. So the business that we have actually runs the kind of point-of-sale terminals and switching, where people go into stores and use their debit or credit cards to actually buy stuff. All the backbone is run by this company. And the beauty of that model, of course, is you make revenue every single time somebody does a transaction.
So you’ve got relatively fixed-cost infrastructure. That has huge leverage, just with the growth of the volume of transactions. Now, clearly the volume of transactions on the continent with credit cards is low. But it’s growing very, very rapidly.
In fact, electronic payments in Africa is growing at 30% per annum, which is much faster than it is anywhere else in the world. And what we’re trying to do is build a high-quality platform that covers all of Africa, that creates the perfect kind of one-stop-shop acquisition opportunity for one of the big global players, when they do come to look at Africa as the last frontier for growth.
So that’s a very exciting development. And we’ve got very high aspirations for this business. We’re two years into the journey, and we think it’s going to be a very, very exciting one for us.
Snow: Any questions for Fash about his financial-services play?
Doddy: I wanted to ask about kind of the regulatory nature. You know, you had regulators who were regulating some pretty slow-moving banks in their own country, and all of a sudden, you’re kind of dragging them into the modern age with these networks that are moving money and have that possibility. How are they reacting, and what do they make of all this?

 

Sawyerr: Yes, clearly the regulators have a big role to play when it comes to the financial-services sector. And so we clearly have to work within the regulatory framework in each of the countries in which we operate. But the truth of the matter is, the services that we are offering are services that banks themselves are desperate to roll out themselves. So whether you’re talking about Nigeria or Ghana or Egypt, these banks, as part of their own core business models, are desperate to see the rapid growth of debit cards, credit cards, other financial-services products.
So in many ways, the regulatory framework is already in place. And then it’s a case of these banks really having the confidence, and the regulator having the confidence, that a third party like us are a trustworthy counterparty to be able to kind of manage the infrastructure of these payments. And we’ve been able to do this successfully, as I say, in all the markets in which we operate in Africa today.
But it’s something that… We have to stay close to the regulator. For example, with the EMPH, each year we organize a big Africa-wide conference on electronics payments. It is the marquee event for electronic payments in Africa.
And we invite all the regulators along to that, so we stay close to them. We want them to know what we’re doing. And so far, we haven’t really had any major problems with our business. But you know, it is Africa. You can’t get complacent about these things. And so staying close to the regulation is core to the success of our business.
Snow: Graham, now you are active in advising on deals across many different sectors across Africa. One sector that is very big and very interesting is the agricultural sector and all things agribusiness. Can you talk about the kinds of private equity theses that you’re seeing in that sector?
Graham Stokoe, Ernst & Young: Sure. I guess, first of a all, the agriculture has just grown by the need for food across the population of Africa, but also across the population of the world, and, you know, of population’s increasing more than food production, and the whole climate changes, and all of that greatly being quite dynamic, and not getting enough food. So Africa has more arable land than anywhere else.
I guess we’re seeing changes. I guess historically DFIs have invested in agriculture for decades in Africa. And what we’re seeing is a couple of guys who’ve left DFIs, who had been involved in those investments, finding ways to invest not just in, I guess, agri-processing and the more downstream of agriculture, which private equity has invested in always.
Actually investing in pure agriculture, whether it be poultry… We’ve seen eggs. Trying to think. Palm oil. I guess, further down, commodities businesses also very interesting, seeing a lot of that potentially happening.
Africa, as there have been more private equity players joining the field, what is your special angle? What is your skill set? How are you going to differentiate yourself that you’re going to be the capital source of choice?
It’s not just about the capital. It’s about the value-add. It’s really about how you’re going to grow that business more than anyone else. And that’s one area where there are a couple of funds now that have added that sort of more specialized nature and being able to invest in agriculture as such. But definitely, I guess, agri-processing and going through the whole diversification is a key area.
Doddy: Now ECP’s had success investing in rubber and sugar. And in both instances, it was an existing operation, and we’re putting money into expand it. Is that what you’re seeing? Or are people now even more willing to… Literal greenfield investments?
Stokoe: Yes. What we’ve seen is existing operations and putting in more capital to expand that.
Doddy: Because then you know that the infrastructure is already there and working.
Stokoe: Yes. And the other key thing that these B funds have to have—and you guys probably have had it—is the experience, and a lot of potentially maybe more operational partners, guys who’ve been experienced in agriculture. And then also the downstream of that: the ex-Unilevers, the ex-Nestles, the ex-Target Brands, the guys that are the roots of the market and really connecting the downstream, getting the agricultural products and then targeting the huge consumer markets.
Doddy: Also, would you say that governments are more interested because of its ability to develop the rural areas and give the people jobs? Or are they more worried about the foreigners who are coming in and “They’re buying up our country”? Which of those reactions would you say is more prevalent these days?
Stokoe: I would hope that it’s more interest about the employment growth, about the whole economic growth, and they can see the bigger picture, rather than just foreigners coming in. But I think that’s a key play, and you’re going to have to have local partners in these sort of transactions. I see local partners as a key element, and the management team having local experience dealing with it. So it does bring with it increased risk in that sort of land, and playing with local communities and all of that.
Well, I hope that as demand for African goods and services grows in Africa and globally, I can have all of you back to talk about the private equity opportunity in Africa. But for now, I think we can pause. So, gentlemen, thank you so much for joining Privcap today.
Expert Q&A With Graham Stokoe, Associate Director, Transaction Advisory Services, Ernst & Young
Privcap: In addition to the audit and other services you provide private equity clients in Africa, are you also helping them source investments?

 

Stokoe: The key thing we’re focusing on, particularly in the last two years or so, is really being more proactive in the origination of opportunities. I think one of the key things for private equity to be successful is really finding these businesses. We may not have transaction specialists, but we’ve got experienced audit partners, tax partners, that are in these businesses, that are serving other good, growing businesses and really leveraging our network to be able to potentially source investments.
Privcap: Please talk about the Ernst & Young network across Africa.
Stokoe: We’ve got offices in 34 countries across Africa. In the odd countries where we don’t have offices, I guess we would serve that from a neighboring country. However, in all the main centers that we’re serving, that’s where private equity is, from a transactions perspective.
We operate on a sort of hub-and-spoke model. So we have a fairly sizable team in Johannesburg, a growing sizable team in Nigeria in Lagos, and then in Kenya. But then also the spoke teams—a very, very strong team in Ethiopia. And then also, in the funding and structuring side, we’ve got a very strong team in Mauritius—and Mauritius is often key, not in the origination, but really in the support element from a private equity perspective. And we’ve got a really strong team there.

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