August 28, 2013
Interviewed by: David Snow
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African Deal Dynamics: Unlocking Value Creation

Part 3 of Investing in Africa: GPs share real success stories from the region’s frontier markets. The anecdotes illustrate a PE firm’s ability to partner with entrepreneurs, provide transformative ideas to a company’s operations, and unlock hidden value in the African economy.

This Privcap series is informed by a recent EY and AVCA study on African PE value-creation available here.

Part 3 of Investing in Africa: GPs share real success stories from the region’s frontier markets. The anecdotes illustrate a PE firm’s ability to partner with entrepreneurs, provide transformative ideas to a company’s operations, and unlock hidden value in the African economy.

This Privcap series is informed by a recent EY and AVCA study on African PE value-creation available here.

African Deal Dynamics: Unlocking Value Creation

Investing in Africa

David Snow, Privcap:

It’s possible to be very abstract and talk about value creation but, you know, all of you have stories to tell so I’d love to hear some stories about, you know, private equity at work, creating value in Africa. Maybe starting with Ziad, you’re based in Tunis, a lot of your investment activity is in North Africa, not exclusively but a lot of it is in North Africa. Are there any recent deals that you’ve done that you think are good illustrations of the way that you invest and add value to portfolio companies?

Ziad Oueslati, TunInvest-AfricInvest Group:

So this is a company that we invested in in 2006/2007 in Algeria, it was just after all the big problem and the civil, quasi-civil war that Algeria had and we decided to go there and to invest actually, we’ve been in Algeria since the early 2000/2001 and we’re among the few players there, I mean again, this is a tough environment, country with a lot of potential, 35 million people, but one of the richest country in Africa, as you know, I mean they have over 160 billion in terms of reserves, so the government is pouring a lot of money into the economy. If you look at our portfolio there, it’s over 20 – 25 percent growth on a yearly basis the portfolio company, so it’s nice place to invest but you have to understand the whole environment. So we went there, we invested into this company which is a family owned company, that makes, when we invested this company was supposed to move from canned foods to milk basically and they got very nice study from the Swedish company Petro-Pack [?] about how profitable this business is going to be, etc., etc., etc. And the company started basically from zero to become today, the largest player in Algeria. We had a lot of challenges to that company: we had an earthquake, we had fights with between the family because this is a company that is owned by four brothers and the brothers became, also you have the son and the daughters, so a lot of fights. So our role was, at the same time, to double up the business, to put the right strategy to hire people, but also to manage those families and manage the fights between those families. Actually, the team that is following and my partner who is following this company spent a lot of time being like an arbitrator between those families. But things went well, I want to say, and we were discussing this between us earlier, I think luck is very important because the market was there, the demand was there but also we provided the right product at the right price, and the right time. So the company became the leader and the leading company and we managed to convince the family to go to the stock market. Before two weeks ago there were only three companies that are listed into the Algerian stock market, because we listed in the lock market, basically zero liquidity. We managed to convince them to do the first exit as a private company, a private company that went to the market and it was a success.  I want to mention that we’ve put a lot of effort into that, the fact also that we were a shareholder within that company convinced many potential investors to go into because they knew they were getting into a transparent company. That’s key. That is where there is the adequate governance and many small investors and individuals and actually I think over 70 percent of the investors are individuals and private individuals. So we managed to do over one time and I think it’s 1.1 at this stage because we started the selling process like two weeks ago. We’ve been very active in doing that so we went to all the roadshows. We tried to convince so many people to come on board and it’s there, so we’re gonna be exiting. It’s not our first exit, it’s going to be our third exit in Algeria. Again, it’s a tough market, you have to remember. It’s not Tunisia, it’s not Nigeria or Nairobi, Kenya. In general in terms of investing and divesting, there is lot of bureaucracy, etc., so we had to deal with that and actually played a very strong growing in convincing the authorities also to do the listing and go to the market. So it’s done, we sold, as I said, almost 70 percent of our holding.

Snow:

Any questions for Ziad? What is the name of the company?

Oueslati:

Reba.

Sandile Hlophe, EY:

I think that’s a good story, I think the important thing with any corporate growth, there will always been a bit of storming and fighting, but I always say to a lot of my clients, profit fixes everything. So if you can deliver profit, you can overcome a lot of the challenge because if the business is growing there’s something else to focus on.  So that’s a lot of the value that we see prior to bringing to the African market. How can you turn companies around? Companies that you can see the potential but they’re just not able to turn that potential into a profit. So it’s part of that maximizing, “how can we add that value?” that actually brings up a lot of difference and being hands on, so definitely hands on is something that definitely helps in a lot of these value creation activities.

Snow:

Ngalaah, I’d love to hear a story that you think illustrates sort of the Ethos approach to investing and adding value.

Ngalaah Chuphi, Ethos Private Equity:

I think I’ll take a theme from what Ziad has talked about, I want to speak about a company that I was particularly involved in. So it’s a company in the sporting goods retail. We bought this company from a management consortium plus financial buy and a family that owned it.

Snow:

And where was this?

Chuphi:

This is South Africa and he had two parts of the business in one instance it’s a big box formal retailer, so if you go in you have almost like 4 or 500 or close to 1,000 categories of sporting goods. If you want the fishing section, if you want the running section, and so on and so forth. And the key thesis when we went in is that South Africa was also changing from a demographic standpoint where you’re seeing more and more black people coming into the middle class and taking their kids to more up- markets school and formal schools and sporting in South Africa is done in schools rather than, you know, clubs as it might be in some different parts of the world. And with that, a lot of children, you can imagine, they grow every year, the parents would change their cricket bat and so on and so forth every years. So there was a lot of growth potential as a result of that and management wanted to grow the business through rolling out new stores and different notes, but the previous owners had been milking the business and just wanting the cash back to them as dividends to fund different parts of their own businesses. So management was quite happy for us to partner with them. We articulated the strategy together and, you know, in a session where we did involve some outside parties that can help us with, the three year strategy, and the strategy was in the first instance: let’s identify new towns that are now growing cause South Africa the middle class is growing and we don’t serve those areas and open up stores there. Let’s also look at the demographic shifts and see where people are now starting to move to and open up stores in those nodes as well. Then let’s look at existing stores that probably need repositioning. Close them down or move them to a different spot or they need to be refreshed from our an outlook and brand new perspective and make it look more kind of vibrant and current. And we embarked in doing all that. So when we went in there were 33 stores and we grew the store base from 33 to 50. What we also did was look at the product categories and expanded those, so now we introduce things like GPS instruments and other sporting goods. Soccer was becoming a very big kind of item in schools and we were also leading to the world cup in South Africa in 2010 where soccer was getting a lot of attention. So we managed to actually also sell a lot of soccer products through the outlets.

Now when it came to exit and clearly we had been there five years, now the decision was, you know, who do we sell to? And having control of that business where we own 60 percent management on the balance we could, you know, determine which way and clearly the first point of call for us is the strategic and we like to go to the local strategic to kind of see where we could engineer a deal. And quite a few of them were quite keen because they would fit quite neatly into their bouquet of retail outlets because this was a very unique kind of product. But we didn’t get the price that we wanted, so most of the interest that came through was at a price that we thought this is just such a beautiful lady, you don’t want to let her go at a suboptimal kind of pricing, you know. In Africa, when your daughter gets married you pay what we call a Bolla. So the more beautiful she is, the more educated she is, you pay more and, you know, the analogy, this is a profitable growing business so we wanted to be paid more. And then we opened it up to the international strategics, there was interest from some of the Europeans but clearly again, at the end of the day when we sold, the pricing that they were putting on the table, we were not excited about it as well. And then we realized and, you know, through investigation that the Johannesburg stock market had a very strong appetite for retail stocks, and Johannesburg stock is essentially a huge stock exchange, it’s 16th largest in the world. So it has capacity to absorb interesting investments. We were very successful in the IPO, we managed to sell 80 percent of our 60 percent at the IPO and we were in a well cup for the balance for six months and at the last day of the sixth month we managed to get somebody to come and say, I want to buy the whole thing at once and I’ll build a book at the price which was actually about 15 percent higher than the IPO price and was a very successful outcome for us.

Snow:

Quick follow up question, do you think the interest for the international investors was because they saw this company as a proxy for African consumer demand?

Chuphi:

Exactly spot on, because this you’re selling to, and you know, growing middle class where, you know, kids are going to formal schools, and parents more and more African parents, you know, want better schooling for their kids, so that is something now that the middle class is growing, you will see more and more of that phenomenon happening and the international investors know that the consumer story in Africa is a real story because the middle class kind of growth is only still in the beginning and it’s actually going to continue to grow.

Hlophe:

Actually that’s where you see quite a big interest in African based, it’s in that consumer growth story. So there’s a lot more populations or communities moving into what you call middle class and with a lot of urbanization, it means lot more consumerism so hence, while you tend to find a lot of the sectors that are exposed to the middle class, such as retail, financial services and insurance tend to be the fastest growing, which is that story that drives growth in that space.

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

What are the key findings of EY’s 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 just use the analogy in terms of for you to harvest any growth you need to invest you know put a bit of effort, fertilizer and growing and watering the seed. So some of the key insights that our study shows was that although the exit from Africa happened to be it was strategic bars are more special 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 multiples were even better than what they had JAC in this to deliver from a return over a five-year period.

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

Hlophe:

So 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 natural 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. There’s been a good multitude in spread and different sizes in between from north to 20 million U.S. between 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 so 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 and 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 product for creating a lot of the value in terms of assisting and deferring, typically they need to change their CFO and network of their service providers and also connecting our other businesses and most likely in the exit, and part of the work is 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 achieve to dress up the bride and actually prepare it for the exit?

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