December 17, 2012
Interviewed by: David Snow
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Myths and Facts in African Private Equity

In Africa, growth is strong, debt is low, and populations are young. No wonder investor interest in Africa is accelerating. Still, misperceptions exist about the true nature of the African private equity opportunity. Our three experts help to dispel these myths and address the challenges of investing in a dynamic, growing region.

The first of Privcap’s three-part series on private equity in Africa features Hurley Doddy of Emerging Capital Partners, Fash Sawyerr of Actis, and Graham Stokoe of EY.

In Africa, growth is strong, debt is low, and populations are young. No wonder investor interest in Africa is accelerating. Still, misperceptions exist about the true nature of the African private equity opportunity. Our three experts help to dispel these myths and address the challenges of investing in a dynamic, growing region.

The first of Privcap’s three-part series on private equity in Africa features Hurley Doddy of Emerging Capital Partners, Fash Sawyerr of Actis, and Graham Stokoe of EY.

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. Thank you for joining us.

Today, we’re talking all about private equity in Africa. It’s a hot topic. There’s a lot of things we could discuss. But why don’t we start with a very high level, the continuing interest in private equity in Africa among institutional investors, and possibly some areas that institutional investors could continue to educate themselves about. Maybe starting with Fash. Are you surprised to see the continuing surge in interest in the private equity opportunity in Africa? And what is driving that?

Fash Sawyerr, Actis: I’m not surprised. I mean, I think in a way it’s long overdue. And I think there are very good reasons for the surge in interest in private equity capital into Africa. I mean, the continent is growing rapidly. It’s the second-fastest growing region in the world after Asia. It’s going around 6% per annum. There’s increasing political stability across most parts of the continent, not notwithstanding the odd flashpoint here and there. Overall, political stability is much, much better. And so therefore, I think investors are feeling more comfortable than they have in the past with investing their capital there.

And I think, frankly, there’s now a recognition that there are some very, very high quality businesses on the continent, and probably businesses that can be acquired for lower multiples than their equivalent businesses in India, China, and Brazil. So I think for those reasons, it does make sense that there’s more private equity capital into Africa. And the last point I’d make is with regard to private equity specifically. Because the capital markets in most of sub-Saharan Africa are not particularly mature, it’s hard to get access to great quality businesses other than through the private route. There’s not a lot of liquid securities that you could invest in. So I think for all of those reasons, private equity is seeing a bit of a boom in Africa, and it makes total sense to me.

Snow: Hurley, from your vantage point, what do you think is driving the continued interest and, in fact, the accelerating interest in the African private equity opportunity?

Hurley Doddy, Emerging Capital Partners: I would certainly agree with those points. I mean, really, a word growth is something that we have in Africa. It’s something that most of the world doesn’t have at the moment. And I think it’s not just private equity investors who are interested. I think it’s also something you see from a strategic place where you could expand. It’s one of the few untapped markets left.

And also the contrast with Europe, for instance, where there’s not much growth. There’s high debt, and there’s an aging population. Africa, when you look at it– high growth, a low debt, and a very young population, and this is something that means this is not necessarily a one-year trend or a couple quarters. I think these are advantages for the next decade for Africa.

Snow: Graham, you work with a lot of different private equity groups that come to Africa or are in Africa and are investing. What is driving their interest?

Graham Stokoe, EY: Well, I think it’s all of the above. I think others factors are increasingly urbanization, and, I guess infrastructure gradually improving. One of the key factors is that sort of consumer-driven growth, and I guess the other thing is the listed markets aren’t there. So I think, as mentioned before, private equity is the ideal source of capital for a lot of medium-sized businesses to sort of go the next stage in their life. Africa is a very entrepreneurial place, so there’s great entrepreneurs, and they need capital. And I guess private equity is the ideal source of driving that.

Snow: Well, interest in private equity has gone from one extreme to another. I mean, it probably– and I’m sure all of you have stories– has gone from “wouldn’t want to go there if you forced me” to “who do I give money to?” Well, maybe not that extreme. But are there still some recurring themes that you see by way of areas where institutional investors need to understand more? Perhaps myths that they have about the African opportunity, maybe starting with Fash.

Sawyerr: Yep, sure. I mean, I always come back to a few myths that I think it’s worth trying to dispel. I mean, myth number one is that Africa is universally risky. The truth of the matter is, there are 54 countries in Africa. The risk profile in each individual country is very different. And so I think thinking about Africa as sort of a monolithic block is passe, and you need a much more sophisticated country by country, opportunity by opportunity understanding to really get a handle on risk.

The second myth that you often hear is that no exits. It’s very hard to do private equity exits in Africa. And Actis’ experience is exactly the opposite. I mean, Actis has done 21 private equity exits since 1998. 

Snow: In Africa.

Sawyerr: In Africa. In our investments in Africa, we’ve done 21 exits. And so from our perspective, it’s actually a great time to be looking to exit private equity investments. Because as Hurley said, a lot of multinationals are looking to stake a claim in Africa. And very often, private equity can be that staging post from family businesses professionalizing and then exiting to multinational companies.

And then the third one, just to focus on this, is that the deals are all very small. And again, there are lots of small SME, medium-sized deals that can be done in Africa. But there are also larger deals. Again, just coming back to Actis, we’ve done seven transaction since 2008 of over $50 million equity investment. And that’s the sort of space in which we like to play, and we see lots of deal opportunity in that space. So on the deals are too small myth, again, I think the data argues to the contrary.

Snow: Do those myths sound familiar, Hurley? Are there other misperceptions that you find yourself clearing up frequently?

Doddy: Well, those are certainly some key ones in terms of the deal size and the exit that we struggle to explain to people. But fundamentally, a cellular network for 10 million people costs the same amount of money, if not more, in Africa than it would in Eastern Europe or in the US. A mine, a power plant– all these things are big ticket, they’re expensive, and they’re needed in Africa. And you can make good investments off of them.

I’d say similar on the exits too, I think ECP’s experience as well. We have over 20 exits. If you have a good company, someone’s gonna want to buy it. If it’s generating cash, someone’s gonna want to buy it. Probably a couple people are gonna want to buy it, and that’s, I think, pretty well demonstrated by now.

Another, I think, general misconception– Africa just gets more than its share bad of news. People don’t realize the extent. There is democracy, and there has been good reforms there.

We have 50 countries. That means every year there are two dozen elections. And if there are 23 good ones and one bad one, the one that’s on TV is gonna be the bad one. And that’s something else that I think we struggle with, is just sort of an imbalance in terms of the news and reporting. That’s only now slowly starting to right itself.

Snow: Right. I can’t remember the last time I saw an African peaceful transfer of power headline in a prominent newspaper. Graham, as you work with many different kinds of sponsors doing transactions across Africa, what are some interesting aspects of doing business there, of investing there, that you think people perhaps less familiar with the region would be interested to learn?

Stokoe: Well, I guess less familiar– there are advisers throughout the continent, across the big regions, the big geographies. So there is growing support. I think maybe another misperception I would’ve raised is private equity is not just new. Yes, it’s greatly increased in the last couple of years, but both my partners have been in private equity in Africa for over 10 years. So it hasn’t just suddenly appeared in the last two years, three years. There’s definitely a lot of increased interest, but it’s been around.

And I think there’s proof that it is a model that works in Africa. There are exits. There are returns. And yes, there are a whole lot of new partners, but there’s demonstration of it being done.

Snow: Setting aside things that maybe many international investors think of first when they think of Africa– maybe things like country risk that they have to get comfortable with– let’s talk about real challenges that face the private equity investment opportunity in Africa. One that I’ve heard a lot about is simply finding good management, finding talent to run some of these private-equity backed companies. Can you talk about how that challenge has evolved, and sort of what the landscape looks like for matching talented managers with private equity investments? Maybe starting with Fash.

Sawyerr: Yeah, Look, I think you’re right to point out that that remains a big challenge of doing private equity in Africa. I think the truth of the matter is that depending on the size of the company that you’re talking about, depending on the brand of the company, the profile of the company, there are great managers out there that you could attract into these businesses. Sometimes they’re in the African diaspora. They’re highly trained, very experienced folks from Africa who’ve lived overseas for a while and are looking for a great opportunity to come back. And actually, a private equity-backed situation could sometimes be very good for those people. But you have to be able to find them, right?

So part of the art of doing good private equity in Africa and building great companies is having the network and the systems to be able to sort of hoover up some of these great people. And it can be done. Every single investment that we’ve done in Africa in the last eight years, I would say we feel we’ve got a very, very good management team.

And I think one of the points I would like to make is people talk about world-class management. It’s a bit of a hackneyed phrase. Our view is it’s not about world-class management, it’s about fit for purpose management. You don’t necessarily need to get the most blue chip, Harvard MBA with a CV working for three or four multinational companies. That individual does not necessarily make for the best CEO of a mid-sized African company. Those technical skills are needed, but also the leadership, the ability to navigate the local context, deal with the day to day challenges that you have. It does require a bit of a unique individual.

And as I say, for us, it’s about having fit for purpose management. And by and large, we’ve found that we’ve been able to do that. But it still remains the thing that we probably spend the most time thinking about as we contemplate new investments. Or if we’re working with companies where we need to change management, again, we spend a huge amount of time agonizing over just how we’re gonna find the right caliber of management. So it is a challenge.

Snow: Hurley, how much time do you spend trying to source the right talent for the right deals?

Doddy: Well, it is one of the keys to the business, that’s for sure. And one of the challenges as well is that the managers, they’re in high-growth companies, which is always a challenge, but also often expanding across borders into the next country with different laws, customs, ways of doing things. And that’s something to, as Fash said, it’s not just a matter of getting somebody who’s done it in France and bringing them there. You do have to find the right person, and that does take a lot.

On the other hand, in many of these business models, Africa might be five years behind other emerging markets, and that’s a benefit for us. I mean, in our cellphone companies, we could bring in the people who built cellphone companies someplace else. ECP has an investment in IHS, which is a cellular tower company. We were able to bring in guys who did that business four or five years ago in India and bring them over to Africa. And so from that standpoint, we have the benefit of people who have operated in a similar environment and now can make that happen in Africa.

Snow: Are you finding that private equity is actually underwriting the blending of talents of people from different regions with different backgrounds into corporate situations that they might not have previously been in? Or are these managers who have already been in sort of multi-country situations, and that’s why you source them?

Doddy: Well, it certainly does depend on the situation there, but I think there is something there. I think in general, private equity is helping the regionalization of Africa. And many of the times, we’re looking to go to East Africa, to maybe start in Kenya but move it into Uganda and Tanzania, because you can get into a bigger footprint. You get a 70 million-sized market, 70 million people there. And that’s good for us. It’s good for the growth prospects of the business, good for selling the business. But it’s also, I think, helping the regions knit themselves together into more important economic units, and that’s something we’re seeing across the continent.

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 experience 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.

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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