Investing in Africa, for many private equity investors, would appear to be a very risky proposition. Historically, Africa has been a continent better known for poverty, volatile governments, arcane regulations and a distinct lack of infrastructure ? hardly the ideal playing field for returns-minded investors.
But Thomas Gibian, chief executive officer of Washington, DC-based private equity group Emerging Capital Partners, has a unique perspective on the challenges of investing in African countries. Working through its US office as well as the firm's four offices in Africa, ECP has raised five Africa-focused private equity funds since its inception in 2000.
To date, the firm has raised north of $1 billion (€745 million) for investment in African-based companies in a wide range of sectors, particularly in telecommunications and financial services. The firm's recently-closed fifth fund, EMP Africa Fund II, is the largest pan-African fund ever, with commitments of $523 million. More than half the fund is already invested, says the firm.
Gibian feels that the old reputation of Africa as a risk-laden investment target has been outmoded by recent developments across the continent, especially in the areas of regulatory reform in its banking and insurance sectors.
?The trend line for governance, the trend line for transparency, and, really, the trend line for deregulation is positive almost everywhere,? he says. ?Telecom, I think, really represented an industry that every government paid attention to, one that no government could ignore. It [The deregulation] was so successful ? it's created so many new companies, it's created so much wealth, it tapped into such unmet demand and such an unmet need that it's washed over now into other areas.?
One change that Gibian has noted since ECP's beginnings is the enthusiasm that Africa now has for foreign investment. ?When you visit African countries, virtually every country has a welcome mat out for investment,? he says. ?In the past, while that interest in attracting foreign investment might have been on the country's terms, I think that the level of sophistication, and the level of reality, has shifted such that countries recognize that investment can flow anywhere in the world, and that in order to be competitive and to attract investment, they need to facilitate what foreign investors require ? whether that fixing the tax regime, whether that's improving the banking system, whether it's lowering tariffs or improving the flow of goods through international waters or through customs. In general, I think the trend line is positive.?
Banking on Africa
Indeed, recent reforms in the African banking and insurance industries have made the sectors fertile fields for investments for ECP. In June, the firm announced a 3x exit on its investment in Togo-based Ecobank Transnational, one of the largest regional banking groups in sub-Saharan Africa. Ecobank has operations in 18 different countries, including Nigeria and Ghana. ECP received proceeds of $35.9 million on its initial investment of $11.8 million in April 2006.
?There's a lot of room to grow in banks in Africa. They are very under-banked populations in general, with very low banking penetration,? says ECP's chief operating officer, Hurley Doddy. ?And these guys are following that wave. We got in before it was listed; it was subsequently triple-listed in Nigeria, Ghana and C^te d'Ivoire, and the stock has rallied a lot. It's up to three times what it [Eco-bank] was when we bought that stock, and that's been a real good story: they're really getting the size and the scale through their regional strategy. It's a really important banking name in Africa, and it's traditionally an African bank ? it's African-owned, it has an African CEO.?
Another of ECP's investments in financial services is Continental Reinsurance. Continental, which is headquartered in Nigeria, has a pan-African focus and business plan. ?This is the largest reinsurer in Nigeria, and I believe the fifth-largest in Africa. We have a controlling interest in the company,? says Doddy. ?Insurance, even more so than banking, has a lot of room to grow in Africa, and in Nigeria, in particular, at the moment.?
Doddy says that banking reform in Africa has made such investment possible. ?There has been a very successful banking reform,? he says. ?The central bank in Nigeria increased the capital requirements rather dramatically in the banking sector, and there's been a real consolidation of the banks. There once were over 90 banks there ? that's come down to 25 banks. So you have much bigger banks with a much bigger capital base. They had to raise money, bring in money, merge, really raise their game up, and become significant in their size. They had to reduce the number of banks to increase the abilities of the regulators to regulate the banking sector.?
Also, Gibian points out, appropriately priced debt and financing is more available across many industries that it had been before. ?In 2000, there might have been only one or two countries in Africa that actually had sovereign debt ratings,? he says. ?Now you have credit rating agencies in South Africa, you have credit rating agencies in Nigeria. You have probably more than a dozen countries that have sovereign ratings. You have banks and insurance companies within these countries which have ratings. You have larger local stock exchanges, more liquidity, more research analysts, more infrastructure associated with making investments.?
Based on the success of banking reform, ECP saw something similar in the insurance sector. ?One of the winners, one of the guys that met the new bar, was our company, Continental Reinsurance, and we're excited about the prospect,? Doddy says. ?That one we also just listed [in May 2007]. I was just down in Lagos for the listing of Continental Re on the Lagos Stock Exchange, and I'm happy to say it came in at [NGN]126 and is now over 180. It's doing quite well for us.?
That said, ECP hasn't only focused on financial services: it has also been investing in more traditional, bricks-and-mortar infrastructure, which is a real growth area in Africa. One such investment is in Spencon International, an East African civil engineering and construction company that specializes in water supply and sewerage systems, and civil building projects, including roads, bridges and buildings, as well as power and transmission lines. Spencon has spearheaded 200 major projects in the last decade for clients such as the World Bank, European Investment Bank and the African Development Bank.
?That means they've got customers who regularly pay in dollars, and they have a lot of work going on,? says Hurley, on Spencon. ?This is an indigenous firm, run by some guys of Indian descent who've been in the business a long time. It's a good growth business. The economies are growing there, and they have a steady stream of business. Also, there's a quite a bit of business rebuilding in southern Sudan: after the peace settlement in the south, there's a lot of rebuilding to do. The donor agencies are going to be doing a lot of the rebuilding, Spencon's the kind of company that can deploy in the southern Sudan and get the roads and the power working and the things that the people need in southern Sudan.?
ECP also has a hand in other African industries, including mining. One of its newest fund's investments is in the Congolese copper mining company Anvil Mining, which has interests in the Democratic Republic of the Congo, as well as in Zambia and Vietnam. ?They really put down a good plan, and they've really followed that plan,? says Doddy. ?We really see them building that, driven by continual strong demand for copper, and high copper prices driven in part by China. We see that continuing to grow, and we think demand be able to grow that into an interesting target for somebody else.?
Diversification is a key part of ECP's investment strategy. ?We do a variety of industries in a variety of countries,? Doddy says. ?We've got investments in 30 different countries. That's partly for diversification and risk reduction, and partly because we see a variety of opportunities throughout the continent.?
Since 2000, says Gibian, many of the African economies have been growing at four to six percent per year. That kind of growth is beginning to spark more interest from foreign investors worldwide. ?They're growing that way this year, they're going to grow that way next year, and maybe the year after,? says Gibian. ?We're seven, eight years into our program here, and that kind of aggregate growth in economic activity becomes very visible after a certain point. It's almost a tipping point, and you can see it in so many ways. For example, just try to get a business class ticket from London to Lagos… there's just a lot of interest and a lot of activity.?
It helps that the African markets are somewhat insulated from the rest of the world's. ?When the Shanghai market dropped nine percent, it didn't shake up the traders in the Ghanaian Stock Exchange necessarily so much,? Gibian points out. ?There's probably more interest in [Africa] than there has been in quite a while, but it's nothing like Latin America, where hot money flowed in, and therefore could flow out if people aren't satisfied. The African story is a dual story of improved governance and regulation and debt reduction. There is also a strong demand for commodities in a place that has world-class deposits and resources. So there is some correlation through commodity prices, no doubt, but there's not a lot of the hot-money flows.?
What each of ECP's investments have in common, Gibian says, is that they illustrate really what ECP's business thesis is, which is that it is a growth investor in Africa. ?Of those companies, they had all been in existence for a number of years before we made our investment. They were all profitable before we made our investment. They all had management teams experienced in Africa, several of them indigenous teams, some with expatriate management ? particularly in mining ? but very experienced in Africa.?
And ECP was able to, in each case, zero in on companies that it considered to be part of the ?new entrepreneurial spirit within Africa, of doing business away from government dispensations or links to the current president or something like that,? Gibian continues. ?These are all companies that are operating in a sector where meritocracy is really all that counts. In a retail business like a commercial bank, you have people who can vote with their feet every day, whether they want to leave their money with the bank, or take it out, or put more in.?
Undoubtedly, ECP will continue to put more money into Africa. The firm's success may inspire other globally-minded private equity to do the same.
Emerging Capital Partners
|Johannesburg, South Africa|
|Abidjan, Cote d'Ivoire|
|Thomas Gibian, chief executive offcer|
|Hurley Doddy, chief operating offcer|
|Vincent Le Guennou, executive vice president|
|Carolyn Campbell, general counsel|
|Navaid Burney, director|
|Bryce Fort, director|
|Michael Jansa, director|
|Ferdinand Ngon, director|
|Edward V.K. Jaycox, special advisor|
|Agromed (dairy processing)|
|All Africa Airways (transportation)|
|Anvil Mining (metals)|
|Bank of Africa Group (commercial banking)|
|Batim Africa (real estate)|
|Celtel Gabon (telecommunications)|
|Charaf (fertilizer distribution)|
|Continental Reinsurance (reinsurance)|
|Kosan Crisplant (oil and gas equipment)|
|Notore Chemical Industries (fertilizer production)|
|Semme Mineral Water (food and beverage)|
|SEP Pharma (pharmaceuticals)|
|Somdiaa (sugar production)|
|Spencon (engineering and construction)|
|Starcomms Nigeria (telecommunications)|
|Veolia Water Maroc (water and electricity distribution)|