When comparing African private equity to the public side, the data is compelling. Over 200 African private equity funds now target the continent, with increasingly sophisticated investment strategies, varying from generalist to sector or region specific funds. Many of these investors are making good and consistent returns. A recent study by the African Venture Capital and Private Equity Association and EY, examining the results of private equity exits between 2007 and 2013, found that private equity in Africa continues to outperform comparable listed equities indexes.
But despite Africa’s growing attraction, fund managers on the continent still need to make the case that on a risk-adjusted basis the returns in Africa make the market at least as attractive, if not more so, than other destinations.
As Africa enters the global private equity map, sophisticated investors are insisting on greater systemic standards for fund managers, to mitigate risk and maximize returns. Many investors now have more stringent requirements relating to track records and institutionalized back offices and reporting than they did in previous years, making it harder for first-time managers to raise capital but allowing seasoned managers with track records to tap into larger investor pools.
Over ECP’s fifteen years of operation, we have developed sophisticated systems for analyzing various categories of risk that apply to each opportunity and then devising ways to address them on deals that we select for an investment.
With minority stakes, we seek to create structures that are protective and flexible and to obtain key positive rights rather than the typical negative approval rights, which are essentially the right to veto, or block, certain actions. Examples of positive rights would include the right to terminate key management members including the CEO and CFO and appoint their replacements, the right to force the company to pursue certain paths to liquidity and the right to require sponsors to pledge their own shareholdings in support of the business. Example: We recently invested in Atlas Bottling Company, a large soft drinks bottler and distributor in Algeria, where the local landscape is relatively unknown to many investors and where we were limited by investment laws to a minority stake. Having been an investor in the country since 2002, we were very comfortable with the local partner and knew which operational aspects would be key to us in order to ensure alignment as we expand the business in the years ahead. We therefore focused on having management influence and an active role in board sub-committees relating to HR and finance.
In deals where we have control positions, we seek to address risk by establishing solid board structures and policies and by implementing diversified growth plans. With our team presence in both Anglophone and Francophone markets in Africa, we have made it a core part of our strategy to actively assist our companies to expand between these regions. We focus on building platform businesses, in banking, insurance and telecommunications technology for instance. In the last two years, Orabank, our West African regional banking group, has expanded into six new countries, IHS, our telecom tower business, has expanded from Nigeria to four additional countries and Nairobi Java House, our casual dining business, has nearly doubled its store count as it rolls out across East Africa.
We believe the fundamentals of Africa will present continued growth opportunities across a range of countries and sectors. The risk/return reward trade-off for investment can be significant if correctly managed by seasoned professionals. Africa is fundamentally is no different from other regions: risks exist, but investment experience can help to mitigate them.
Carolyn Campbell is partner and general counsel at Emerging Capital Partners, a pan-African private equity manager with seven offices across Africa.