Q&A: Private equity investment in Africa


Financier Worldwide Magazine

September 2016 Issue

September 2016 Issue

Ponmile Osibo at AVCA moderates a discussion on private equity investment in Africa between Hasnen Varawalla at Barclays Africa, Nick Tims at Investec Asset Management, and Lydia Shadrach-Razzino at ENSafrica.

Osibo: In broad terms, how would you characterise recent private equity activity across Africa?

Tims: A significant amount of money has been raised by African PE funds in the last 18 months, and there is a lot of dry powder, especially for larger deal sizes above $100m. Few deals have happened this year. This space was already crowded, with South African and other corporates in many cases joining the fray. Expect more PE to PE deals, and the continued creation of build vs. buy platform strategies in this context of relative deal scarcity. This scarcity also has implications for pricing and it is clear to us that value resides more generally in the mid-market space. Most African fundraising to be done this year is for regional, sector and credit funds and it will be interesting to see when the market opens up again for any larger generalist funds that are looking to launch follow-ons. Keep an eye on election risk, as there will have been 17 this year, including in some important PE investor countries. Furthermore, expect growing interest in the sub-Saharan credit and real estate spaces.

Shadrach-Razzino: ‘Exciting’ is the first word that comes to mind when considering current private equity activity across Africa. There has been a recent surge in African fundraising activities, which highlights the interest in Africa. There are different drivers within each African region, which creates many opportunities for PE, and ultimately determines investment trends. At the moment, the common trend across Africa is very consumer focused – for example, food, beverages and fast-moving consumer goods. This is not surprising given the rapidly expanding nature of African markets. Funds in Southern Africa are usually larger given that the PE industry in this region is more developed.

Varawalla: The main themes in private equity investment in Africa have not changed dramatically in the past year. Investors are still looking for exposure to growth and there continues to be three main sectors that are being considered, with the overarching theme being that investors continue to look for transactions with exposure to consumers. The first theme is financial inclusion, which touches on various aspects that involve, for example, the direct participation in the equity of banks as well as the insurance industry, which is underpenetrated in Africa. Second is the financial technology sector, as this is an easy way to ultimately get to consumers and to include them financially. And third, we are seeing interest in the technology and telecoms world and this includes the e-retailing sector, or e-tailing as it is known. The core traditional sectors remain an area of interest such as industrial companies with good cash flows.

‘Exciting’ is the first word that comes to mind when considering current private equity activity across Africa.
— Lydia Shadrach-Razzino

Osibo: What factors are driving PE investment in the region? Which countries and sectors seem to be of particular interest to foreign firms?

Varawalla: Given that the public equity markets in Africa are relatively nascent, when it comes to companies looking for equity capital for growth and other reasons, people continue to turn to the private equity world. This is why private equity is an important source of risk capital here. From the supply side, there is a lot of money in the world looking for growth and one of the few regions where we are still seeing strong growth, although it has been muted in recent times, is in Africa. The growth story in Africa remains intact and that is what lures private equity funds. Right now, East Africa is seeing a fair amount of activity because the macro environment is one of the brighter ones in Africa, so this region is showing stronger growth characteristics. Despite the headwinds, we continue to see activity in Nigeria and West Africa. And, of course, given the size and the development here, South Africa remains as active as ever. In terms of popular sectors, these include the consumer sector, financial services, and telecoms and technology.

Tims: Currency and commodity price moves have obviously been extreme and have had an impact on the short to medium term invest-ability of certain countries, at least in some of the more commodity export-dependent ones. US dollar liquidity has, in some countries, been a particularly difficult issue, while parallel unofficial exchange rates have led to dealmaking going on hold until we see official exchange rate stability. But Africa, despite the above, remains one of the highest economic growth destinations in the world and a number of countries have been, to varying extents, immune to the above difficulties and are still displaying high economic growth. Typically, but not entirely, these are net importers of commodities. Countries such as Morocco, Egypt, Kenya, Cote d’Ivoire, Ethiopia, Rwanda and Tanzania remain particularly attractive, and the holy grail for private equity investors is finding consumer-related plays in these countries – in sectors such as logistics, food and non-food retail, FMCG, healthcare, education, and so on.

Shadrach-Razzino: Fast-growing economies are the major drawcard for investment in Africa. Developing regimes and regulations also provide comfort to investors, who may have been somewhat fearful of the unknown ‘deep, dark Africa’ not so long ago. Countries that seem to be of particular interest to foreign firms include South Africa, Botswana, Kenya, Nigeria and Tanzania, while healthcare, telecoms, food, logistics and fast-moving consumer goods are key sectors.

Osibo: Have any high-profile private equity investments caught your attention in recent months? What trends have you identified from these investments and what impact have they had on local markets?

Shadrach-Razzino: Kleoss Capital, a newly created 100 percent black-owned private equity firm in South Africa acquired a controlling stake in packaging firm TrenStar, following an exit by PE firm Vantage Capital. This was the first transaction concluded by Kleoss Capital. There was Actis’ acquisition of a minority stake in Food Lover’s Market, estimated to be the largest independent food retail group in Africa. This was a standout deal given current trends and the predicted growth of this sub-sector. Also, 1k1V acquired a stake in Beefmaster, a South African cattle farming business. The Actis and 1K1V deals reflect the trend in the food industry. The 1K1V deal is interesting as it involves a traditional South African cattle farming family partnering with an American PE firm to farm cattle and sell meat. Performance of the asset post-acquisition will be interesting to watch to see whether the parties manage to capitalise on the synergies.

Varawalla: Earlier this year a high-profile group of investors, including Goldman Sachs, MTN and Rocket Internet, invested €225m in the Africa Internet Group, valuing the company at over €1bn. This is very exciting as it is among a small number of African ‘unicorns’ – private companies with a $1bn plus valuation. Also, it is about investing in new business models and internet platforms to tap the continent’s growth. We hope that we will see many more such deals in the rapidly growing African tech sector.

Due diligence has always been important, and while the availability of information is sometimes sketchy, you have to be extra careful with the verification of information, as well as the analyses that you conduct as an investor.
— Hasnen Varawalla

Osibo: How would you describe regulatory frameworks in Africa as they apply to the private equity industry? How do they influence investment decisions, as well as ongoing fund management, tax decisions, exits and returns?

Varawalla: The issue is not that the regulatory environment is averse to private equity investments in any country. There is nothing preventing private equity activity from taking place in Africa. What many people are struggling with today is that they have raised their capital with overseas investors and these funds are typically denominated in US dollars. Due to the depreciation of local currencies, their returns are suffering. The depreciation is having a negative impact on returns, investment decisions and fund management.

Shadrach-Razzino: The regulatory framework in South Africa is well established and not difficult to navigate. However, PE deals are unchartered territory in many African jurisdictions and the lack of regulation is often seen as one of the biggest hurdles when it comes to investing in the African continent. Doing deals in Africa is more conducive to the aggressive investor who is willing to wait for returns. If investors are in hurry and cannot take a long-term view, Africa may not be the right place for them right now. While an IPO, as an exit strategy, may be fairly easy to implement in South Africa, this is not the case in most other African jurisdictions. This could be seen as limiting for some investors.

Osibo: What advice can you offer to PE firms when it comes to structuring and negotiating a private equity deal in the region? What due diligence and risk management considerations should be part of the process?

Shadrach-Razzino: As a first step, I would advise PE firms to get the right advisory teams in place and ensure that advisers have appropriate experience in the region. Advisers sitting in Europe and the United States are not efficient when doing deals in Africa – you need strong African advisers who are on the ground and can provide relevant advice. Diligence is key to doing deals in Africa, and having the right advisers who know what to look for and what questions to ask makes the process efficient. Never underestimate the counterparties – in most instances they probably understand the risks better than the investor coming in. PE firms should also ensure that the management team is solid and appropriately incentivised, but not perversely incentivised. Other risks to watch out for in Africa are a poor legal framework or inadequate enforcement of law, undue interference by governments, political risks, regulatory and tax risks, a lack of viable opportunities, weak supply chains, a lack of proper governance, incidents of corruption, and the limited number of established fund managers.

Varawalla: An important thing for people to think of is how to mitigate the currency risk. Due diligence has always been important, and while the availability of information is sometimes sketchy, you have to be extra careful with the verification of information, as well as the analyses that you conduct as an investor. You must also try to structure your transactions so that the vendors – the people selling their assets to private equity firms – see part of the consideration coming through in a deferred manner so that if the business performs, they are then able to see an improvement in whatever sale proceeds were given to them.

The need to work very closely with management is critical, and identifying strong incumbent management is the first stage of any transaction.
— Nick Tims

Osibo: In your experience, how are PE firms building value within their portfolio companies and generating expected returns? What kinds of exit routes are proving popular in Africa?

Varawalla: Private equity firms in Africa are getting the returns they seek. With regard to exits, traditionally we have seen that there are three common exits. The first is an initial public offering and this is sometimes difficult in Africa because some of the public markets are still in the early stages of development. Second is being able to sell your assets to other players in the industry. Third is when private equity firms sell their assets to other private equity firms.

Tims: There are many ways in which PE firms do this, and bear in mind that the asset class in Africa is one that does not involve much leverage – LBOs are not a feature and the emphasis is on growth capital. The need to work very closely with management is critical, and identifying strong incumbent management is the first stage of any transaction. In many cases, PE firms can make highly valuable additions to a portfolio company’s management, perhaps, for example, bringing in a CFO or improving the finance function. Other improvements can be made by redesigning incentive structures, enhancing accountability, helping with succession planning and exploring exits, for example.                                                                                                                 

Shadrach-Razzino: PE firms are building value by working closely with strong management teams and adding value with sophisticated investment strategies. They are further seeking opportunities for growth and expansion – through acquisitions and otherwise – of the business, while the management teams ‘get on with the knitting’. PE firms also bring with them some elite processes to streamline internal functions, making the businesses efficient and profitable. Proper corporate governance comes with PE firms and adds immense value to portfolio companies, especially in Africa. Clear reporting lines and structures make the flow of information to the right people easier. Problems are then anticipated by those with experience and solutions are formulated in time. The most popular exit routes are managed sales processes and IPOs. We have, however, seen many more sales processes than IPO exits in recent months.

Osibo: Looking ahead, what are your expectations for future opportunities for PE investment in Africa? Are there any particular developments you expect to see?

Shadrach-Razzino: I expect that there will be more and more opportunity for PE investment in Africa over the coming years. Africa is one of the fastest growing investment regions in the world. As the African markets mature and interesting opportunities arise, more PE investors will be attracted, as so many have been to date. South Africa, in particular, has been a leader in the field of PE on the African continent. The ease of concluding PE deals in Africa is becoming more evident as barriers to entry are gradually being broken down and as African PE managers expand their track records. PE will continue to offer unique and stable investment opportunities into Africa, with African PE funds anticipating strong returns. Exits, too, will become easier as Africa becomes more of a mainstream destination for the bigger PE managers that can take over positions from smaller specialist funds and as capital markets develop and facilitate IPO exits.

Varawalla: We continue to see big international funds looking for investment opportunities in Africa. We are also seeing activity from regionally focused funds. Africa does face headwinds in the immediate term, but the underlying growth trajectory remains, and the continent does remain an attractive destination for investors, particularly against a backdrop of low growth in the developed world.


Ponmile Osibo is the manager of research & training at the African Private Equity and Venture Capital Association (AVCA), where he coordinates African private equity data collection, analysis and manages production of AVCA’s research and market intelligence products. His role also involves developing and facilitating training programs for fund managers and African institutional investors. He can be contacted on +44 (0)20 3632 0408 or by email: ponmile.osibo@avca-africa.org.

Hasnen Varawalla is the Head of Corporate Finance at Barclays Africa, based in Johannesburg. He oversees the corporate finance and M&A business. He has 22 years of investment banking experience spanning London, Emerging Europe, Africa and Asia, having advised on over 100 capital markets and advisory assignments. Prior to joining Barclays, he has worked at Renaissance Capital building their African investment banking business and at Credit Suisse. He/She can be contacted on +27 011 350 4000 or by email: hasnen.varawalla@barclays.com.    

Nick Tims is the managing director of Investec Asset Management. Having joined Invest in June 2011, Mr Tims leads the firm’s capital-raising for Africa PE, African private credit and African real estate. He can be contacted on +44 (0)20 7597 2182 or by email: nick.tims@investecmail.com.

Lydia Shadrach-Razzino is a director in ENSafrica’s corporate commercial department. She specialises in mergers and acquisitions across various industries, takeovers, initial structuring and general corporate governance. Ms Shadrach-Razzino is also a private equity transactions specialist. Her experience includes advising on equity capital markets, disposals, acquisitions, empowerment transactions, corporate governance and stock exchange transactions in multiple industries. She can be contacted on +27 82 411 9346 or by email: lshadrachrazzino@ENSafrica.com.

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