By John Hamilton
A new generation of private equity funds is finding good reasons to be enthusiastic about Africa
The last investment frontier — a phrase sometimes used to describe the difficulties of investing in Africa — is about to be breached. Investors are increasingly being drawn to the opportunities in economies that have shown strong and steady growth for several years.
Many analysts argue that the ultimate driving force behind sub-Saharan Africa’s economic upturn is the “China factor” – bringing in a major new commercial partner, alongside other Asian and Gulf-based investors, to rival OECD dominance, and fuel the global commodities boom.
But many private equity funds are looking at other trends in the African economy to underpin their investments. Private equity has generally steered clear of any broad exposure to the commodities sector. This has been partly due to its volatility, but also because funds can add little value to the sector, which for a long time was the only game that international investors could play in Africa.
Instead, the new generation of Africa-centric private equity funds have focused on consumer and service sectors: ranging from financial services through to infrastructure, construction and retail.
Last autumn, the 13-year-old Tunisia-based Tuninvest launched a second fund focusing on sub-Saharan Africa named the AfricInvest II Financial Sector Fund. Its aim was to focus on new or existing financial institutions in some of the continent’s most troubled states. Banks, leasing, credit, insurance and factoring companies in post-conflict and in the least developed countries are high risk, but they also have great potential.
The range of investments is huge — as is their size. AfricInvest II is a tiny fund of just E20 million ($13 million). But at the other end of the scale, private equity group Actis last year finally closed its $1.2 billion leveraged buyout of Alexander Forbes, the South African financial services group. This was one of the largest and most complex transactions of this kind ever undertaken in Africa. In February, Actis also invested $130 million in Nigeria’s Diamond Bank.
Peter Schmid, the partner responsible for Actis’ African investments, says this focus is nothing new. Created out of the old Commonwealth Development Corporation, he says, “we have always liked” investing in sub-Saharan markets — commodities only ever formed a minor part of the fund’s activities.
Schmid says the real value is to be found in the large populations of South Africa, Nigeria, Egypt and other major markets, each with a growing middle class and consumer sectors that have not yet caught up with demand. “There is very limited choice, so there’s not much competition. Many of these businesses are growing at substantial rates,” he says.
Sev Vettivetpillai, chief executive of London-based Aureos Advisers, says: “Investors see the potential of what is the world’s second most populous continent, with GDPs growing at an average rate of between 5.3% and 5.5%. Furthermore, despite the occasional setback, Africa’s political economy has improved, so its engagement in global trade and investment flows has also strengthened.”
Aureos is raising funds for the $400 million Aureos Pan Africa Fund (APAF), which will invest $2–10 million mainly in companies with the potential to build pan-African businesses. Aureos has been running three regional funds in east, west and southern Africa since 2003.
In March, Aureos’ Southern Africa Fund acquired 30% of South Africa’s electronic building management and security services company Sandbox Holdings, a typical example of the kind of service-oriented company that is attracting the most attention from private investors.
Emerging Capital Partners (ECP), the first private equity group to raise more than $1.2 billion for investment in companies across the African continent, has been investing in Africa since 2000, initially as part of EMP Global before spinning out in 2005.
It started with a $407 million AIG African Infrastructure Fund, which has focused strongly on telecommunications. In December 2006, it closed EMP’s $523 million Africa Fund II, which is weighted towards financial services. It also runs smaller funds specializing in central Africa, the Middle East and north African region, west Africa, and a Moroccan infrastructure fund.
Telecoms
ECP says it invests in companies that “operate in business environments characterized by limited competition or in sectors where Africa has either a comparative advantage or an unmet need”.
At the end of February, its Africa Fund II made the group’s seventh investment in continental mobile telecoms, when it put $20 million into Cellcom Telecommunications, the Liberian market leader, to expand Cellcom’s home network and to launch services in Guinea and Sierra Leone. Financial services and telecoms head a list that also includes, retail, real estate and infrastructure, where private equity companies believe they can add value and make substantial returns.
Getting out of investments, sometimes considered a problem for private equity investors, is no longer a problem. ECP, which has made over 45 investments in more than 30 countries, has managed 18 exits so far, including the successful sales of Telecel Faso, Orascom Telecom Algeria, Celtel International and Sonatel.
In the past, most funds were sold to strategic buyers, but the expansion of local equities markets has led to an increase in the number of opportunities for initial public offerings which are open to larger investor audiences.
Schmid – who says that “exits have never been a problem in Africa” – describes flotations as a good second choice. But he still favours dealing with strategic buyers and has no problem in finding takers.