Despite political instability, corruption and other problems that turn commercial investors off Africa, a variety of businesses are set to grow there, according to Richard Laing, Chief Executive of Capital for Development (CDC), a private equity fund.
Private equity flows to emerging markets tripled to over $21 billion last year, according to the Emerging Markets Private Equity association. CDC, a UK government-owned fund-of-funds with £1.6 billion invested in the world's poorest countries, just posted net earnings of £426 million, including investment gains of £147 million. CDC's investments in Africa make up 47% of CDCÕs portfolio; Asia, 25%; Latin America 18%; and Asia-Pacific, 6%.
It is possible for private equity investors to make strong returns on companies in Africa, Laing told Emerging Markets: “You have to be very careful to make sure your partners are the right partners. That they have an in-depth knowledge of the sector and good management teams. Its difficult, but they’re there”.
One of the key reasons for CDC’s strong earnings this year was its successful exit from a handful of deals made in the late 1990’s. These include Celtel holding, a pan-African mobile telecoms company started in 1997 sold to Kuwaiti telecoms firm MTC for $3.4 billion in May 2005. CDC was Celtel’s second-largest shareholder, and made its original investment back five times over, according to Laing.
Opportunities that CDC is looking at in Africa include mining, commercial property and consumer finance. “Although many countries are poor, the consumer base is increasing, and looking for consumer goods”. Its property fund has invested in Lagos’ first shopping mall, and office buildings in both west and east Africa.
CDC invests in two pan-African private equity funds, a mining fund, a Nigerian fund, and three South-Africa based funds including one that invests in small and medium-sized enterprises in southern, west and east Africa. One third of CDC’s portfolio is invested in GlobalEq, a power-generation company focused on emerging markets that has invested in Tanzania, Kenya, Ivory Coast and Egypt.
“The world is awash with liquidity so it’s easy to raise money. We’re constantly looking for new destinations in which to invest”, agreed Moeen Qureshi, Chairman of Washington-based Emerging Markets Partnership (EMP). EMP’s Africa Fund achieved a 37% return on equity last year and the firm is now looking to raise capital for a second fund on the continent.
CDC was founded in 1948 and is the UK government’s instrument for investing in the private sector in developing economies. It invests in over 60 private equity funds across emerging markets: a mixture of local and UK- or US-based funds. “All our partners in India are local”, said Laing. CDC has strict criteria to ensure that its development objectives are met. Most of its capital – 70% - is invested in the poorest countries in the world, that have per capital national income of $1750 or less (2001 prices). The rest is invested in countries with per capita income of $9000 or less.
Half must be invested in Sub-saharan Africa or South Asia. These tests, said Laing, are the key to “getting capital to work in poorest countries in the world”, and, above all, setting a precedent for commercial investors.
“We’re pioneering investors... we go into funds that have limited support from commercial capital and demonstrate to third-party investors that this is a god place to be, and to come and join us”, said Laing.
“We’re typically the largest investor in a fund, but we’re more than happy to reduce our commitment to make room for other investors”.
In 2005, capital from, third-party investors was £837.2 million, most of it through Actis, a London-based private spin-off of CDC. Investors run the gamut of all those interested in the growth of emerging markets: pension funds, mutual funds, and individuals.
According to Laing, the rapid growth of India and China, and lucrative IPO’s and buy-outs in the latter, has signalled to investors the profits to be had from a “first-mover advantage”. Asia (excluding Japaan, Australia and New Zealand) was by far the fastest-growing market for private equity funds last year`: according to the Emerging Markets Private Equity Association, funding shot up from $2.8 billion to $15.4 billion from 2004 to 2005.
As for the rest of the world, over the year ahead, Laing said he expects CDC to post strong returns from India, where the corporation is collaborating with Indian private equity firm IDFC. The quality of a country’s infrastructure, such as its ports, roads and telcommunications, is the most important factor in enabling businesses to grow, said Laing.
He also identified Latin America, in particular Brazil, Mexico and Chile as countries where “interesting things” are happening in private equity finance. While political developments – the rash of populist rhetoric and policy - in Venezuela, Bolivia and Ecuador is “not helpful”, there are opportunities to invest in the power sector in other Latin American countries.