Africa’s real gems lie deep beneath the surface

Global firms' pullback from Africa has been greatly exaggerated, AVCA chief Michelle Kathryn Essomé explains.

After private equity behemoths Blackstone and KKR announced plans to pull back on investment in Africa, it was interpreted in some quarters as being symptomatic of the difficulties faced by private capital on the continent.

A lack of big-ticket opportunities (typically defined as above the $100 million mark) has reportedly been the main driver, alongside stiff competition from China on large-scale infrastructure projects.

Michelle Kathryn Essomé, chief executive of AVCA
Michelle Kathryn Essomé, chief executive of AVCA

From where I sit, as chief executive of the African Venture Capital and Private Equity Association looking at all PE and VC activity across the continent, drawing this conclusion misses the point. Whilst Africa has over 400 companies with revenues of over $1 billion, according to McKinsey, the greatest investment opportunity lies in the small and medium-sized enterprise sector, which accounts for approximately 90 percent of African businesses and provides nearly 80 percent of the continent’s employment, according to the London Stock Exchange.

There’s certainly no shortage of quality SMEs that require external capital to take the leap from being highly competitive local players to strong regional companies. These range from Goodlife Pharmacy, which grew its presence in East Africa from 19 to 38 stores following a $22 million investment from LeapFrog, to companies in consumer goods and services, logistics and distribution and education.

At the top end of the SME segment is a critical mass of dynamic and ambitious companies whose growth trajectory could be accelerated and their sustainability more assured with the backing of private equity, enabling them to access new markets, adopt new technologies and roll out new products and services at scale. An interesting example of this is African Infrastructure Investment Managers’ recent $31 million investment in BBOXX – an innovative company delivering clean energy to off-grid communities – to accelerate its expansion in Rwanda, Kenya and the Democratic Republic of the Congo. Likewise, Emerging Capital Partners drove Java House’s expansion from Nairobi to 10 cities in East Africa, growing the business from 17 restaurants to 55 in just five years and exiting in 2017.

SMEs therefore tend to attract most PE investments in Africa. AVCA data shows that less than 10 percent of the 200 GPs operating on the continent make investments of more than $50 million, and the median ticket size over the last few years has hovered around $7 million. Deals below $50 million accounted for 85 percent of deal volume in the five years to 2017. Given that PE firms in Africa typically take a minority position, the size of companies is actually greater than the figures suggest.

It’s also not accurate to suggest that all top-tier US PE firms are withdrawing from the continent. In 2018, the Carlyle Group continued to do significant deals in Africa, including its acquisition of African Capital Alliance’s stake in online travel agent Wakanow for a reported $40 million, as well as transactions in manufacturing companies Abacus and Tessara in East and South Africa. In 2017, Actis launched Honoris United Universities as a tertiary education platform following a $275 million deal.

These deals show that PE investment is transformative in creating the scale that is needed to grow the list of companies on the continent with more than a billion dollars in annual revenue.

That said, it’s not all about ticket size. We find that fund managers who focus more on growth potential than ticket size are patient with their capital, have a strong local presence and have networks that are best placed to pick winners and work effectively with the founder and management team to unlock value.

Finally, it’s worth looking at where future PE investments are likely to be made. Africa’s venture capital sector has experienced exponential growth in recent years, with investors hunting value earlier in the cycle and African start-ups receiving over 50 percent more investment in the first half of 2018 than in the whole of 2017. Just last month, Andela – a company that trains Africa’s most talented software developers – secured $100 million in a series led by Al Gore’s Generation Investment Management, following an earlier round led by the Chan Zuckerberg Initiative.

The future is bright. Fifty-three percent of institutional investors that participated in our most recent annual survey plan to increase their allocation to the continent over the next three years. African private equity continues to generate significant returns, outperforming public markets as represented by the MSCI Emerging Markets Investable Markets Index by 76 percent between 2016 and 2017. Blackstone and others may be back sooner than we think.

Michelle Kathryn Essomé is the chief executive officer of the African Private Equity and Venture Capital Association. She has 20 years of investment banking experience in marketing and origination roles in equities, fixed income and investment management at Merrill Lynch, Goldman Sachs, JPMorgan, Lehman Brothers and Nomura.