When pan-African small- and medium-enterprise (SME) focused private equity firm AfricInvest launches the second generation of its dedicated financial-sector fund, there will be one major difference from its predecessor: instead of a classic 10-year fund structure, it will be an evergreen vehicle.
“After much discussion we have decided to launch an evergreen fund as the second generation,” said Ann Wyman, a senior officer at AfricInvest responsible for client relations, speaking on a panel this week at the Private Equity in Africa conference in London, hosted by the Financial Times and EMPEA.
Wyman said that in the countries in which AfricInvest invests, some of which are post-conflict countries, and the type of investments the firm is making in smaller financial sector companies which are adopting technologies for the first time, traditional 10-year private equity funds can be too restrictive.
“The time horizon needed to develop these companies is a bit longer, and an evergreen structure seems to make more sense for many,” Wyman said.
AfricInvest’s first financial sector fund, which focuses on financial inclusion in Africa through investments in financial institutions that service micro and medium-sized enterprises, held a third and final close on €60.6 million in 2014.
The vehicle was initially launched in June 2007 with a capital commitment of €20 million from Dutch development finance institution FMO, and was then increased to €31 million in April 2010 with additional capital commitments by Proparco Développement International Desjardins.
AfricInvest is expecting to launch the fund in early 2017 and will initially seek to raise €100 million, it is understood.
Wyman said raising an evergreen fund requires “a reorientation of the way that investors think”.
“Getting interested in evergreen structures means you need to start thinking about liquidity windows, as opposed to the fund life,” she said.
“But it is something I think in Africa is becoming more prevalent, the thought of how can you structure a fund to more adequately meet the needs both of the fund manager, in terms of living out the life of the investments, but also the investee companies that tend to perform sometimes better without that time horizon or clock ticking in the background.”
Earlier in the day, Murray Grant, managing director and head of intermediated equity at UK development finance institution CDC, raised the question of whether traditional private equity funds were suited to investing in extreme frontier markets.
“We do need to think outside the box of what is the right architecture that allows you to deploy capital in a more challenging environment, where access to six, seven independent management teams that are all going to be self-supporting is probably not correct at this point in time,” he said.
“Do we need to go back to what I call some of the older constructs of investment holding companies where we are allowing ourselves more time, more patient capital, to put capital into the ground, build those management teams and allow them to grow over a 10-15-year time period, as opposed to expecting miracles to happen in five to seven years?”
However, as Hany Assad, co-founder of Avanz Capital, pointed out, longer-term or evergreen fund structures require “a completely different set of investors” to those traditionally investing in small emerging markets private equity funds, such as family offices and endowments, who require more frequent liquidity events.
“Those that can afford the long-term are those like pension funds, institutional investors,” he said, noting that those investors need to commit significant sums to such funds in order to make them cost-effective.
Wyman suggested the DFI community would be the right place to start when raising such a vehicle.
“If the belief is that evergreen structures ultimately make sense, getting them to the size that would be attractive to a UTIMCO or others would require some assistance over a certain period of time to help that industry develop,” she said.
“DFIs sometimes can do something smaller, and help the evergreen structure within the industry develop.”