Duet: ‘Cautious’ LPs eye deal-by-deal investing in Africa

Fundraising in the continent has seen better days as investors look for strategies with more transparency than traditional private equity fund structures.

As one of MENA’s largest players, Abraaj Group’s unravelling has done little to instil confidence among investors looking at African private equity funds. No vehicles targeting sub-Saharan Africa held final closes in the first half of this year and they closed on just $330 million last year, according to PEI data.

Fundraising for MENA-focused private equity vehicles also fell to around $711 million in 2017, down 64 percent from the roughly $2 billion raised the previous year.

A growing number of investors are now looking to dip their toe in on a deal-by-deal basis, rather than committing wholesale via a blind-pool fund.

Duet Private Equity, which invests deal-by-deal in sub-Saharan Africa and eastern Europe, is among those that could benefit from this shift in sentiment. The firm, which has as many as 25 investors with whom it regularly invests, has seen the number of enquiries for such opportunities increase over the past year, chief executive Henry Gabay told Private Equity International.

“[We’ve seen] probably twice the appetite, and in addition to that we have unsolicited calls or meeting requests,” he said. Its existing investor base includes two development finance institutions, a multi-billion-dollar family office and a Middle Eastern investor.

Gabay, who did not refer to Abraaj, said “quite a lot of concerns recently” have left investors more cautious when it comes to emerging markets private equity.

“In blind-pool funds you’re locking money away for five to seven years and it’s still the emerging markets; still Africa, still eastern Europe, so people prefer the deal-by-deal approach.”

In February, media reports claimed four LPs in Abraaj’s $1 billion Global Healthcare fund had hired an auditing firm to help trace capital that was to be invested in medical projects in Africa and Asia. Abraaj responded by appointing KPMG to audit the vehicle, and concluded that all payments and receipts had been verified and that unused capital had been returned to investors, though this did little to allay concerns. The firm is now undergoing provisional liquidation.

Investing on a deal-by-deal basis carries more transparency than a blind-pool fund, Gabay said. Large and strategic investors benefit from Duet’s own due diligence prior to joining a transaction and may join the target company’s board as directors, observers or advisors for greater oversight.

Heightened demand does not necessarily translate into more private equity firms as not all investors have the resources or means required for deal-by-deal transactions, Gabay noted. Decision-making can often be tight if for a distressed or turnaround asset.

“Although everyone likes the concept and idea, when it comes to the execution side some people think they’re ready but they’re not,” he said.

“Deal-by-deal is quite opportunistic right now and it could probably be more process-oriented to allow an institution to come in on a regular basis – ideally we’d probably like to have one or two larger institutions that can have a programme to invest over the next five or 10 years. That gives you stability and it’s good for them that you committed to deploy capital over five to 10 years.”

Duet Private Equity is part of the Duet Group. Founded by Gabay in 2002, the group also has asset management and wealth management arms, having acquired the $1.3 billion Belgian wealth manager Merit Capital last month.