Dutch development finance institution FMO has been investing in emerging and frontier markets for more than 45 years. Alison Klein, manager, private equity at FMO, discusses where she sees opportunities in Africa’s private equity markets and how they will develop over time.
What advice would you offer to first-time investors in Africa?
Investors should take a portfolio approach. I’ve seen some newer investors commit to just one fund, but if you invest in a single manager, country or sector, that can present additional risk. There’s enough critical mass now to create a diversified exposure, so you can mitigate against currency or macroeconomic challenges.
They should also try to benefit from others’ experience. There are a number of investors that now have 20 or even 30 years of history in African markets and they are usually happy to share information. That’s particularly the case with DFIs such as FMO – we’re here to catalyse and support new investors.
Are you seeing newer, emerging managers in Africa?
We have a relatively higher allocation to first-time managers and we’re seeking to build best practice with them by supporting team development, firm sustainability, succession planning and helping to incorporate ESG management in firms’ processes. Yet we are currently in a slower part of the cycle for newer managers in Africa.
The fundraising market is challenging for private equity, but we are seeing more managers in the private credit space.
Which markets are the most attractive right now?
You have the largest markets, such as South Africa, Nigeria, Kenya and Egypt, where there are well-established private equity industries and these are benefiting from growing economies and populations. Yet there are some markets showing good potential that aren’t yet on the private equity map in a big way. Ethiopian private equity is starting to emerge, for example.
And what about the most attractive sectors?
Anything consumer-facing has strong potential as these businesses can benefit from tailwinds such as rising populations, increasing incomes and urbanisation. We’re seeing a lot of activity in financial services, FMCG, retail, restaurants, healthcare and education. Logistics and transport, as well as on-grid and off-grid power, are also active. Venture capital is another growth area as barriers to entry for technology-enabled businesses have fallen substantially.
How are returns in Africa shaping up?
Compared to other regions where we invest, they are lagging a little. There are a few reasons for this. The biggest factor is the J-curve, which tends to be more pronounced in our African portfolio because we have a high proportion of new managers and because fundraising is taking longer.
You have to consider that private equity is still relatively new in many African markets and so it can take a long time from a firm making initial contact with a potential investment opportunity to completing the deal and then exiting. This timeframe will shorten.