Mediterrania Capital Partners: Starting early on exits

Evaluating exit opportunities prior to making an investment is a critical consideration in the African PE market, says Albert Alsina at Mediterrania Capital Partners.

This article is sponsored by Mediterrania Capital Partners

Albert Alsina

The exit environment in Africa has long been regarded as a challenge for the continent’s private equity industry, stymied by local currency fluctuations, a limited buyer pool and geopolitical uncertainty, but there are some very positive indicators for the market.

The African Private Equity and Venture Capital Association reported in its latest annual study that there were 82 exits on the continent last year – almost double the 2012-19 average. Albert Alsina, founder and CEO of Mediterrania Capital Partners, a PE firm specialising in growth investments in Africa, explains that firms with strong experience of operating on the continent can successfully pursue a range of routes to exit.

The key, he says, is to identify an exit strategy even before an investment is completed.

Do you agree that the exit environment is one of the key challenges for private equity firms in Africa?

When you look at the inherent risk factors associated with investing in Africa, there are three main challenges to consider: political risk, currency risk and liquidity risk.

In recent years, pan-regional analysis has shown that a significant proportion of private equity activity in Africa has been unable to deliver sufficient liquidity to investors.

However, it is important to differentiate between the experiences of venture capital funds, first-time funds and funds investing in African small and medium-sized enterprises, and the performance of the mid-cap funds and large-cap funds on the continent.

Usually, mid-cap and large-cap funds tend to deliver very good liquidity events and achieve some excellent exits.

These firms – with their larger and more diverse teams, highly experienced in different geographies and industries – are better equipped to make successful investments, generate value in companies and design the most appropriate paths to exit regardless of their complexity, and so are able to deliver higher returns to investors.

How important are robust ESG policies in preparing to exit your portfolio companies?

Every single buyer now requests ESG-related due diligence, and this has become just as important as conducting financial due diligence on an investment.

Having strong and well-defined ESG practices across all portfolio companies is crucial. At Mediterrania, we have created our own ESG Scoring Tool, which includes 60 metrics covering environmental issues, 80 metrics focused on social aspects and 14 metrics related to governance factors. This tool enables us to transparently and objectively measure a company’s relative ESG performance, commitment and effectiveness and provides a platform for accurate reporting back to the investors. This methodology helps to ensure that all of the companies we put out into the market following our investment are top performers, not just financially but also in terms of ESG.

A tight combination of financial performance and a strong ESG approach is crucial, as creating robust and sustainable frameworks helps build more resilient – and consequently, more valuable – companies.

Mediterrania exited seven companies in 2022. What made it such a good year for exits?

Last year’s unprecedented number of exits was a combination of three things. First, the covid-19 pandemic halted all divestment processes. In fact, it caused a two-year lull in which the very few liquidity events that occurred were extremely difficult to execute because of the travel and social restrictions imposed by governments. That led us to put many processes on hold until we could resume our normal activities.

The second factor is that after covid, there was a lot of liquidity in the market because financial institutions and investors had been unable to put their money to work for two years. As the pandemic passed, this accumulated liquidity in the market created an exceptional environment for exits.

The final element relates more to our firm. As a consolidated PE firm that has operated in North and sub-Saharan Africa for the last decade, we have built a strong divestment approach within our team. This approach, which is fully integrated into our daily operations, includes us talking about exits every day, not only when it’s time to exit. Despite the two-year lull caused by the pandemic, we continued to discuss exits on a daily basis, meaning that as soon as business returned to normal, the initial discussions had already taken place.

How early do you prepare for exits in your portfolio?

Our preparation begins on day one of the investment – or rather, before day one. We work around four different exit strategies: initial public offerings, sales to strategic buyers, the secondary market, and management buyouts. We try to achieve a good mix of strategies as a method of increasing liquidity at an early stage of our funds.

Before a potential deal goes to the investment committee, we determine which exit strategy seems the most appropriate, based on the nature of the business and several other factors. The strength of the exit strategy is extremely important in deciding whether to invest in a company.

What is needed to successfully exit via an initial public offering?

Many things are needed to deliver a successful exit through an IPO. We recently completed two exits of our portfolio companies in Morocco through IPOs on the Casablanca Stock Exchange, and there are a few common variables that benefited both these processes.

The most important aspect to consider is an intrinsic characteristic of the PE fund: that it has a local presence, with a team that has built up a solid understanding of the markets and the ability to liaise directly with the local regulator, the institutional investors, the investment banking community and the banks as well as other key players.

Having a local presence is essential, as there are many daily operations that must be done locally. Private equity firms that do not have a local presence will find it incredibly challenging to manage an IPO from a remote office.

Second, as minority investors with significant stakes in our portfolio companies, we can heavily influence value creation and ESG processes, helping our companies reach their full potential while paving the way for a successful exit. In the IPOs, owning a minority but significant proportion of the business has enabled us to guide the company towards achieving and exceeding their business objectives, thus increasing its value. This has helped us deliver extremely successful exits and high investor returns. In both cases, the stock value has been growing after the IPO, outperforming the market.

When is an exit to a strategic buyer or another PE firm a good option?

Large corporations understand that they need a presence in emerging markets as they look to expand into new geographies with a strong potential for growth.

Africa in particular, with its growing population and ongoing economic reforms boosting investment in technology and infrastructure, constitutes a promising frontier for private equity investments. The continent offers a massive consumer base and a growing middle class that is demanding better quality products and services across many segments, including education, healthcare, retail and financial services, all of which offer huge business opportunities.

“The ecosystem surrounding IPOs is progressively maturing and becom­ing more adept and sophisticated… This will enhance exit opportunities”

Whenever a strategic buyer decides to enter Africa, the best assets on offer are typically those that have been managed by a private equity firm. PE firms have several advantages in this area: they introduce strong control mechanisms, implement disciplined value creation processes and ESG policies, and establish strong audit procedures to ensure good governance. In Africa, PE-backed companies are often viewed as ‘clean’ assets that have been managed effectively and are ready to be acquired and brought into their next stage of development. Exiting to a strategic buyer is a clear win-win.

The secondaries market, with some exceptions, is not as popular as a route to exit as in other regions because there are fewer private equity firms operating in Africa. However, we expect it to grow in the coming years.

When would a management buyout be a good exit route?

We have realised several management buyouts through our MC II fund, particularly on investments where we held a majority stake, and we reached an agreement with the management of the company to purchase our stake. An MBO is a more common and appropriate exit path for SMEs because the cash requirements for those kinds of companies are smaller than for mid-cap companies and they are usually able to find the necessary financing through local banks.

How do you think the exit environment across Africa will develop over the years?

First of all, it’s essential to consider that Africa is a diverse continent with wide-ranging economies at different stages of development, and the exit environment may vary significantly across countries and regions. In all the countries and sectors in which we invest, we are seeing economic growth and stability and both elements are attracting investors and creating favourable conditions for successful exits.

As the African markets mature and sectors such as fintech, retail, renewable energy and healthcare continue to grow, there will probably be increased opportunities for profitable exits. Companies operating in solid industries will be easier to exit.

Additionally, a stable and inves­tor-friendly regulatory environment is crucial for private equity exits. Nowadays, in a few specific countries, the landscape is in­creasingly evolving towards IPOs as a viable exit avenue for dynamic mid-sized companies. The ecosystem sur­rounding IPOs is progressively ma­turing and becoming more adept and sophisticated. As the African capital markets continue to evolve, this will enhance exit oppor­tunities.

In terms of secondary exits, we are witnessing the start of a surge fuelled by large global funds looking to build sec­tor-specific platforms with the objec­tive of establishing a substantial pres­ence in Africa.

Regarding strategic sales, a growing number of prominent multinational enterprises are generating a large proportion of their profits from the emerging markets. As such, large corporations cannot overlook their need to establish a substantive presence in Africa.