Outlook 2015: Eyes on Africa

Interest in Africa is booming, but for the best deals GPs need a team on the continent, according to Emerging Capital Partners’ Andrew Brown

2014 has been a good year for private equity in Africa. Halfway through the year more had been collected for Africa-focused funds than had been raised for the region in the whole of 2013.

Industry behemoths also made their first forays into the continent, with the Carlyle Group raising $698 million for its dedicated sub-Saharan Africa vehicle and Kohlberg Kravis Roberts investing $200 million in Ethiopian rose grower Afriflora.

“What we’ve seen in 2014 is increasing interest in Africa as an investment destination,” Emerging Capital Partners managing director and chief investment officer Andrew Brown said.

With many countries across the continent growing at upwards of six percent per annum, there’s certainly money to be made from investing in Africa. That is not to say, however, that prices are universally low. Newcomers at the upper end of the market who find themselves in auction processes will see some very high valuations paid, Brown said.

ECP, which is currently in market seeking $750 million for its fourth fund, has found the key to success to be dedicating a large amount of the capital it raises to developing portfolio companies, rather than acquiring shares.

“What we’re looking to do a lot of the time is buy a company that is not necessarily huge but has a significant market opportunity in front of it and then put substantial amounts of capital into the business,” Brown said.

To source and execute proprietary deals, it is imperative to have investment professionals based in Africa, preferably in several locations throughout the continent.

“In order to be able to deploy capital effectively in Africa, you still have to have good teams on the ground to be able to find deals,” Brown said. “If you’ve got the right team on the ground, then you just keep turning up loads and loads of opportunities.”

Building businesses of scale on a country by country basis is tough, Brown said. ECP searches for opportunities on a pan-African basis, and focuses on regional businesses which have the opportunity to grow outward from a hub economy.

“For us, Cote D’Ivoire is a very interesting market, it’s the hub economy for the whole French-speaking West Africa,” Brown said. “The politics is looking a lot better, the growth rate is very high at the moment, [and] it’s a comparatively sophisticated economy.”

Building a business into a regional platform is also a good way to safeguard against country risk, which is still high up on many LPs’ list of concerns.

“You can mitigate a lot of that country risk if you’re building out regional platform companies, so we’ve got a lot of portfolio companies that operate in five, six, even 12 countries across Africa,” Brown said. “You’ve then got a diversified portfolio company as well as diversification at the fund level.”

When it comes to exiting businesses, IPOs are becoming more of a viable route, and ECP has successfully offloaded several portfolio companies through both local and international exchanges.

“There’s a lot of money that’s been raised for either frontier market listed strategies or Africa-specific listed strategies, and what a lot of those investors are looking to do is to find businesses that match the consumer-led growth story that they’re being sold,” Brown said.

Feminine and baby hygiene product manufacturer Société d’Articles Hygiéniques was just such a business. ECP listed SAH on the Tunis Stock Exchange in January 2014 for a sale price of around $80 million, the largest IPO the exchange has ever seen, generating a 2.4x return multiple for the firm.

As the markets across Africa mature, the types of businesses that GPs are looking at is also changing. Directly consumer-facing businesses are still popular, but as those businesses grow, opportunities are beginning to emerge in the business to business space. Companies are starting to identify reliable suppliers and opportunities to outsource certain aspects of their operations, which will allow them to focus on their core strengths, Brown said. This will open up opportunities in sectors such as financial services and logistics.

“That’s clearly going to help them to become more efficient by focusing on what they’re good at, and it’s also going to throw up some very significant growth opportunities in that business to business sector,” Brown said.