South Africa and beyond

Sub-Saharan African private equity is difficult to characterise, say market participants in the region.

Just as in Edgars Consolidated Stores, the fashion store in South Africa currently looking for a buyer, variety is the name of the game. Private equity investors in the region can find a little of everything which takes their fancy, from buyout led by established local groups in mature sectors to early-stage start-ups funded by first-time managers.

Just as it is boom time for private equity in more developed markets, Sub-Saharan Africa, long considered the most immature of the world's emerging regions, is riding a wave of capital and catching up with its peers.

And now even the global firms are coming.

At press time, Edgars was in talks with The Blackstone Group, Bain Capital and Kohlberg Kravis Roberts, discussing a potential $3 billion (€2.2 billion) deal. It is a measure of how sophisticated the South African market has becomd (and how far afield global capital will travel for a deal).

Edgars Consolidated Stores, known as Edcon, said in October that it had been approached by private equity firms interested in acquiring the fashion chain, which has more than 900 stores in South Africa, Botswana, Namibia, Swaziland and Lesotho.

South Africa, which is the dominant country in the region by a large margin, is blazing a trail for the asset class. As a result, it is increasingly the home of ever larger buyouts and later-stage investments. Alexander Forbes, an employee benefits consultancy, is likely to pip Edcon to the post as the country's first $1 billion plus deal. Actis, the emerging markets specialist, is leading the talks.

Then there is the rest of the region, with local and regional teams on first or second-time funds and mainly backing start-up or early stage businesses. Many of them have come a long way.

Rod Evison, portfolio director for Africa for CDC, an emerging markets fund of funds manager sponsored by the British government, says: “The first CDC pan-African fund in 1996 was really a vehicle for co-investment funding for limited partners. It did not do too badly with a gross return of 1.7 times capital. But not really good enough to attract private money.”

CDC specialises in making commercial investments, which often have a development aspect to them. Or as Evison describes the firm's investments: “Best of breed and pioneering. And outside of South Africa, most African managers are pioneering.”

He adds: “We are very selective about first-time managers and will only back a team if it is producing commercial returns; though even the best will go through a learning curve. They'll say 20 percent, we expect 15.”

As pioneering managers gain experience and returns improve, meaningful quantities of capital are beginning to flow in.

About a third of the capital committed to the region in 2005, or a little more than $210 million, was provided by government and aid agencies, according to the latest numbers from the African Venture Capital Association. Private monely does now account for just under two-thirds of investor money in the region.

Still, the bulk of the capital is being put to work in South Africa, which has a population of 44 million. In 2005, the country accounted for 81.6 percent of all investment, amid a 27 percent drop of all investment in the region relative to 2004 to just under $1 billion.

Evison says: “If you look at the depth of the South African economy, it should be the hub for the rest of Africa. It was the pariah nation. Now links have been re-established and it has become the engine room for much of Sub-Saharan Africa, exporting business models.”

South Africa is providing a blueprint for the region, especially for two of its biggest fund managers, Ethos Private Equity and Brait.

Ethos recently closed Ethos Fund V on R5.5 billion ($750 million; €589 million), currently the largest private equity fund in Africa and more than double the size of its predecessor.

Brait, the private equity arm of the eponymous merchant bank, is set to close a larger fund in the next few months, according to market sources.

André Roux, Ethos's chief executive, says: “South Africa is a unique destination in a continent that for many investors is the final frontier.” Roux says South Africa has managed to transform its fortunes post-Apartheid because of its history as a British colony and because the institutions of civil society were strong.

“Astute political leadership has made the best capital of the 100-year-old stock exchange, world-class universities, an independent judiciary, a trade union movement, a central bank and a will to modernise and join the global economy,” he says.

From the perspective of a private equity investor, all those factors coupled with the rule of law, which gives meaning to contracts, have helped reinforce the argument for buyouts in the country.

Both Ethos and Brait specialise in medium to larger South African and African buyouts, growth capital deals and privatisations. Ethos looks to address ownership change, and in particular Black Economic Empowerment (BEE) transactions.

Black Economic Empowerment is a programme launched by the South African government to redress the inequalities of Apartheid by giving previously disadvantaged groups such as black Africans and Indians economic opportunities that were previously not available to them. The programme includes measures such as employment equity, skills development, targets for ownership, management and preferential procurement.

Roux says: “To date, Black Economic Empowerment transactions account for approximately 45 percent of Ethos' investments since 1992. It is a catalyst for us to get involved. It is a voluntary act to commit to a BEE charter, but we see it as an economic imperative”

Antony Ball, executive chairman of Brait and co-founder of its private equity business, says that what is happening in South Africa today will also open up opportunities across the continent.

Part of the growth of South Africa's economy, predicted to run at 4 percent for the rest of the decade, comes from the growth of the middle class, As income increases, Ball says the lion's share goes into food, beverages and clothes, sectors where growth has been in double digits for the last four to five years. This robust growth is predicted to spread to the rest of Sub-Saharan Africa.

Ball says: “We tend not to have invested directly in Africa. We work with our South African portfolio companies which are better equipped to the challenges of the continent.”

CDC, meanwhile, is placing bets on managers outside the country, especially in Nigeria, which is coming up fast on South Africa's heels.

The Nigerian governments' own reform programme, alongside the increase in oil and gas prices, has helped the economy to a BB- country risk rating achieved at the end of 2005. This has boosted the country's appeal to private equity.

In November, CDC committed $50 million to a fund managed by Helios Investment Partners, which held a first closing at $201 million in July and has approval from OPIC, the development agency, for a $50 million debt facility. Temitope Lawani and Babatunde Soyoye, former principals of Texas Pacific Group in San Francisco and London, established Helios Investment Partners in 2004.

Helios may find that its success may be judged in how long it is before Lawani and Soyoye do a club deal with their former Texan partners. As a source close to the talks with Edcon says: “The global buyout firms know retail well, but it is early days in the negotiations and perhaps a local partner might help.”

Welcome to the brave new world of Sub-Saharan private equity.