In search of liquidity

When emerging markets stalwart Actis wooed investors into its third pan-emerging markets fund – which closed at the tail end of 2008 – it did so with an unusual structure. The fund comprised a central pool of capital and five regional side-pockets for India, Africa, China, Latin America and Southeast Asia. Once LPs committed to the global pool, they could then earmark capital for specific regional exposure as well. Of the five side-pockets, Africa was, along with India, over-subscribed.

A survey among delegates at November's PEI/EMPEA Emerging Markets Private Equity Forum in London revealed that Africa fever is still rampant. No less than 40 percent selected Sub-Saharan Africa as the most exciting of the emerging private equity markets today. And while a high level of anticipation has long been associated with the region, which offers some of the world's most rapidly developing frontier markets, fundraising numbers from EMPEA suggest capital is flowing in on this wave of excitement.

During the first half of 2009, a period that witnessed historic lows for global markets, the fundraising total for Sub-Saharan African private equity hit $1 billion, according to an EMPEA report. If extrapolated, this would put 2009 on course to match the prior three years, when a total of $2 billion – or thereabouts – was raised per annum.

A small number of managers in the region have built up the scale and track record to be able to raise funds on a more or less equal footing to the strongest managers in other emerging markets and even those in developed markets. The likes of Ethos, Brait and Actis have all attracted capital from prominent US pension funds. The California Public Employees' Retirement System committed to the African pocket of Actis's 2008 fund, while Brait and Ethos have in the past garnered commitments from the New York State Common Retirement Fund and New York City Employees' Retirement System respectively.

Ethos, which is currently braving the fundraising trail for its sixth fund, reports difficult conditions. Ngalaah Chuphi is a partner at the firm: “It is a tough fundraising environment without a doubt, but hopefully things will open up as the recovery of the global economy takes shape,” he says, adding that the firm has already had some “positive responses” from South African investors.

But despite a handful of firms successfully courting these “old school” institutional LPs, many funds have found the door remaining firmly shut.

David Hutchings is head of private equity for Albourne Partners, which advises institutional investors, such as the Ohio State University and San Diego County Retirement Association, on their private equity fund selections. His clients remain to be convinced that the perceived risk of African private equity is matched by the reward.

“Despite having had one really interesting and well sponsored offering in front of clients for some months, there has been no appetite,” says Hutchings. “Largely that is because there is such a good array of credit and distressed opportunities available in the US and Europe that it just has not been attractive to take the extra risk.”

Were it not for the continued involvement of development finance institutions (DFIs), the stifling of the global fundraising market could have proved catastrophic for the private equity industry in the region, just at a time when it had looked poised for growth.

Adlevo Capital is one of an emerging breed of first-time fund managers in the region. Seeking to raise $100 million to invest from its bases in Lagos and Johannesburg, it was on its way to a first close about a year ago just before the financial crisis truly took hold. It had a combination of DFIs and commercial investors lined up to commit. “Given what happened with the world economy, a couple of the private investors had to drop out,” says Yemi Lalude, Adlevo's managing partner. “So we really had to restart the fundraising again this year, and the strategy we took was to go after people who have both the money and the mandate for a first-time Africa fund,” he adds. For this read DFIs.

African Capital Alliance, another Lagos-based private equity firm, had begun raising its third fund when the financial crisis hit. As well as revising its final fund target down from $500 million to $350 million, the firm refocused its efforts on its historic investor base. This strategy has allowed the firm to corral $200 million for a first close, the bulk of which is DFI money, complemented by some commitments from Nigerian pension funds and other local private investors.

“Apart from the DFI community, you don't see a lot of capital around,” says Jean Marc Savi de Tove, a portfolio director at UK government funds of funds CDC Group. “Particularly outside of South Africa, it is clearly mostly DFI money being committed.”

While DFI money has been critical in keeping African fundraising on track during the global financial crisis, even these institutions are far from immune. “By and large, a lot of DFIs have had a bumpy ride this year and stopped investing,” says Coco Ferguson, a partner at Maris Capital, a fund manager focusing on Africa's frontier markets.

CDC Group is owned by the UK government and mandated to stimulate growth in the world's poorest economies – many of which are in Sub-Saharan Africa – through investment in local private equity firms. In April the organisation recorded a decline in the value of its portfolio for the first time in seven years. The firm continues, however, to make commitments; this year it will have put up to $250 million to work in Africa-focused funds.

Savi de Tove notes that there have been a lot of people out trying – and failing – to raise first-time funds. Many requests for this funding merely comprise teaser emails and can easily be discounted. “Many people think that DFI money is free money, but this is not the case. CDC has not received any new money from the British government in 14 years and in order to be sustainable we have to be selective about who we back.”

It's easy to paint too bleak a picture of the fundraising market in Africa. A number of would-be first time fund managers are finding it difficult to build up traction with any one group of investors. They should take heart however in the fact that while many LPs have yet to “pull the trigger”, as one GP puts it, interest in the continent is still as strong as ever.

As signs emerge that Zimbabwe may be moving once more in the right economic direction, investors have begun to eye the investment opportunity.

Ritesh Anand, formerly head of Africa and Middle East investments for £13 billion (€14.5 billion; $21.8 billion) endowment The Wellcome Trust, has left the organisation to launch a Zimbabwe-focused fund, PEI has learned. Anand, who was born and raised in the country, was a fund manager there between 1997 and 2001 before leaving to join Wellcome.

His new fund, which is likely to be launched in the first quarter of 2010, will combine a long-only listed equity strategy with an allocation to private equity investments. “With the dollarisation and the economic recovery programme, Zimbabwe presents an attractive turnaround story,” he says.

Having met Prime Minister Morgan Tsvangirai in July 2009, Anand was invited back to the country to help support development and encourage foreign investment. “This is too exciting an opportunity to miss,” he says.

Also eying Zimbabwe is Maris Capital, a firm which to date has focused on South Sudan, Kenya and Mozambique. “Zimbabwe presents a unique investment opportunity. The recovery will be long and bumpy, but we think the trend will be upwards,” says Maris partner Coco Ferguson.