Fundraising for the last frontier

Last year $964 million was raised for private equity funds in Sub-Saharan Africa. This was a sharp drop from the record $2.24 billion raised in 2008, according to Emerging Markets Private Equity Association figures, but the numbers are back up once more. As of September, African private equity funds had raised $1.48 billion in 2010. With a number of funds expecting to reach closes over the coming months (see box-out), the numbers look set to increase.

Hurley Doddy

“There is increased interest in sub-Saharan Africa beyond South Africa among both investors and GPs,” says Alex Wolf, associate at HarbourVest, who is currently examining the African market. “The region has been more resilient to the downturn than other areas and from an investment perspective, the growing middle class is driving demand for improved infrastructure and a broad range of goods and services.” HarbourVest has been investing in South Africa for well over a decade and is one of a number of investors now looking more closely at other Sub-Saharan African markets.

The problem to date has been that African funds have been highly reliant on development finance institutions for their capital. There was a jump in interest before the crisis hit, but that proved to be short-lived as investors had to grapple with their own liquidity issues.

Yet there are signs that this is starting to change as LPs look further afield for growth. “LPs in developed markets are just starting to come back to investing and they are looking more and more at emerging markets, where they can capture growth,” says Hurley Doddy, co-CEO of Emerging Capital Partners, which recently reached a final close on its third fund at $613 million. “The US and Europe will not see much growth for the next few years and returns from these are expected to be low. Africa demonstrated that it was able to grow even through the difficult times of 2008 and 2009 and is forecast to continue to grow at around 5 percent for the next couple of years. It also now has a long enough track record of growth to show that this is not a short-term phenomenon.”

This is demonstrated by the mix of investors in ECP’s latest fund, which includes sovereign wealth funds, pension funds and family offices as well as DFIs. “The interest level of LPs was also demonstrated by the fact that we were invited to present to major institutions that five years ago were not interested in Africa.”

Siguler Guff is another investor watching the market closely. As an emerging markets fund of funds investor, it tends to focus on the BRIC economies and has not so far invested Africa. “Now is the time to be doing due diligence on African funds,” says Patricia Dinneen, managing director at Siguler Guff, who adds that she has been spending a lot of time in Africa recently. “The region has come a long way over the last few years. Initiatives such as the trading blocs in East and West Africa are increasing its attractiveness and deal flow is improving.”

CDC, a UK-based DFI, is encouraged by the improved outlook for African fundraising. The organisation’s managing director for Africa, Rod Evison, points to the fact that funds are now able to attract more private capital as a welcome development. “There was a lot of froth in 2007 in Africa,” he says. “There were a lot of would-be firms trying to get off the ground, but they never did. In some respects, that is a good thing as it has left the way clear for firms that are now on their second or third fund. These can now have good conversations with commercial investors.”

There are also signs of increased capacity among local institutions. As they build their capital bases, they are looking for new homes for their investments and private equity is starting to become a viable asset class for them. “The holy grail is to get more local capital into funds,” says Evison. “South African institutions already back private equity, but there are moves in markets such as Nigeria to allow pension funds to invest in the asset class.” The other positive development in the region has been the creation of Africa’s first fund of funds: South Suez.

Yet despite the optimism surrounding the region, it’s likely that institutional capital may take some time to mobilise. One of the main reasons is that LPs are still working through their own issues. “Investing in Africa means taking a bigger picture view,” says Ngalaah Chuphi, partner at Ethos Private Equity, which is currently raising $750 million for its fourth fund. “Unfortunately, many of the traditional investors in Africa, such as the US foundations and endowments, are still suffering from the indigestion caused by prior commitments and lack of distributions in the past 12 to 18 months – and they don’t want to compound the problem by making new commitments.”


Despite the progress made in the region over the last 10 years, many investors still consider it to be inherently unstable and lacking in management talent. “From our experience, LPs tend to be concerned about the brief track record of many managers in Africa as well as exit prospects,” says Doddy. “But they are also swayed by the fact that Africa gets a bad press in general. We have to overcome their fears about corruption and instability with good data on how the continent is doing in terms of investment and returns. They are far less used to hearing about that.”

And, although many investors may be looking at investing in Africa, they may only do so on a highly selective basis. “We feel that Africa would offer us good diversification and we like the emerging middle class story,” says Dinneen. “But we feel that while it may be the right time to look, it may not yet be the right time to invest. When we do start, it’s likely to be a small part of our overall portfolio.”

“The increasing interest among LPs is there, but it’s from a low base,” says Till Burges, senior associate at HarbourVest. “We’re seeing the first wave of institutional investors in private equity testing the waters. More may follow once there are a few high profile exits. Managers in the region need to prove that they can make money in a significant way.”

So, it seems likely that the DFIs’ role in private equity will continue to be significant for the foreseeable future, although the hope is that it will become less so over time. DFIs will continue to play an important role, says Doddy, “but investment flows from other investors will increase. Look at India: it has the same size economy and yet it receives three times the amount of investment that Africa does. There is plenty of scope to grow.”

The Alternative to fundraising

While many firms in Africa are opting for the traditional limited partnership fund structure, a handful are attempting to do things differently, particularly as institutional capital remains hard to come by. Marlow Capital, Blackthorn Capital Partners and TLG Capital are some of the funds in Africa that are investing on a deal by deal basis.

TLG Capital is a case in point. Established in 2009 by former Goldman Sachs banker Zain Latif and seeded with capital from Kuwaiti investors, the fi rm is hoping to have deployed over $25 million by the fi rst quarter of 2011 in growth capital deals.

While TLG will seek to raise a fund in future, Latif says he is in no hurry to do so. “We decided early on to focus on doing deals rather than raising a minimum amount,” he says. “We felt that if we could seed a few small deals and demonstrate returns, we’d be in a better position to speak to LPs.”

He adds: “A lot of funds raise $50 million but won’t close until they raise $100 million, for example. But our view is that you don’t need that amount of capital to make a statement in, say, Liberia. You need to operate more smartly to get off the ground.”