Africa: Managing expectations

There is no shortage of interest in Africa from emerging markets-focused private equity firms.

At PEI’s recent Emerging Markets Forum held in London in November, delegates were asked which emerging market offered the most attractive investment opportunities in the world at the moment, outside their home territories. Africa topped the poll, and by some distance: it received 27 percent of the votes cast, outstripping both Latin America (20 percent) and China (11 percent).

The fundamental argument is clear. Africa offers attractive demographics (including a burgeoning middle class), an abundance of natural resources, faster growth rates than most developed economies – and yet continues to suffer from a desperate lack of infrastructure and services. 

However, so far the hype has not translated into action. In 2011 to date, there have been $1.7 billion-worth of private equity deals (growth capital and buyouts) done in sub-Saharan Africa. At just $792 million, buyout activity is actually 87 percent down on its 2007 peak. Indeed, if we take South Africa out of the equation, only 57 private equity deals have been done in sub-Saharan Africa since 2000. 

Different countries in the region present different challenges. Although some governments, such as Rwanda and Ghana, are taking steps to make foreign investment easier, other countries still have a lot of work to do. This makes it extremely difficult to manage cross-border projects in the region, particularly in sectors where cooperation between governments is critical, according to Catherine Swanepoel, investment manager for Africa at development finance institution CDC Group.

If you're not willing to do [everything], you're going to fail

One GP familiar with the region stressed that in Africa, the private equity firm has to do everything – all the way down to the logistics of clearing a road in order to let vehicles access a building site. “If you are not willing to do that, you are going to fail,” he said.

The dominance of the family ownership model is also a major barrier, says Murray Grant, a partner at emerging markets private equity firm Actis – many families are reluctant to give up majority control stakes investors want.


However, the key challenge faced by investors in the region, according to various sources, is finding or building the right management team. Very few local people have had experience working in large, global corporations. This lack of business experience and sophistication often frustrates firms trying to implement effective change and de-risk investments. 

As a result, it’s difficult for investors to strike the right balance. As Grant says: “Sub-Saharan Africa is a region bursting with entrepreneurship and talent. But as a private equity investor you have to place a premium on management experience and the skills required to run larger organisations.”  

The climate is certainly improving for private equity in Africa. Governments are gradually getting more supportive, and its GDP growth story will look increasingly attractive if the developed world continues to stagnate.

But perhaps the most significant change relates to the growing number of investment professionals from the African diaspora who have studied in developed countries, but are now showing interest in returning to their homes in Africa, according to Swanepoel. This could be the key to unlocking a new generation of managers in sub-Saharan Africa who have the business experience and the local knowledge necessary to make private equity investment a success.