Africa is an exciting place for private equity. Many countries on the continent are enjoying rapid economic growth, often courtesy of a burgeoning middle class with increased disposable income. And while the majority of African private equity deals agreed in the last four years have been in South Africa, the buyout market is expanding into other parts of the continent: for instance, The Carlyle Group recently made its first investment from its new sub-Saharan Fund on ETG, a business based in Tanzania.
But despite these positive indicators, it remains extremely challenging for GPs to find high quality management teams for their portfolio companies. The local buyout market is still relatively immature, and talent (especially outside South Africa) is scarce. “It is a very consistent message across most GPs,” says Roddy McKean, head of the Africa practice at Webber Wentzel. “There is a lack of talent, because there is a lack of skills.”
“The economies in the West are developed to such an extent that private equity investors can fairly easily hire management for investee businesses,” adds Mark Ransford, director for West Africa at Actis. “That model in Africa is much less developed.”
Obstacles to finding good talent vary from country to country, says Ferdinand Ngon, a managing director at Emerging Capital Partners. Chad, Mauritania and Gabon are particularly difficult places to attract talented people, in his experience. “In Gabon, for instance, most people work in the civil service where they get very good salaries. So the incentive to go and suffer the hassle in the private sector is not there.” This is true for most countries with an underdeveloped private sector, he says.
THE SKILLS GAP
Skill levels are also still an issue, despite some big advances in educational standards across Africa, according to Ngon. “If it’s just having access to people that can read and write – that is getting better by far. But when it comes to actual skills, there is still a long way to go,” he says.
The issue is that educational improvements take years to bear fruit, agrees Ransford. “If you are educating 10 year olds today, they only really become economically productive in their early twenties, and senior managers in companies in their mid-forties. So education today yields very strong results, but only in 30 years’ time.”
So in this fast-changing environment, Ngon argues, the best solution is to hire someone who can adjust, rather than hope you find someone with the appropriate training. “The young generation in Africa tends to cope very quickly with new technology and methodology and so on. What they lack is the exposure, the fact of being put in the actual situation in order to acquaint themselves with what is required,” he adds.
This requires private equity owners to be very active. “You have to be very hands-on, on a daily basis, and keep in mind that you need something like a year or two for the person to adjust,” he says.
However, logistical issues may get in the way of this strategy, McKean points out. “If you are a GP based in South Africa and you have portfolio investments in say Nigeria, Kenya and Zambia, those countries are not next door to each other,” he says. “Lagos is an overnight flight away from South Africa. So you have to be prepared to do a lot of travelling, or have people on the ground [who are] able to run those businesses and manage the portfolio.”
Portfolio diversification is important here, says Ngon. “When we build up our portfolio we make sure we don’t only have companies with management challenges. We also make sure we have companies where the management skills are already in place, either because we have an international sponsor or because we were lucky to find the right management when we invested.”
One extremely positive development is the growing trend for people in the US or Europe with an African background to come to Africa and take up managerial roles, industry sources say. “There are bankers that used to work at Morgan Stanley in London, for instance, and have decided to move back to Nigeria with their families and build corporate finance practices in Lagos to start up entrepreneurial businesses. They are very high quality people, with very strong skill sets and lots to bring to the economy,” says Ransford.
However, there’s not enough of them to make a huge difference, according to McKean. Equally, their experience or expertise may not always be directly applicable. “If you have someone who knows Nigeria, that doesn’t mean this person will know Ghana, even though they are more or less next door to each other,” he says.
McKean believes that although some international expertise may be desirable, you need to combine that with local talent. “You would want to have local people involved in management of the business because they know how the country works.”
Some firms specifically prefer to hire local management teams. At Actis, about 80 percent of its portfolio company management teams are local Africans, while about 20 percent are Africans that have previously lived and worked abroad.
It’s a similar story with Helios Investment Partners: locals account for the vast majority of its management teams. “Some of the large corporate players will bring in an entire European team. My personal preference is to work with African management teams, because it is just easier. Africa should be managed by Africans,” says Marin Dirks, an operating partner at Helios Investment Partners.
However, as the African buyout market gets ever more crowded – with the likes of Carlyle stepping up their activity – the war for talent is getting ever more competitive. “The investor base is widening, [so] there are more people looking for the same skills in the market and therefore those skills are getting spread more thinly,” says McKean.
Some African governments are also making the situation more complicated by trying – either through legislation or on a case by case basis – to make sure that local people benefit from large international investments or projects. This can be a particular problem if you’re trying to move managers around within the region, says Ngon. “The idea is that each of the countries wants to make sure their nationals have as much access to job opportunities as possible. If you want to bring in someone from the UK or the US, it is normally not an issue. But if you want to take a Cameroonian to Gabon or Chad, then you have a challenge.”
All that said, the challenges of finding good management teams are clearly not preventing established firms from investing on the continent, or deterring new players from entering the market. And to some extent, this is a problem all over the world – particularly in emerging markets. “Finding the right talent is always a challenge,” says Dirks. “The right people with the right experience, background and mindset are costing money. You see that on all continents.”