Biding time

Ask any industry insider which emerging market they’re most enticed by, and chances are they’ll land on sub-Saharan Africa.

“Interest levels are incredibly high at the moment,” Pantheon principal Dushy Sivanithy says. “Ask people which emerging market they think’s most exciting or which is going to deliver the best returns, Africa comes very close to the top again and again.”

Fundraising figures certainly seem to reflect the burgeoning interest. Excluding North Africa-specific funds, in the first three quarters of 2014 Africa funds raised $2.42 billion, more than the $2.11 billion raised in the whole of 2013 and on-track to triple the $1.02 billion raised in 2012, according to PEI’s Research and Analytics division.

However, despite the buzz, when it comes to actually making commitments, the majority of LPs are still reluctant to dip their toes in the water.

“There are a lot of international investors looking at sub-Saharan Africa on the basis of strong macro developments, but very few are actually executing on new opportunities,” says Asante Capital’s Warren Hibbert, who helped to raise South African private equity manager Capitalworks’ $240 million second fund in 2013 and is now working on a $100 million debut fund for Verod Capital, a Lagos-based firm.

TOO EARLY TO TELL

LPs are hesitant about committing, he says, because at this point relatively little capital has been returned to investors. Although current portfolios hold a lot of promise, most investors would prefer to wait a vintage or two.

“Africa is probably going to be a ‘hot’ region for some time to come, but we’re not seeing the level of commitments to African funds on a par with the level of interest,” Hibbert says. “I’d say around 20 to 25 percent of those looking are actually committing.”
Recent events such as the Ebola crisis only serve to increase the perceived risks of getting involved in the African market, says Jeremy Cleaver, UK development finance institution CDC’s Africa portfolio director.

“People still see war and famine and disease and pestilence, and they lump the whole continent into one bucket,” Cleaver says. “For some reason people think the risk on the governance side in Africa is a lot worse than it is in Latin America, and I think that’s just not the case across the board.”

In a market where investment risk, either perceived or actual, is high, a fund manager’s track record and the potential performance of current investments needs to be particularly impressive to attract capital.

“[Sub-Saharan Africa] portfolio returns need to have that wow factor, otherwise if you were a pension plan based in the US Midwest, you’d scratch your head and [say] ‘Why bother when I can earn two and a half to three times money with various funds in my backyard?’” Hibbert says.

IMAGE PROBLEMS

Even the Carlyle Group, which recently closed its sub-Saharan Africa fund almost 40 percent above its $500 million target at $698 million, found many investors were not ready to take the leap.

“I think Africa is still, to a lot of LPs who invest globally in private equity, largely unknown and un-tapped,” says Marlon Chigwende, co-head of Carlyle’s sub-Saharan Africa team.

Adams Street Partners’ Arnaud de Cremiers agrees that many investors are still on a learning curve.

“Although for the last couple of years now Africa has definitely been on the map, and so people are now taking it seriously, there’s still a lot of education to be [done] and a lot of perceptions to be challenged,” he says. “So that means that although a lot of investors are looking at it, few are actually willing to commit capital at this point.”

For some, funds of funds are an ideal way to gain exposure to the Africa story without having to shoulder the burden of risk-mitigation themselves, Sivanithy says.

“People are delegating that responsibility and saying ‘Africa is a bridge too far for me to do myself, but I would like some exposure, I’d like it in a diversified manner, and I’d like an expert to go and do it for me’”.

FIRST TIME AROUND

Actis, the global emerging markets investor that spun out of CDC ten years ago, closed its latest Africa-dedicated vehicle on $212.5 million and its fourth global flagship buyout fund on $1.7 billion in 2013.

“Part of our job is to help [investors] understand not just the quantum of the risk in emerging markets, but how it actually varies from developed markets,” says Actis’ head of investor development Neil Brown. “We don’t use anywhere near as much leverage in many of our investments as is common in developed markets, and so that risk is not as prevalent as it would be in a developed market.”

First-time fund Amethis Finance, which spun out of Proparco, the subsidiary of Agence Française de Développement, closed in June with $380 million committed to private equity and a further $150 million debt commitment from US government development finance institution OPIC.

The success of the Amethis fundraise was in large part due to the team’s joint track record at Proparco, says Sonia Trocmé-Le Page from Global Private Equity, which placed the fund. As well as a history of successful deal-making, the team brought with them a vast network through which to source new opportunities.

“At Proparco they did a number of small deals, and those companies have grown so quickly that they are now good targets for Amethis,” Trocmé-Le Page says.

DRY POWDER

Not only is more capital being raised for sub-Saharan Africa, the funds themselves are getting bigger. The $2.42 billion garnered in the first three quarters of 2014 was concentrated in eight funds, whereas the lower amounts raised in 2013 and 2012 were both spread across 11 funds.

And this looks set to continue, with Helios Investors III in market targeting $900 million, Abraaj Group targeting $800 million for its sub-Saharan Africa-dedicated vehicle, ECP Africa Fund IV looking to raise $750 million and African Capital Alliance targeting $600 million. If closed on their respective targets, just these funds combined would exceed $3 billion.

“[It’s] potentially creating a bit of a problem in that by the end of 2015 there will be a huge amount of capital available to the large-cap space,” Cleaver says. “The dry powder that will be available in that market is very significant.”

An increase in fundraising at the large-cap end could mean there will be too much capital chasing too few opportunities. “There are plenty of businesses of size, there just aren’t many for sale,” Sivanithy at Pantheon notes. “We’ve seen some very competitive auctions at the top end of the market.”

GOING PUBLIC

As well as facing potential problems deploying capital, larger firms could run into trouble when the time comes to sell.

“When [the big funds] want to exit, it’s going to be tough for a number of them because the companies will be very, very big,” says Trocmé-Le Page. “How do you IPO a $600 million company on an African market? Tough. Really tough.”

Although Africa’s stock markets are relatively underdeveloped compared to other regions, they are becoming increasingly viable as an exit route for private equity investments. In May Actis exited Ugandan electricity distributor Umeme through the Uganda Securities Exchange and the Nairobi Stock Exchange, a month after African Capital Alliance completed an oversubscribed $500 million dual listing of Seplat Petroleum in Lagos and London.

On the whole, though, GPs are relying on trade sales and secondary exits, which can often require holding on to companies for longer and working on relationships with potential buyers from day one, says de Cremier.

“It takes time to grow an asset to a certain size where it becomes attractive and meaningful to a multinational or a larger private equity fund to acquire,” de Cremiers says. “[GPs] are putting more focus [on] who could be the potential buyer and in what shape or form that business needs to be in order to fit within that group.”

The Africa story, insiders agree, is an overwhelmingly positive one. Although cautious LPs are still biding their time, interest levels are high, and as returns begin to roll in over the next few years the willingness to commit will likely increase. Challenges remain, but there is undoubtedly money to be made, and sources agree that in sub-Saharan Africa, emerging markets investors who were disappointed with returns in other regions may well find what they were looking for.