Africa: Breaking the language barrier

With its growing economies and increasingly affluent young populations, resource-rich West Africa is proving an attractive destination for investors.

In a survey by the African Private Equity and Venture Capital Association this year, 70 percent of the 68 global LPs questioned identified West Africa as the most attractive region for private equity investment on the continent over the next two years.

The strongest market – arguably in sub-Saharan Africa as a whole – and one that has been on LPs’ radars for a number of years is Nigeria, the largest country in the continent with a GDP of $568.51 billion in 2014, according to the World Bank.

Uncertainty surrounding the country’s presidential elections earlier this year has given way to renewed positivity following a peaceful handover of power. Lagos-headquartered African Capital Alliance, which is in the process of raising its fourth fund for Nigeria and West Africa, targeting $600 million, is seeing strong support from international investors, and has already secured an $85 million commitment from the New York State Common Retirement Fund, its first from the public pension.

However, Nigeria’s macro picture is not all rosy. Tumbling oil prices are giving some investors cause for concern.

“The impact of oil and the implications on the Nigerian economy is significant,” says Nick Tims, a managing director at Investec Asset Management. “We’re staying away from oil. We’re still looking at oil services, but as a firm we don’t look at the direct resources in funds going forward.”

While oil prices sound a note of caution for some investors, others see the sector’s headwinds as an opportunity. Helios Investment Partners, which closed its third fund on $1.1 billion earlier this year, has made two investments in the sector in 2015, acquiring a 12.4 percent stake in Africa Oil for $100 million in May and, alongside Netherlands-based Vitol Group, a majority stake in Oanda’s Nigeria-based downstream energy business for $276 million in June.

The firm is also understood to be raising a $300 million dedicated oil fund to take advantage of attractive valuations in the sector. A source familiar with the fundraising told Private Equity International earlier this year that the firm is seeing a number of good opportunities within the sector, and due to restrictions regarding sector concentration it is unable to take full advantage of them using just its generalist vehicles. Helios declined to comment on the fundraising.

“Oil and gas, and I would say energy in general, is quite an attractive sector because you have, on the resource side, access to low-cost resources and new world-class discoveries all the time,” says Souleymane Ba, a principal on Helios’ investment team. “At the same time, given what’s happening in the global oil environment, oil and gas sector valuations are quite attractive. We always like a sector when capital is scarce, that’s when you can really price your capital very judiciously.”

Beyond Nigeria, Francophone West Africa is increasingly opening up as a destination for private capital. According to RisCura’s Bright Africa report, real GDP growth in the region this year is at 6 percent, the same as Ghana and higher than private equity hotspots Nigeria (4 percent) and South Africa (3 percent). 

“There are a number of investors that have started investing in Nigeria five years or so ago,” Jean-Marc Savi de Tové, a partner at Francophone West Africa-focused Cauris Management, told PEI in August. “But now they’ve realised that in West Africa you have another 15 countries which together pretty much represent the size of Nigeria. And within those 15 countries you have probably eight that are very homogenous in terms of speaking the same language, having the same currency, one single central bank, one single business law, so it becomes a bit easier to do business and go cross-borders.”

Emerging Capital Partners (ECP), which has a strong track record of investing in Francophone West Africa, is currently in market with its fourth pan-African vehicle, targeting $750 million.

“Francophone Africa is less well-known to international investors mainly due to the language barrier,” says Hurley Doddy, managing director, founding partner and co-chief executive of ECP.

Investors are showing increasing interest in the region, he says, but are hampered by the difficulty of finding experienced teams.

“Over time we’ve been able to attract more and more private capital, and that comes both from Africa, where we have insurance companies and pension funds, but also from Europe [and] the Middle East,” Doddy says. “Sovereign wealth funds are [also] an important source of capital for the industry and for Africa.”

ECP also has 35 exits under its belt to demonstrate possible exit strategies. In 2014, it sold Togo-based regional commercial bank holding company Oragroup to Gabon’s Strategic Investment Fund, generating a 2.2x return, and exited feminine and baby hygiene products manufacturer Société d’Articles Hygiéniques through a listing on the Tunis stock exchange.

The firm is understood to be in the process of selling Continental Reinsurance, which is listed on the Nigerian stock exchange, and in May ECP sold west and central African insurance group NSIA Participations to fellow private equity firm Amethis Africa Finance, which picked up 5.4 percent, and the National Bank of Canada, which acquired 20.9 percent, highlighting the increase in interest from international strategic buyers in the region.

For a smaller player such as Cauris, which is currently investing its 2011-vintage €60 million Cauris Croissance II, an increase in interest from larger private equity firms and strategics provides healthy exit routes.

Savi de Tové expects to see a number of deals completed by larger players in Francophone West Africa in the coming year, although, he warns, it is no easy feat.

“Francophone is a nice area because most players are not able to tap into it. So if you’re able to transact in the region you have a competitive edge,” he told PEI previously.

“It’s not just about speaking French, by the way. It’s about being close enough to the businesses. A number of players think that if you speak French and you have a business card, then that means you have a potential deal. It doesn’t work that way.”