8 Miles closed its debut mid-market Africa fund on around $200 million in August 2013. The fund has since invested in six mid-market companies across Africa, seeking engaging opportunities in atypical investment destinations such as Ethiopia, Egypt and Uganda. Private Equity International caught up with partner and co-founder Doug Agble to hear how the firm helps its portfolio companies’ transition to the next level.
What are the elements that make the mid-market so compelling?
Two key factors: volume of dealflow and the ability to generate above market returns through both alpha and beta. Businesses in most African economies are generally SMEs and mid-market companies and so there is naturally more dealflow in this space. We focus on companies that are in key stages of transition, offering increased opportunity for enhanced returns. At the larger end of the spectrum there are simply fewer companies and fewer deals. Furthermore, large companies tend to be focused in fewer sectors – eg, extractive industries, infrastructure, telecoms, financial services – whereas mid-market companies are more prevalent across all sectors of the economy.
Our strategy is to take significant minority or majority positions, typically in businesses in transition with revenues of $10 million-$50 million. They are often entrepreneur/family-owned, and they’re reaching that stage where they’re simply too challenging for the entrepreneur/family alone to run. They need to become more corporate and professional. So the ability to improve performance by just helping them to professionalise and get the basics right is huge.
How do you go about sourcing deals?
Thus far, we have made six investments and all have been proprietary, with one exception. We have sourced deals in different ways: some through leveraging our existing (and expanding) networks in Africa; some through identifying gaps in specific sectors and geographies and complementing this desktop analysis by approaching relevant targets on a very bespoke basis; in one or two cases we have participated in structured processes, such as privatisations in Ethiopia.
We have also tried to focus on a narrower group of tier-one countries and pursued depth rather than breadth of coverage. As with most GPs in Africa, we receive several inbound enquiries, but the challenge here is selecting the ones that fit our investment criteria and are worth pursuing.
Our sense is that, while the recent growth of intermediaries in Africa is here to stay, there is still a lot of opportunity for proprietary deals, particularly in the mid-market space. Equity capital markets in Africa are not as developed as they are elsewhere and so if you’re an entrepreneur in Africa looking to fund growth of a business, your funding options are a lot more restricted. This is especially so for companies below a certain size which, by definition, tend to be off the radar for many of the larger African private equity funds.
However, we do find that entrepreneurs are becoming a lot more savvy. They’re not looking just for capital, they’re looking for someone who can take them to the next stage in their evolution. And this is where we try to emphasise our hands-on approach as partners.
What are the first steps for a newly-acquired business?
During the due diligence process, we develop a ‘post-completion action plan’ (PCAP) with the owners and management of the target. It forms part of the package of execution documents and gets signed and executed alongside the more traditional documents, ie, SPA, SSA, SHA, etc. It serves as a way to really focus people’s minds on the transition and that we are really serious about implementing these changes.
The PCAP covers various themes including five core silos: strategy and implementation; finance and reporting; ESG; human resources; and board and corporate governance. The PCAP identifies the actions in these areas and details the costs associated with them. Implementation of the PCAP is an ongoing journey with the business that commences once we make the investment but does not have a fixed time period such as 100 days or the like. Helpfully, later on in the transformation process, it can also play the role of an aide-memoire when recollections sometimes fade.
What’s the most common issue you encounter in portfolio companies?
Two recurring themes, and certainly ones we also hear from our peers in the industry, are sourcing good talent and the relative weakness of finance departments; the lack of consistent data, low visibility and granularity on margins; poor and unreliable reporting systems; weak and ineffective controls.
For example, we have some businesses where EBITDA margins are very healthy at a company level. But the finance department would really struggle to provide margins at a product level, and select the best performers by net margin rather than by sales volume. Such information is key when you are trying to guide management to pursue the most profitable growth. The challenge becomes finding the people and putting the systems in place that enable the provision of such information to drive strategic decision-making. So we really try to take ownership of that finance function, even as minority shareholders, because it is an area where we can leverage expertise and experience to implement meaningful change.
But it is not just at the senior management level; very often there are equally critical appointments at the level below the senior managers, the “engine room” of finance functions, where sourcing or helping senior managers to source personnel is pretty critical. You need to have the networks to find those people at the middle and junior management levels and we, as a firm, continue to develop ways of tapping into networks of people at these levels. Some of it involves tapping into the diaspora or local resources or local university graduates who are dynamic and can be trained appropriately. We have also had some success finding experienced people with specific skills in international MBA programmes. In one case we had a highly experienced MBA graduate who, as a result of his spending an extended period of time in the company and analysing all the major cost items, managed to identify tangible savings in excess of $1 million in one of our portfolio companies.
What is the biggest challenge when working with founder-run businesses?
For some entrepreneurs who haven’t raised private capital before, it can be a bit of a shock to the system. You can have as many conversations as you want during the due diligence process, but the fact of the matter is, entrepreneurs who have been doing things their own way for the last 15 years are not used to people questioning what they want to do. That sometimes can precipitate an emotional reaction. This is why it’s important to have an agreed PCAP which provides a roadmap and allows us to have impact. Part of the process is also upgrading the management team. Quite often, particularly in founder-run businesses in Africa, people are given senior positions because the owners trust them rather than for their specific competence. The desire to have people you can “trust”, typically family members, has often over-ridden the need to have competent people. You will generally find a significant talent gap between the founder and the next level of management.
How do you manage that process of upgrading the incumbent to someone who is actually a better fit and brings in fresh thinking?
It is challenging. What we’ve done so far is try to manage these things carefully – you have to balance the need for speed of transformation with the need to maintain a good working relationship with the founder. It is challenging and we will not get it right all the time. It might hamper the rate at which one can grow a company, but if you try to implement wholesale change too soon it can lead to fall-outs with the founders.
What skills do private equity firms need to succeed in Africa?
A different set of skills is needed in selecting and making the investment versus maximising the value of the investment. Post-investment, the skills needed depend on which space in the market you operate as a PE firm. In the mid-market a lot more “hand-holding” is required than in the large-cap space. The actual skillset required is not particularly sophisticated: introducing best practice, eliminating inefficiency, improving the work ethic, introducing personal accountability, enforcing the discipline of regular reporting, ensuring alignment of interests for all parties involved, etc, and then disseminating these practices throughout the entire organisation.
If you look at our team, it is unusually weighted towards people that have operational experience rather than people with financial markets experience because those are the skills that we need to drive the transition and eliminate inefficiency in these companies.
You’ll always have the growth because of macro trends: population growth and demographics, sector dynamics, low penetration rates, import substitution opportunities, etc. The question is, can you eliminate the inefficiency? If you can do that successfully, then you have the double positive whammy of higher growth and lower cost, resulting in greatly enhanced margins. ?
Doug Agble was a senior member of the Africa-focused private equity firm Helios Investment Partners, which he joined in 2006. He played a key role in a number of significant transactions before joining 8 Miles in 2010. Prior to Helios, he spent five years at Terra Firma Capital Partners (formerly Nomura Principal Finance Group).
This article is sponsored by 8 Miles. It first appeared in the Africa Special 2016 supplement of the September 2016 edition of Private Equity International.