Africa Keynote Interview: Actis on the biggest opportunities

With seven decades of investing in Africa behind it, Actis has seen a great deal of change across the continent. Yet while different challenges have emerged, the firm retains its focus on investing behind the themes of a swelling middle class, rapid urbanisation and a growing and youthful population.

In addition to its private equity activities, Actis also invests in energy through its global infrastructure fund and recently raised its third real estate fund for Africa – Actis Africa Real Estate Fund 3 – which reached a $500 million final close in June, comfortably above its $400 million target.

Private Equity International caught up with Actis partner and co-head of private equity Natalie Kolbe at the firm’s Johannesburg office to find out the opportunities on offer.

As an investor in African countries for decades now, Actis must have seen significant changes. What do you consider as the most important developments over the last few years?
If there is one thing about Africa, it’s that it is never constant. New challenges and opportunities spring up every year. If we look back 20 years, however, the most important changes are the rise of democracy and the increased stability of governments. There has been a significant improvement in the political climate and that has led to better governance and reduced corruption.

Borders have opened up and technology has allowed the continent to become much more connected. This has allowed a rapid growth of the middle class, with higher disposable incomes, and the highest rate of urbanisation in the world. By 2035, more than 50 percent of Africa’s population will live in urban areas.

This brings tremendous opportunity as it gives easier access to the continent’s new consumers, creates the need for real estate in the form of offices and shopping malls and requires solutions to strains around infrastructure, particularly energy.

What kinds of opportunity are you seeing now?
Much of the opportunity comes from rapidly growing economies – the World Bank estimates average GDP growth of 4.5 percent across Africa for 2017-18, with some countries showing much higher growth. Africa also has the fastest growing population in the world – in 2034, the continent is expected to have the largest working age population globally, with 1.1 billion people, according to the McKinsey Global Institute. This is creating demand for healthcare, education, financial services, consumer goods and services, real estate and infrastructure.

This plays into our investment themes. For example, we’ve recently invested in Mundiapolis University in Morocco, which offers 38 degree courses and high rate of employability – 93 percent of graduates are in employment within 12 months.
And in financial services, older systems are being leapfrogged – much as we saw with mobile telephony bypassing the need for fixed lines. So we may see mobile payments supersede credit cards. In addition, as the emerging middle class grows, many people are accessing financial services products for the first time, from bank accounts, to insurance and pensions. Our recent investment in Nigerian pension fund administrator Sigma is an example of how we are tapping into this opportunity.

And what about challenges?
There are three key trends that we are keeping a close eye on. The first of these is the currency impact – there is a lot of volatility right now and we have to manage exchange rate risks. The second is access to foreign currency. This determines which markets we can invest in as we need to be able to take US dollars out of a country when we exit.

There have been some improvements in some markets in this regard – for example, Nigeria’s recent decision to float its currency is a step in the right direction. And finally, we keep an eye on commodity prices. We don’t invest in commodities, but the movement in prices affects both stock markets and consumer spending.

But we take a long-term perspective. This means that macro issues don’t scare us away; it’s often the reverse as we see dislocations in markets providing opportunity. We understand the dynamics in the different markets so while other investors may choose to sit on the sidelines we can spot good investment prospects. When Egypt was going through political turmoil, for example, we continued investing there and our investment in CIB bank proved highly successful as we managed to continue growing the business even through times of civil unrest before selling in 2014.

What do you think it takes to be successful in Africa?
You really need people on the ground who understand the markets, who know the partners they want to do business with and who can build good relationships with those partners. It’s very hard to make it work if you operate a fly-in, fly-out model because you need to understand counterparty risk and you really need to know the right people – from the entrepreneurs to the regulators.

At Actis, our people in Africa are Africans. We were born and live in these countries, we went to school and university here and so we know the business environment inside out. That allows us to build up proprietary dealflow, develop angles on deals and navigate constantly changing markets. Roadblocks are often thrown in our path in Africa, yet we know how to get round these barriers. We also have a relationship with regulators, so we often know what’s coming up in terms of changes and reforms.

Exits are now starting to come through, with 2015 a record year, according to recent AVCA/EY statistics. What are you seeing?
There were a lot of deals completed in Africa in the pre-crisis era of 2005 to 2007, just as in more developed markets. These businesses have all been through the crisis, have regrouped and can now show two or more years of growth. These companies are now starting to be exited and this will show through in the exit figures. But we are also seeing the development of a variety of exit routes, with private equity buyers, multinational strategic buyers, local trade buyers and public markets all showing increasing interest. So far, our exits in Africa have been fairly evenly spread across these four routes, although we’d expect public markets to become more of a theme for Africa’s private equity exit scene in general.

What trends do you think will be important in Africa in the near and medium term?
One thing to look out for will be the direction of commodity prices because these underpin the growth of many African economies. If, for example, the oil price increases, we will see a boom in countries like Nigeria and Angola. That said, the consumer theme will continue to be important regardless of commodity price volatility.
Over the medium term, the increasing democratisation of Africa will create further opportunity as new markets open up. We are very confident and excited that the prospects look good for the continent. ?

Natalie Kolbe joined Actis in 2003, having started her career at Investec Bank and then Thebe Securities. Based in the Johannesburg office, she is a partner and head of private equity at Actis. Her recent deals for Actis include Sigma Pensions in Nigeria and Coricraft, a South African furniture maker.

This article is sponsored by Actis. It first appeared in the Africa Special 2016 supplement of the September 2016 edition of Private Equity International.