Africa’s private equity industry has grown rapidly over recent years, from just a handful of players in the 1990s to more than 200 firms managing over $30 billion of capital between them, according to Africa Expert Network. At the peak of the Africa Rising narrative, strategies targeting the region experienced a strong fundraising environment with over $16 billion raised between 2011 and 2016, according to the African Private Equity and Venture Capital Association.
It is one thing to spot the potential, it is quite another to realise it. We caught up with Actis head of private equity Natalie Kolbe to get her perspective on why local knowledge and a sector focus are integral to making the most of the opportunities all the way from origination to realisation.
How hard is it for firms to deploy capital in Africa currently?
It depends on who you talk to. We’ve observed that the narrative around Africa started to change last year: some people started commenting that dry powder levels had risen in Africa and that firms were finding it hard to deploy capital, even in the face of favourable demographic trends across the continent.
I think that’s certainly a feature at the larger end of the market – if you’re trying to find four $250 million plus deals to do by dipping your toe in the market, that’s going to be a difficult task. There just aren’t many businesses of scale in most African markets and those that do come to market tend to be sold in very competitive processes.
So how can firms find deals?
If you want to originate deals and deploy capital successfully in African markets, you can’t just look at individual country markets and hope to find businesses of scale, as many firms currently do. You have to be prepared to create them. That requires not only deep sector knowledge, but also a clear understanding of emerging market themes. It requires people on the ground across the different markets, who are familiar with local business cultures and who have the networks to identify the high quality, smaller family-owned businesses with the potential to grow organically and through acquisition. You also need the vision – backed up with experience – to create regional and pan-African champions.
Does that mean a heavy emphasis on buy-and-build platforms?
Buy and builds are certainly an important element of growing businesses in Africa, although organic growth plays a significant role. If you take a sub-scale business that is well run and put it together with businesses in other regions, you can build scale, open up new markets and attract high quality management teams. These businesses will then be attractive to strategic and IPO investors when it comes to exit.
The Emerging Markets Payments (EMP) platform is a good example. In 2010, we created an integrated payments services provider – a product that did not exist in the African markets. We focused on building scale but we also needed to achieve vertical integration. We acquired a small business in Egypt that provided card-issuer processing services to banks across Africa. A year later we acquired Visa Jordan Card Services to expand into the Middle East, followed by a South African retailer card business that had been struggling to get into the major retailers because it was too small. Within six months of the South African company becoming part of EMP, it went from loss-making to profitable – that was in part because the large retailers suddenly took notice of what had become a larger business.
You mentioned organic growth. How much of a difference can that make if you’re building a company across such a large continent?
The EMP story also demonstrates that organic growth can play a major role. We took the view, for example, that it would be more cost-effective to build payment infrastructure from scratch in West Africa, where there were few suitable businesses to acquire in any case. When we exited the business in 2016, it was a pan-regional company operating across 40 countries – and that had been achieved through a combination of targeted acquisitions and organic growth.
What are the challenges associated with this approach?
One of the biggest challenges can be finding the right talent. While having an ambitious growth plan can attract top quality teams, it’s not always easy to find people who can operate multi-country platforms in Africa. You have to start with finding the right CEO who shares your vision and has the right skills. In EMP, we could see that electronic and credit card payments were just starting to take off in Africa and we wanted to create a business that could do the same in this space as mobile phones had done for communications in Africa. These plans meant we could attract the former CEO of mobile phone operator MTN, Paul Edwards, who had exactly the right experience. You also have to consider the different layers of management and not just the C-suite – and that can be a particular challenge because you have to bring different cultures together.
You also talked about the importance of understanding emerging market themes earlier. What do you mean by this?
You have to understand the specific features and nuances of what will make a successful business in emerging markets – and this applies equally to Africa as to other markets in which we invest. The point is that if you come from a developed markets investor perspective, it can be easy to jump to the wrong conclusions.
Tertiary education is a good example of this, where we have experience from our investment in Honoris. So, in developed markets, universities are often public, based in suburbs with large grounds and beautiful facilities. The situation couldn’t be more different in Africa. Here, our experience shows us that the future of education is a complementary mix of public and private financing and provision.
Clearly, that’s a great investment opportunity driven by the demands of a rapidly urbanising population of African consumers looking to secure their own and their children’s future quality of life by investing in their education. You need experience of what works in Africa for Africans. There’s no point in locating these universities in the same kinds of places they would be in the US or in Europe, for example, because the students can’t get there – there’s little or no transport infrastructure. The campus needs to be in a central location and there needs to be a focus on online opportunities to make education accessible for those in more remote areas. These are considerations that might not be so obvious for investors who are not experienced in our markets – you need to understand not just how Africa works but how Africa lives.
What’s your view on some of the less positive macro-economic conditions we’ve seen in markets such as Egypt and Nigeria?
We are not completely immune to downturns. But we do find that when times are difficult, other investors withdraw – we tend to go against the tide and find good opportunities. That’s the value of having several decades of experience of investing in emerging markets – we know that macro conditions change over time, political situations come and go and regardless of all this, people still have to live their lives.
That’s why we have a sector focus centred around secular growth trends that are often decoupled from GDP – such as payments moving from cash to credit cards or online, or a growing need for healthcare or education.
Where we do feel macro volatility is in currency as we are dollar investors and we pay a lot of attention to this area. We use local currency debt to mitigate this and we shy away from backing companies that rely largely on exports. We look to invest behind or create market leaders.
With the right management and approach to value creation, when things calm down, they will be in a strong position while weaker companies will not have survived – our investment in Egyptian snack foods business Edita demonstrates this well.
And finally, you’ve recently had a few exits via IPO. How is this shaping up as an exit route?
Public equity and capital markets are developing across Africa and are starting to attract more foreign capital – a necessity to create depth in the markets. As a result, IPOs will become a bigger feature of our exits: we’ve already exited via IPO across a number of markets, such as Egypt, Uganda, Kenya and South Africa. To be successful, you need to be certain that there will be sufficient interest, including from foreign investors as this gives you better pricing power, and you need to be listing a relatively large business, of which there are few in Africa.
LOOKING TO THE LONG TERM
When Actis invested in Egyptian snack foods business Edita in 2013, the country was going through a major upheaval – indeed, Egypt’s President Morsi was overthrown just days after the deal signed. Yet Actis had been in discussion with the family owner for some time and could see the company’s potential – it was a high-quality business that sold large volumes of pre-packaged bakery goods at low price points across 60,000 of the country’s mom and pop stores, run by a team that that had spotted the opportunity to capitalise on the changing tastes of Egypt’s 90 million-strong population.
While other investors and buyers had been interested in the company, the growing social and political unease that was becoming apparent in the country had started to deter a number of these. “Egypt was not flavour of the month at the time,” explains Kolbe. “The founders understood that instability was coming and wanted to diversify some of their wealth, but their options were narrowing because of the social unrest.”
Actis, however, took a long term view. “As we often do, we went in when the tide was coming out,” says Kolbe. “We could see that if we could back a strong management team and a good business, we could create a stronger business that would gain market share as weaker competitors fell away.”
After investing in 2013, Actis helped the company acquire brands that it had previously manufactured under licence, immediately saving the business $2 million in annual licensing fees. This also allowed the company to embark on a process of refining and refreshing Edita’s stable of brands. The Actis investment provided capital for expansion, with Edita nearly doubling its manufacturing capacity, launching a new headquarters and logistics hub and upgrading its enterprise resource planning systems to enable further growth.
The firm also helped professionalise the business, upgrading its ESG framework and instituting regular, formal board meetings and establishing key sub-committees. “In common with many businesses we back, Edita was a family-run business,” says Kolbe. “By putting in place the right corporate governance and institutionalising the company’s processes and procedures, we were able to create a world-class business that would be attractive on exit.”
In 2015, Edita listed on the London and Egyptian stock exchanges in an IPO that was 13 times oversubscribed. While a successful outcome, it wasn’t without its challenges. “At the time, the local currency was very volatile, but we knew the business was strong and we were able to communicate that to investors, who also took comfort from our involvement with the business.”
Actis fully exited the business in 2017, following a final sell down of its stake, returning 2.5x MOIC in USD or 3.5x in local currency. “That’s no mean feat considering the recent flotation of the Egyptian Pound,” she says.
This article is sponsored by Actis and appeared in The Africa Special 2017 published in Private Equity International in September 2017.