North Africa expands towards sub-Saharan Africa

GPs in the region, which is traditionally bracketed with the Middle East, are now looking southwards.

Tunisia is on the brink of being admitted into Africa’s largest trading bloc, the Common Market for Eastern and Southern Africa. Its accession in June will take the member countries to 21. The move is the latest example of the strengthening economic bonds between North Africa and its southern neighbours. Historically, North African markets have looked towards Europe for export markets and to attract investment. But the pace of economic growth in sub-Saharan Africa, which outstrips Europe, is pulling the attention of governments, companies and GPs south.

“We do see increasing commercial focus from North Africa toward sub-Saharan Africa as an important development in the African market,” says Ann Wyman, Tunis-based director at AfricInvest. Wyman sees the firm’s expansion across Africa since it started in North Africa in 1994 as an early indicator of the trend.

The GP is currently raising Maghreb Private Equity Fund IV focused on Algeria, Egypt, Morocco and Tunisia and targeting €200 million with a €250 million hard-cap. It hit first close at the end of last year on €152 million. “We are moving toward an even broader pan-African strategy as investor appetite for exposure to SMEs across the continent continues to grow,” Wyman says.

GPs based in North Africa see similar investment themes in sub-Saharan Africa, where population growth, urbanisation and a rising middle class are driving demand for services, infrastructure and consumer goods. Investors are seeking to replicate their North African success in sectors such as healthcare, education, transport and logistics, business hospitality, retail, food and beverage, and financial services.

Banking on it

The expansion of Moroccan banks has been instrumental in cementing the connection, particularly in francophone Africa. “The financial sector has created a platform for many large companies and SME’s to establish commercial links and subsidiaries and for the development of larger projects,” says Albert Alsina, founder and managing partner of Barcelona-based Mediterrania Capital Partners.

Alsina believes the connection between North Africa and sub-Saharan markets is now stronger than with the Middle East. Few of his firm’s 22 acquisitions, which are primarily North Africa-focused, have eastward links. About two-thirds of the portfolio companies are trading with or have expanded into sub-Saharan African markets. These include Morocco’s Travaux Généraux de Construction de Casablanca, which has subsidiaries in Gabon and Côte d’Ivoire. MCP acquired the general contractor in January through its third fund, MC III, which held a first close in November on €103 million and is targeting €250 million.

The acquisition of a minority stake of Abidjan-based meso-finance company Groupe Cofina, which has a presence in several francophone markets, followed in March. The deal marks MCP’s first investment in a business headquartered in sub-Saharan Africa.

Heading north

Sub-Saharan GPs are surrounded by opportunities in neighbouring countries and typically stay local. But Amethis Finance, which has an established footprint in sub-Saharan Africa, has widened its focus. The final investment from its €280 million Fund I was in Morocco’s CFG Bank alongside AfricInvest. That was followed by an investment in Moroccan industrial equipment distributor Groupe Premium, the first deal from Fund II, which is seeking to raise €300 million.

“We are a natural partner for North African companies looking south,” says Luc Rigouzzo, a managing partner at Amethis. “Groupe Premium is a perfect example. It was looking to grow in Morocco but it was key [for the business] to make acquisitions and grow in sub-Saharan Africa.” The company has extended into Burkina Faso, Cameroon, Côte d’Ivoire, Mali, Senegal and Togo. In line with the shift, the firm is adding an office in Casablanca to ones in Abidjan, Paris, Luxembourg and Nairobi. It could even establish a dedicated North Africa fund, says Rigouzzo. “We see potential in each country and potential synergies with the companies we invest in on the [African] continent.”

“When we are marketing a pan-African fund, we sometimes have to talk to two different departments within one institution: one that focuses on MENA and one on sub-Saharan Africa”
Ann Wyman

North-south investment is prevalent in but not limited to French-speaking markets. “The common political linkage back to France is less important for businesses than in the past,” says Wyman. “If it’s GPs and companies leading the charge in linking up north and sub-Saharan Africa, it doesn’t need to follow the traditional paths.”

AfricInvest has moved into Egypt, recognising the potential for Egyptian and sub-Saharan co-operation, says Wyman. “There’s a lot of low-hanging fruit there if you think about its proximity to East Africa.”

Pan-Africa investor Actis, which has invested more than $3 billion across the continent, is not bound by language either. In mid-2017 it launched Honoris United Universities, a platform that began with Actis’ 2014 investment in Tunisia’s Université Centrale Group. That expanded into Morocco through acquisition and then to South Africa where it acquired Management College of Southern Africa and Regent Business School.

Bridging the gulf

Commercial linkages between north and sub-Saharan Africa may be multiplying, but Sherif Elkholy, a partner at Actis who is based in Cairo, says North Africa is not detaching from the rest of the Middle East. “There are plenty of examples of [North African] businesses looking to expand organically or to acquire in the Middle East or to be acquired by Middle Eastern businesses to accelerate their growth,” he says.

His firm invested in Cairo-based Emerging Markets Payments in 2010. The company expanded into sub-Saharan Africa through acquisition and then into Jordan before being sold in 2016 to UAE-based Network International.

“We have been focused on Africa and through our investee platforms we have looked opportunistically at acquisitions and expansion into the Middle East,” says Elkholy.

However, Wyman says the convention to group North Africa and the rest of the Middle East under the MENA banner can present a challenge when dealing with LPs. “When we are marketing a pan-African fund, we sometimes have to talk to two different departments within one institution: one that focuses on MENA and one on sub-Saharan Africa,” she says.

LP appetite for North Africa is rising, according to the African Private Equity and Venture Capital Association, increasing to 50 percent of LPs it surveyed last year, up from 11 percent the year before. “We have been seeing a gradual rise in activity driven by the increasingly stable outlook [in North Africa],” says Enitan Obasanjo-Adeleye, AVCA head of research. “More IPOs have been tested in the North African market and that tends to attract attention.”

Investors are less concerned about geography, it seems, than GPs’ ability to execute deals and generate returns. “When it comes to geographic expansion, LPs understand that it can be a risk mitigation strategy,” says Obasanjo-Adeleye. “And when it comes to exit opportunities you might be more limited if you are focused on one country or region.” However, LPs “do want GPs to demonstrate knowledge of the market they are diversifying into”, she adds.

LPs recognise it “is a natural progression,” to look to sub-Saharan Africa, says Alsina. “The danger comes when teams are forced to go into a geography and are not prepared because they don’t have the local knowledge or networks or resources to cope.”