Following the highs of the period leading up to 2015, when the ‘Africa Rising’ narrative was at its peak, the last two years have been rather more challenging for some of Africa’s private equity investors. The region’s largest markets experienced volatility: both Egypt and Nigeria have seen significant currency devaluations, while South Africa faced a political crisis that resulted in the ousting of President Zuma.
Actis has been one of the most active investors in Africa. The firm has a heritage tracing back 70 years on the ground across the continent and has committed $4.5 billion since spinning out of CDC 15 years ago. We spoke to two Actis partners Natalie Kolbe, who is global head of private equity based in Johannesburg, and head of Africa Rick Phillips about how to source high quality investments and generate value in, sometimes, unpredictable markets.
How has recent volatility in some African nations affected private equity dealflow?
Natalie Kolbe: I’d say it did affect dealflow in certain instances, although we’re seeing greater stability now as currencies have found a level. In West Africa, in particular, there was a period where deals were paused. When you have such a significant currency devaluation, such as in Nigeria, investors and business owners need a little time to recalibrate their expectations. If you are a business owner, for example, and the currency devalues by 50 percent, you may have lost half your wealth overnight.
That meant that conversations we had been having in Nigeria stopped for a period – we kept talking but we put our pens down until the currency stabilised. Meanwhile, businesses needed a little time to recover and close the perceived gap.
In South Africa, the story was a little different. People didn’t move away from deals completely, they simply wanted to wait and see the outcome of the political situation. It just meant deals were on hold for a while – owners saw little point in sending sales memoranda six months ahead of a political change.
To what extent can you continue to invest under those circumstances?
Rick Phillips: In the event of a significant currency devaluation, as a prudent investor, you do have to reassess. Yet more generally, our view is that long-term investors should continue to invest through cycles and political events. In South Africa in 2017, for example, we continued to deploy capital – we acquired distance learning businesses Management College of Southern Africa and the Regent Business School through our Honoris United Universities platform. Our long-term strategy with Honoris is to create a pan-African tertiary education business and expansion into Anglophone markets is a key element of this.
Our experience is that political events may come and go – we’ve seen plenty in our time – but that in certain sectors in Africa, demand continues to grow both as incomes increase and for secular reasons. This is true for university education, both among students and employers. In many African countries, fewer than 10 percent of 18-23-year-olds are enrolled in tertiary education.
You mention education. What other sectors do you see as being attractive across Africa?
RP: We back sectors in which the drivers for growth are underpinned by secular trends. So, education is one such sector. Financial services and healthcare are two others. In financial services, there is low banking penetration among local populations, but changing technology is making the security and convenience of electronic payments available even to the unbanked population. In healthcare, increasing urbanisation is improving access to healthcare providers, and increasing connectivity is improving health awareness. Secular changes in demographics, lifestyles and diet are driving growth across Africa’s healthcare sector.
NK: If you focus on specific sectors that benefit from secular trends, where market penetration is low, you can look beyond the headlines and continue to invest through cycles. That doesn’t mean we are oblivious to issues arising in our markets, but it does mean we can cut through noise and look to the long term.
In your experience, does that mean there are sectors to avoid?
NK: We prefer to be protected from external events that are beyond our control and that fundamentally affect companies in a given sector. So, for example, we won’t invest in oil & gas and mining, as success here is too dependent on commodity prices and agriculture is too dependent on weather.
RP: My experience of investing in Africa began 25 years ago when I moved to Kampala and I have learned this the hard way. There are sectors to avoid, you have to draw lessons from that kind of experience – it makes you better at reading and assessing risk before you invest and at managing it during the investment. Focusing on specific sectors with high growth potential that are less subject to external shocks is one of the ways of mitigating risk in what can be quite a volatile region.
So what would you say is the most important lesson drawn from these kinds of experience?
NK: I think we’d both agree that, when things go wrong, it’s usually less about the business itself and much more about the call on the person or people involved. This clearly is not unique to Africa. You have to be very circumspect about who you invest with and our local presence is key to knowing who we’re dealing with – if there is any hint of misalignment between us and the team we are looking to invest with, we’ll walk away.
If a business underperforms and you are aligned with the management team, you can work with that – the partnership can bear the strain and you can work together to improve the business. If it underperforms and there is misalignment, a decent investment can quickly become a poor one; the downward spiral can be very fast indeed.
RP: I’d also add that, with the right people as partners, volatility can provide attractive opportunities for investors.
Can you give an example of volatility creating opportunity?
RP: CIB in Egypt is a good example of this. We invested just after the global financial crisis in 2009. It was Egypt’s leading bank and had a solid commercial loans business. We saw an opportunity for CIB to expand, using its excellent brand in the consumer space, particularly as bank penetration was low in Egypt. Eighteen months in, with CIB ahead of budget, the Arab Spring erupted and Egypt underwent a revolution.
The company and the market as a whole went backwards, but we’d invested with good people and we decided to throw our full weight behind them. We revisited our original business plan and could see that the secular trends of the move towards electronic payments and increased demand for financial services among consumers remained robust, even as the corporate sector was under pressure. So we doubled down on our plans to build up the consumer side of the business. It took three years of rebuilding, but CIB increased its market share, doubled its profits and delivered a strong return on our investment – we managed this because we kept our eye on the long-term goal rather than being distracted by external events.
And finally, what about exits in Africa? To what extent are we seeing routes develop?
NK: The main exit route continues to be trade sales. There is still appetite among international acquirers, with interest growing particularly among Chinese, Indian and Japanese corporates. Local strategics are also important as regional consolidation and growth continues. As the private equity market has matured in Africa, we see a handful of players on the continent that are actively acquiring in our exit size bracket. And IPOs are clearly becoming more important and viable as exchanges develop. We’ve completed a few IPOs over recent years – Edita, IDH, Alexander Forbes and Umeme, for example – and there are a few of our current portfolio companies that may look to public markets listings in the future. n
PAYMENTS IN THE DIGITAL AGE
By the time Actis successfully sold Emerging Markets Payments in 2016, its pan-regional payments business had grown from a single office in Cairo to hubs across Africa and the Middle East operating in over 40 countries, providing services to 130 banks and 30,000 retailers and processing more than six transactions a second. Actis had to surmount a number of macro challenges including currency devaluations in key markets and the Arab Spring, says Rick Phillips.
What do you need to develop a pan-Africa business?
Creating pan-regional businesses of scale from a single country is difficult. You have to have a clear sector vision of what you want to create and you have to create the right culture that enables individuals spread over different countries to work together. You have to have a local presence to understand nuances and different market dynamics and it helps to have past experience of building similar businesses in similar markets.
EMP grew out of a small Cairo-based card processor that you acquired in 2010. How did you cope with the Arab Spring uprisings and currency devaluations?
We looked past these short-term events because we had a long-term vision for EMP. We wanted to build a large, top quality payments business that operated in a number of vertical spaces – we knew this would be attractive to buyers.
This article is sponsored by Actis. It appeared in the Africa Special supplement, published with PEI’s September 2018 issue