Reinventing the wheel

African GPs are looking beyond traditional structures to raise money in today’s market, writes Toby Mitchenall.

One of the prevailing themes at PEI’s inaugural Africa Forum over the last two days has been fundraising. LPs and GPs from all over the continent gathered in London to swap notes and learn from each others’ experiences and one very clear message emerging from both coffee-cup chats and organised panel discussions, was that fundraising in this market can be a painful and frustrating process.

Africa has few truly established players that can speak about a meaningful track record in a way that

Toby Mitchenall

traditional LPs can stomach. In Sub-Saharan Africa the triumvirate of Actis, Ethos and Brait controls the lion’s share of private equity capital and even they – with the exception perhaps of Actis, which last year closed a $2.9 billion fund – will now be braving what can only be described as a frosty fundraising market.

If you are one of the many young firms looking to build a brand and carve a niche as a fund manager in one of the diverse African markets, the challenge can be overwhelming. Heather Sherwin, who in 2001 raised South Africa’s first biotechnology venture capital fund, is currently in the process of raising a fund focused on generalist healthcare investments. She told delegates that there were investors in advanced stages of due diligence in her fund that “just disappeared” towards the end of last year.

While many LPs are looking more seriously at African funds, there is a “chicken and egg” conundrum at play for managers in their early days: namely that a lot of institutions review a fund, like it, but don’t want to be the first one to take the plunge. The fact is, LPs would rather be part of a second close than a first close, said Sherwin.

The development finance institutions (DFIs), such as FMO in the Netherlands and Norfund in Norway, are there to step in and be the first-movers in terms of commitments. But even these institutions have their limitations.  Delegates at the forum spoke of DFIs actually being over-committed to Africa, as well as assuming a more “conservative” stance in the current environment: namely being sceptical about funds that don’t neatly fit their criteria.

The fundraising difficulty has not, however, stopped GPs in their tracks. Nascent managers such as Marlow Capital, which was founded last year by a duo of HSBC investment bankers, have been using predominantly family office money to fund investments on a deal-by-deal basis. When PEO spoke to Marlow founder Andrew Hunt in March – following completion of the firm’s first ever deal – he said the firm would ultimately look to raise a more traditional fund when some normality returns to the market.

Egyptian firm Citadel Capital is in more advanced stages of a similar plan. Having built its track record using private Middle Eastern money on a deal-by-deal basis, the firm is now raising its first institutional fund.

The difficulty mobilising global institutional money into African private equity does raise the question of whether the traditional closed-end, 10-year partnership structure is suited for the continent. Breaking the mould, however, has its dangers. As Sherwin described to delegates: “If you look slightly different to other managers, the door closes.”

Private equity fund managers are characterised by ingenuity and innovation. In today’s market, raising money in Africa requires this in spades.