Sango Capital: Building from firm foundations

Many LPs have historically perceived African private equity markets as high risk, yet the region’s post-pandemic performance could shift attitudes for good, says Sango Capital’s Richard Okello.

This article is sponsored by Sango Capital.

Africa’s private equity fund managers have had to be a patient group. Among LPs that have exposure to the continent, few apart from the development finance institutions have a meaningful allocation to African markets. And, when the pandemic struck, many of those LPs turned their attention to more familiar markets. Yet the longer-term picture may be a little brighter, with a recent LP survey from the African Private Equity and Venture Capital Association finding that 86 percent of respondents plan to raise or maintain their allocation to private equity in Africa.

Richard Okello, co-founder and partner at fund and direct investor Sango Capital, outlines how post-pandemic opportunities are shaping up and what it takes to navigate private equity successfully across the region.

How are opportunities in African markets developing?

Richard Okello
Richard Okello

Institutional investors often perceive African markets to be just about fast growth – so they look to these markets for high returns but with relatively high risk. However, African markets are also highly resilient – that is not a characteristic many investors think about when they look at African opportunities. Resilience has come into focus since the start of the pandemic and is a sought-after attribute, particularly in a world that is volatile and where growth is shrinking. Everyone has heard about the demographic story of African markets – and that is continuing – but we’re also seeing a strong covid rebound playing out.

At a more micro level, it is possible to buy companies in African markets that are growing between 20 percent and 50 percent a year at half the price we are seeing for similar companies elsewhere. There is a massive price differential as we have seen other markets become frothy, while African markets have not. Plus, at that growth rate, you can mitigate currency risk – you have downside protection as well as upside potential.

When it comes to sectors, the themes of rising consumption, food value chain and energy which are driven by the continent’s rapid urbanisation, demographics and rising technology use are particularly rewarding – there are increasing numbers of urban consumers looking for good-quality and convenient products and services at a reasonable price. Retail is therefore an attractive sector, as are technology-driven growth opportunities, industrial assets, packaging, food processing and logistics that support the food value chain.

To what extent might there be longer-term effects of covid on private equity in the region?

I am hopeful the pandemic may help shift the narrative around investing in African private equity. LPs often have the view that Africa is challenging but, historically, markets in Africa have shown resilience to shocks and covid appears no different in this respect. Many LPs expected Africa to fall off a cliff, but it didn’t and so I hope LPs now start to recognise there are strong investment opportunities here that are resilient to various risks. We may also see some bifurcation in the market as strong GPs get stronger and weak ones phase out of the market, but that improves the quality of the overall market.

At a deal level, the pandemic has resulted in a correction of the elevated pricing we had seen in some markets, such as East Africa. Disciplined GPs have been cautious around these markets for some time because of pricing, but this should lead to more investment opportunities.

How does African private equity sit within an LP’s portfolio?

Many of our North American and Asian institutional LPs typically have less than 0.5 percent allocated to African private equity; if they have 1 percent, they are pretty engaged. This is where Asia would have been in the 1990s.

Almost all LPs today are taking a giant bet on growth around the world continuing to be driven by government and central bank intervention, for example in the US and Europe. Yet Africa offers something different. The continent is made up of 54 countries that do not co-ordinate on monetary policy, with governments far less able to be interventionist on the whole. African markets therefore offer differentiated domestic growth drivers and structural diversification. We are now seeing some LPs recognise this – we were the first Africa investment for many of our investors and they are now looking to up their exposure on the continent to around 3-5 percent so that it moves the needle for them.

With an increased focus on ESG among many LPs, how might African private equity help them meet their aims?

You must start with what an LP’s ESG aims are – some are more focused on environmental issues, others on social or governance issues. We need to understand what our LPs want. It’s certainly true that ESG in Africa is 20 years ahead of everywhere else because of the high involvement of the DFIs in developing the market. The frameworks in place to manage governance, for example, have been in place for so long here, they are a non-issue.
Among our own LP base, some just want to understand what is happening around ESG.

Others prefer to understand specific details, so we need to be able to show them, for example, that their money has created a certain number of high-quality, permanent jobs for female employees. Some aspects are relatively easy to measure, but many are not, so we strive to ensure the information we provide is meaningful to them.

What does it take to be successful in African private equity investing?

The most important factor is focus. Africa’s scale and complexity mean investors need to focus by country and themes and/or sectors. There are different dynamics at play in different markets and a lot of the information in Africa is highly localised – and that doesn’t always mean by country, it could even mean by sub-region within a country. If you want access to local information, you either need to be local or have trusted partners on the ground. Yet, you also don’t want to focus too much on single countries or small portfolios – I have seen some investors look for two to three managers, but they have done poorly because they have been subject to volatility. You want exposure to economies, sectors and companies that are driven by structurally different things to dampen down volatility and avoid concentration risk.

The other major factor is strong operational execution. This is essential if managers are to deal with the unexpected and to know which businesses not to back for whatever reason.

How do you see African markets developing over the coming years?

We will see a bulge of exits coming through over the next two years. Many LPs worry about a lack of exits in African markets, but often the issue isn’t a lack of buyers but rather whether GPs have the pulse on potential exits at the point of investment and they then build companies with the exit in mind. There needs to be an intentionality around exits and that is developing. We run an annual invitation-only event at which between 30 to 50 African GPs share best practice and we have seen conversations around exits improve significantly over recent times. Some of the exits we will see will be due to pent-up demand, but others will also be down to this better intentionality – we invested in a manager last year that has already completed an exit from that fund.

We will also see the increased use of GP-led secondaries – we did one such deal recently. And along with that, I expect to see more momentum around secondary LP interests and secondary buyouts. Perhaps of most consequence may be the evolution of long-term hold vehicles and permanent capital. Some asset types and strategies just take longer to generate outsized value, and you also have to consider that some things, such as regulatory approval, take longer in some African markets than they do in other geographies.

Technology enablement is also gathering pace in Africa, even faster than it has in developed markets. However, there is often an African flavour to the way technology is being adapted to African markets and we are seeing African teams with strong Silicon Valley and African experience raise, deploy and harvest capital. This part of the market will deepen considerably.

Finally, we are now in ‘covid-21’ – there could be a ‘covid-22’, 23, 24 or more as variants emerge. Investors need resilience in their portfolios. African private equity has shown itself to be resilient through many shocks and this time will be no different. There is real opportunity here supported by a growing array of customised access points available to investors.

What are the main challenges to successful investments in Africa?

Execution is critical. Let me offer an example. Sango portfolio company Marketsquare is a Nigerian-based retailer of groceries and dry goods. Countries across the continent are urbanising, which can make convenient grocery stores an attractive area for investment – people don’t want to drive for an hour and a half across the city and back to get their food for an evening meal after they have spent the day at work. The largest grocery store in the US, which has a population of over 330 million, has close to 5,000 stores. By comparison, the largest grocer in Nigeria, with a population of close to 200 million has less than 30 stores, per Trendtype data. So, you would think the grocery business should be an obvious opportunity. However, many grocery store chains in the East African Community region, which has a population of 177 million, and Nigeria have had difficulties.

We got to know a great entrepreneur who had experience in an adjacent sector. Starting in 2015, we have worked with him to build a leading Nigerian grocery chain, Marketsquare, that provides high-quality, reliable and affordable goods and employs over 1,500 people. Since then, we have seen the currency de-peg and devalue by between 50 and 70 percent, a short recession, two presidential elections and covid-19. Through all that, the company still managed to grow earnings at over 70 percent per year in dollars. Over the same period, a large incumbent grocery chain has exited the country because of various operational challenges, according to Nigeria’s Premium Times. What explains the difference? Better execution supported by a strong board, including an experienced executive who helped build Walmart India.