African private equity can be a daunting prospect for those new to the continent. With Private Equity International’s Africa Special hitting desks next week, here are three things you need to know before making that commitment:
- Abraaj has left a mark
African funds have struggled on the fundraising trail. Africa-focused funds that closed in H1 2019 took on average 29 months to raise, up from just eight months in 2017, according to PEI figures.
Part of this rise could be attributed to Abraaj Group’s highly publicised collapse. “Africa has been disproportionately affected by what happened at Abraaj, even though a lot of what went on didn’t involve the African portfolio,” says Clarisa De Franco, managing director, funds and capital partnerships, at CDC.
As a result, limited partners are expected to ramp up their due diligence processes on African fund managers – with a particular focus on governance. The move could impact smaller firms with fewer resources to meet these requirements.
- Early liquidity is an option
Africa has been ranked the worst emerging market for realisations, with 40 percent of investors citing a weak exit environment as a deterrent, according to the 2019 EMPEA Global Limited Partner Survey. With that in mind, some general partners are opting to provide partial liquidity early in the investment via recapitalisation from leverage, partial sales or public listings.
“This strategy provides early distributions to LPs and is attractive to incoming funds, because we’ve already done the difficult and time-consuming origination and negotiation work,” says Alykhan Nathoo, partner at Helios Investment Partners.
- Diversify, diversify, diversify
African private equity is not without risks. The key to navigating these lies in portfolio construction.
“I’ve seen some newer investors commit to just one fund, but if you invest in a single manager, country or sector, that can present additional risk. There’s enough critical mass now to create a diversified exposure, so you can mitigate against currency or macroeconomic challenges.”
Not sure how to do so? Just ask.
“There are a number of investors that now have 20 or even 30 years of history in African markets and they are usually happy to share information,” adds Klein. “That’s particularly the case with DFIs such as FMO – we’re here to catalyse and support new investors.”
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