Over half of respondents to Private Equity International’s LP Perspectives 2021 Study are less interested in north and sub-Saharan African investments over the next 12 months; what opportunities does DEG see in Africa in the year ahead?
Medically, Africa is not hit as hard by the pandemic. However, despite positive underlying fundamentals in many companies, we see that global lockdowns, commodity price volatility and political uncertainty cause elevated macroeconomic and FX risks. All of this reduces investor appetite, which in turn makes fundraising a big challenge with a clear advantage for experienced teams with a solid track record and tested strategies. Private credit and digital infrastructure are two interesting spaces to watch in 2021. In general, for those with dry powder and a stringent risk management system in place, we expect good vintage years ahead.
How has DEG been responding to covid-19 challenges in Africa?
In a first step we encouraged all our GPs to immediately engage in business continuity planning and liquidity scenario analysis. But providing GPs with fund-level “emergency lines” for their portfolio companies was a challenge, mainly due to diverging interests at the LP level, and we ended up selectively providing direct company-level financing and allowing flexible terms to support GPs during the crisis. DEG also offers fast-track support with our covid-19 rapid-response programme, which provides technical assistance for digitalisation and immediate covid measures to our GPs and their portfolio companies. Plus, we continue investing through the crisis, both portfolio top-ups and – despite due diligence challenges – new business.
How would you like to see PE in Africa develop over the longer term? What role can DFIs play in this?
Despite a good number of internationally competitive fund managers, the elephant in the room is performance. Given the mixed picture of performance in a still young African PE industry with heavy FX risks and slow exits, we expect GP consolidation to take place. Today, DFIs still play a crucial role in anchoring those managers that will be able to attract commercial capital on the back of a credible strategy and we assist their institutionalisation. For the industry to thrive, policymakers need to make efforts to mobilise local institutional capital which can become the driving force behind Africa’s PE industry. Lastly, Africa does and will play an important role in the impact investing space, where we expect institutional investors to increase their exposures, and where DFIs play a leading role.
Co-investment opportunities are on the agenda for 71 percent of study respondents; from a DFI perspective, what makes for successful co-investment conditions?
Good question! I would say that all LPs love co-investment in theory but much fewer are able to execute successfully because of lengthy processes, for example. Co-investments need to be led by senior professionals on both sides who are on top of transactions and their own processes. With regards to minority protection rights, I would say the more alignment there is with the lead investor, the less complicated the co-investor agreements. In terms of conditions, I’d rather only share that we believe ‘no fee, no carry’ is still a standard for LPs.
Carola Bose is director and head of DEG’s Africa team for funds, direct equity and mezzanine. With her team, she is responsible for a portfolio of $900 million in African private equity