Want to invest in Africa? Try family businesses
As second or third generations take over the reins of family businesses, they may be more open to outside investment to grow their companies. East Africa in particular has a rich seam of such businesses, which canny private-equity investors should be exploring.
Africa’s private capital opportunity is primarily in small and medium-sized enterprises (SMEs) – backing companies with market caps of between $10m and $100m. African economies are largely driven by the SME sector, so there is no shortage of firms of this size on the continent.
Asoko’s data has identified 10,000+ firms in this revenue bracket across growth markets in East and West Africa. Including North and Southern Africa, we estimate this figure could be doubled.
It’s a family affair
Within this segment, family-owned businesses represent a particular untapped opportunity. Some of the continent’s best-known brands and businesses are family owned, but many others fall under the radar.
Research from Asoko shows 645 family-owned businesses earning between $10m and $100m in East Africa. Nearly three-quarters of these companies are Kenyan, while Ethiopia follows with 17%. Zambia has 5%, and Uganda, Rwanda and Tanzania are each home to 2% of the region’s mapped family-owned businesses.
Kenya and Ethiopia each represent just over a quarter of regional GDP. In Kenya, the family-owned business sector makes up an especially big part of its economy. By contrast, Ethiopia’s is small compared to its overall economic value, though this is hardly surprising given the state’s hold on the economy.
Family-owned businesses play a role across most sectors of the economy in the region (see chart below), but are especially active in the industrial, agriculture and materials sectors where 60% of regional family-owned businesses operate. This focus can be attributed to the small-scale trading roots of a number of these firms, often stretching back many decades, as well as to today’s rising consumer demand, which is driving growth across the continent.
Despite being a vibrant contributor to the economy, family-owned businesses face a number of specific challenges, largely related to corporate governance and a lack of robust succession structures. These can limit growth and reduce a company’s lifespan. Globally, just 30% of family businesses make it through the second generation, with only 13% passing three generations.
A look at the ownership of 22 family-owned businesses in Kenya with revenues over $100m show that all are within the first three generations of ownership. The oldest of these dates back to 1948 and is still chaired by one of the sons of the original entrepreneur, with members of the third generation staffing other top management positions.
Besides this firm, only one other company is on its third generation of leadership from within the family. The others are fairly evenly split between first- and second-generation leadership. Current involvement from founders stretches back to companies launched in the 1960s and 1970s, with several implementing succession strategies via the involvement of younger generations in management roles.
As founding generations come to the end of their careers, the best way to keep the family name alive may be to look outside the bloodline. Family-owned businesses are increasingly open to private equity deals as they look to grow and expand their footprint. Identifying the right deals requires strong local knowledge and due diligence can take significantly more resources than in other parts of the world, but for investors that tap into the right corporate data, the returns from Africa’s growing markets can be worth the effort.