In what may have been the largest private equity (PE) deal this year in Africa, the US private equity juggernaut Kohlberg Kravis Roberts (KKR) bought Dutch flower grower Afriflora, which is based in Ethiopia.
I would rather have 30% of a large group than 90% of a small business
It is a sign that African PE has hit the big time: KKR is one of the largest fund managers in the world, with $95bn in assets under management.
The sector has greatly changed since the days of the early PE funds in the mid-90s, themselves often the investment arms of big donors such as France’s Proparco or the Commonwealth Development Corporation.
The emergence of local and national funds, and a greater willingness on the part of African companies to open their equity to outside investors, created a fresh impetus – and the maturity of the market can be gauged by the recent arrival of global heavy hitters such as US firms Carlyle, KKR and Blackstone, and France’s Wendel.
The Bigger Picture
African companies are cash-starved despite the high liquidity levels of local banks, and this is pushing firms towards PE, says Serge Thiémélé, an associate at Ernst & Young in Côte d’Ivoire: “They have realised that they can’t finance everything with bank debt – even more so as access to debt finance is limited if one’s own funds are limited.”
But at heart, the PE route remains a tough emotional proposition for many African businesspeople, especially those who have built up companies from scratch. Handing over a percentage of their companies to outsiders – even in exchange for cash – is still a new phenomenon. But attitudes are changing, with some entrepreneurs seeing the bigger picture.
“I would rather have 30% of a large group than 90% of a small business,” says Mossadeck Bally, founder of Azalaï Hotels Group – one of the few African-owned hotel chains on the continent and active in five West African countries.
Bally, who is responsible for the overhaul of the Azalaï Hôtel Salam in Bamako, Mali, is a keen advocate of the non-monetary benefits of PE, and has already been through two rounds of funding with Cauris Investment funds.
“What a fund brings is more than just financial,” says Bally, who lists help with governance, contacts, strategic vision and training staff as examples of value added from a PE transaction. “It has helped us restructure our group,” he says.
While African businesses may be wary of foreign capital scooping up choice contracts and muscling its way into local markets, there are ways local companies can use these intangible benefits to transform themselves into global competitors.
Fishing for new ideas
Georges Chung, the chairman of Mauritian financial services company Kross Border, is a great believer in this gospel of opening to new ideas and new technologies to help restructure companies: “Mauritius has gone from being an economy that was totally closed to one that is very open. And in two decades we have become the third-largest producer of tinned tuna worldwide, thanks to Japanese technology.”
For Chung, entrepreneurs and companies receptive to new ideas and capital will be the ones to dominate the future of African business.
The entry of PE company Wendel, a French investment company, into the capital of IHS, a pan-African telecoms infrastructure company that puts up mobile phone towers, is a good example.
In 2013, IHS was looking for short-term loans to extend its network of towers in Nigeria. Wendel wanted to lend over a longer term.
But when IHS got the opportunity to invest in towers in Côte d’Ivoire and Cameroon, Wendel stepped in. “We invested, in total, $420m in IHS, which allowed them to raise a further $1bn,” says Stéphane Bacquaert, managing director of Wendel, “and we brought our experience to bear in expanding to francophone Africa, a market we know better than Nigeria.”
While a short-term investment in IHS in a Nigerian expansion would certainly have been profitable, Wendel management preferred the regional expansion – which has lifted the company into a new league.
One thing that African companies have to keep in mind when courting or being courted by PE is the exit, the point at which the investor recoups their initial outlay plus profit. “It’s important that both parties are fully aware of the exit strategy and time lines involved before any engagement,” warns Thiémélé.
Helping matters is the fast-improving international profile of the continent, with multinational firms now looking hard at opportunities in Africa. This has greatly increased the exit possibilities for PE investors looking to sell on their stakes.
For example, French multinational Danone bought West African dairy company Fan Milk from PE company Abraaj Group in 2013, in what Abraaj CEO Arif Naqvi called “the largest [fast-moving consumer goods] private equity transaction in sub-Saharan Africa, outside South Africa.”
Another significant transaction was the investment of Standard Chartered Private Equity and Ashmore Group in the equity of GZI, an aluminium can company in Nigeria.
“It’s really a sign of the vitality of the sector,” says Nina Triantis, managing director of telecoms at South Africa’s Standard Bank, who points to the large number of deals signed in 2005/6 that are arriving at their exit phase.
“If the return on investment is demonstrated by these cases, we will see even more people interested in entering the market.”
The head of the African Private Equity and Venture Capital Association, Michelle Essomé, says she was surprised when their research found that 200 PE exits were made in Africa between 2007 and 2013.
When it comes to return on investment, “in 2013 we compared it to the (Johannesburg Stock Exchange) All Share Index, and it was twice as high,” she says.
For African companies looking to leverage outside expertise to restructure their companies and access funds for growth, PE may be an answer – so long as they are eyes wide open about how an investor is going to exit. ●
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