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A new era for private equity in Africa
Over the past two decades, private equity (PE) in Africa has emerged as an expanding asset class, both in funds raised and capital deployed. By Juan Coetzer for Ashburton Investments
According to the African Private Equity and Venture Capital Association (AVCA), a total of US$6.5 billion has been raised for African PE from 2011 to 2016, with a total reported deal value over the same period of US$ 22.7 billion for 919 deals. In 2016 alone, 145 deals were reported, totaling US$ 3.8 billion.
The evolution of PE in Africa has been underpinned by the enduring commitment of development finance institutions (DFIs), as well as local and international development banks.
The lack of developed listed exchanges might mean one less exit route for PE fund managers, but it presents opportunities for investors to gain access to high-potential, privately owned businesses in those markets. Many industries on the continent are also supported by strong macroeconomic fundamentals – like rapid
In the 1990s and early 2000s, major local and regional players saw themselves mainly as capital providers; taking a more passive role in portfolio management compared to today. The tradition was to take a seat on portfolio company boards, drive good governance, and guide sober financial decision-making.
But things changed and a new approach was needed.
According to Bain & Company, PE firms in Africa need to ramp up value-creation efforts if they are to keep delivering attractive returns amid a challenging macro environment. Over the last five years, several have transformed their investment strategy and portfolio management model accordingly, requiring a bigger investment of human capital into their own in-house portfolio management team. There has also been a conscious shift towards appointing skilled portfolio partners (marketing, sales, engineering, technical, logistics), supported by
Stronger competition for ticket deals north of US$ 25 million, macroeconomic and political headwinds, operational challenges, limited management resources, and constrained
Portfolio management (boots-on-the-ground) is playing a pivotal role as a key value addition tool. For example, as recently as February 2017, Phatisa {link:
Many mid-cap companies in Africa (turnover between US$ 10 million and US$ 25 million) are run by the original founders or their families, with some reluctant to relinquish control to new investors. Others have children who are either ill-equipped, working abroad, or not interested in taking the helm. The common thread is a lack of succession planning to prepare the business for the founder’s ultimate exit.
Active fund managers can bridge the gap, as a team member, to
The focus on active portfolio management has translated into a measurable component of PE returns. EY stated in their 2013 report Global Private Equity Watch, that for exits between 2006 and 2012, 50% of total cash return for the portfolio companies was driven by PE strategic and operational improvements. Operational engineering is likely a key contributor to this outperformance for the foreseeable future.
On a continent where lack of skills and education remain problematic, and in a world where the unexpected seems to be the norm rather than the exception, the approach to African PE investing has to change to unlock its full growth potential. African PE managers need to turn their attention to undervalued investment sectors, engineer and launch new purpose-built, non-traditional investment