May
3, 2012 (Investment Europe by William Clark) -- Sub-Saharan Africa offers
investors attractive demographics and fast growth, but private equity is often
the only way of gaining exposure.
As
investors look to add risk to their portfolios, attention is again turning to
sub-Saharan Africa. But with the Nigerian Stock Exchange showing no signs of
significant recovery from its disastrous 2009 slump, attractive investments
outside South Africa are still thin on the ground.
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| Murray Grant, Actis |
For
investors tempted by the continent’s alluring demographics and fast growth,
private equity is often the only way of gaining exposure. For private equity
firms operating in the region, the growth prospects combined with the scarcity
of capital markets represent a clear opportunity.
“You
know that Africa is going to offer good growth, because of where it’s starting
from,” says Murray Grant (pictured), partner (Africa) at Actis, a private
equity firm.
Africa for all
Charlie
Tyron, manager of Maris Capital, says: “Africa is growing at least five times
the speed of Europe, and our target markets are forecast to grow at eight times
that of the eurozone in 2012.”
Maris
is a venture capital group that specialises in African frontier markets. Its
portfolio includes companies in such little known markets as South Sudan and
Mozambique. Tyron adds: “There are different definitions of frontier markets.
To us, it means post-conflict markets. We are looking at the frontier end of
frontier.”
Tyron
believes it is these post-conflict markets that offer the strongest growth. He
says: “The markets we invest in were largely insulated from the effects of the
financial crisis. There was still exposure of course, in terms of access to capital
and exposure to commodity prices, but growth remained pretty robust.”
For
investors interested in the sharp end of frontier markets, a private equity
fund with local knowledge can be the only way to gain exposure. Tyron says:
“For many of the countries we invest in, there is no alternative to private
equity.”
Away
from larger, more liquid markets such as Nigeria, Egypt and South Africa,
private equity offers investors access to demographic shifts that are rapidly
changing the nature of African society.
Of
particular interest is the emergence of a middle class, and the consumer
spending that entails. Grant says: “We are particularly interested in the
emergence of middle class, even if that class remains very small by European
standards.”
This
view is echoed by Dan Smaller, head of global distribution at Duet, a global
alternative asset manager whose Africa private equity fund invests across the
continent. “We tend to focus on sectors that service the incredibly
fast-growing middle class.”
Middle class focus
It
is these service industries that Duet is most interested in. Smaller adds: “We
tend to focus more on the consumer sectors of the economy, such as: healthcare,
consumer goods, financial, insurance, mobile telephony, retail, food production
and education, rather than mining, oil and gas or infrastructure development.”
Although
managers see this continent-wide demographic boom as a compelling reason to
invest, it is important to understand the many differences between African
economies. Grant is keen to stress the diversity of markets in Africa. “It is
very important to resist talking about Africa in the same way you would talk
about India or China,” he says. “You will always generalise if you try to talk
about Africa as a whole.”
For
Tyron, this diversity is what can make Africa-focused funds attractive: “In the
wake of the Arab Spring, a lot of frontier markets suffered from political
risks that were hard to diversify against,” he says.
“We
invest across Africa, so even though some markets are inter-related, for
example South Sudan is dependent upon Kenyan ports, there is a huge amount of
cultural and political diversity between the countries we invest in. There are
risks to doing business in too few countries.”
The
diversity of the African economies enables private equity funds to manage
country and political risk, but true risk management lies in close knowledge of
the individual investments.
Grant
says: “Management risk is the driver of private equity returns. Risk is always
linked to management. As you focus on management, the importance of country
risk lessens.”
Tyron
stresses that managerial talent is what really makes a tempting private equity
investment. “The greatest challenge is finding good people. Operational
execution is the key, not so much sourcing deals.“
Allaying fears
Perhaps
unsurprisingly, private equity fund managers in Africa are quick to allay fears
of adverse political environments.
Grant
says: “The days of nationalisation are long gone for any rational government.”
These fears may be unfounded, but they keep the competition away and allow
private equity fund managers in the region to pick up excellent deals.
Smaller
says: “We tend to concentrate on those countries where there has been
under-investment of foreign capital. We look for companies that need capital to
expand and that are closed off to this additional financial source, due to it
not being available in the local markets.”
Tyron
believes that doing deals locally is the key to good valuations. “If deals get
brokered in London, they tend to be much more expensive and have been passed a
number of people by the time they reach Europe,” he says. This local knowledge
is an absolute necessity, in a group of diverse and under-reported markets.
“We
find that once we have made one investment it gives up surety to do a lot more.
It takes time to build up the relationships locally,” he says.
For
those with the patience, and the risk appetite, fast-growing sub-Saharan
African markets may prove hard to resist, and for the time being private equity
is the only mean of access to many of them.
