Private equity success story in Botswana

CEO of Venture Partners Botswana, Anthony Siwawa, speaks about the opportunities and challenges in the private equity industry in Southern Africa.

What led you to create an investment firm focused on Botswana? 

I come from a corporate finance background and spent some time investing in private equity in South Africa before moving back to Botswana. We established the business primarily because we saw the gap in capital deployment; 90% of the local capital was reserved for investment in the public market whereas the majority of the capital needed was in the private markets. Botswana had come from 30 years of uninterrupted high growth but investments were primarily in extractive industries. We wanted to channel capital into the fast growing local companies. 

What were the challenges you faced when fundraising for the first time? Do these challenges still exist and what strategies have you developed to overcome them? 

To fundraise effectively we spent a lot of time educating the market, government and regulators, as there wasn’t a strong non-banking regulatory framework. At the same time, the government was evaluating ways to stimulate the local economy, broaden the economic base away from traditional extractive sectors and attract capital from the private sector. 

This culminated in the launch of the CEDA Venture Capital Fund (CVCF) in 2002, which was primarily sponsored by the government of Botswana through the Citizen Entrepreneurial Development Agency. It was a US$40 million fund, which provided venture capital and growth equity financing to indigenous companies in high growth sectors such as manufacturing, retail, agribusiness, and financial services. 55% of the fund was dedicated for venture capital investments and 45% for growth capital investments, with ticket sizes between US$0.5 - 5 million. 19 investments were made through the fund, with 10 successful exits as of February 2014. 

In 2007, we decided to become a regional firm as part of our expansion strategy, after honing our investment strategy on the first fund. We focused on Namibia as it has the largest institutional structure in sub-Saharan Africa outside of South Africa, and there were only subtle differences between the economies of both countries. We were able to successfully raise the fund (approx. US$ 20 million) in 2010 from local Namibian institutional investors, as they saw this as an opportunity to re-invest in private equity, taking cognizance of the regulatory changes with regard to alternative assets as well as the country's need for risk capital. We had also considered raising capital from international institutional investors, but 2009 - 2010 were difficult years for fundraising globally. 

On our latest fund VPB III, we have developed a different fund strategy, which will enable us to list the fund on the Botswana Stock Exchange to attract investors from Botswana, Namibia and South Africa. This gives institutional investors an opportunity to invest in a listed entity (which they are familiar with), while accessing alternative investments. This hybrid model was created in response to local investor appetite. 

Beyond the extractive industries, what makes Botswana and Southern Africa an attractive area for investment? 

Southern African countries are going through significant infrastructure investment, which has driven growth in consumer demand. Hence our focus on primary industry sectors such as logistics, retail, financial services, healthcare and service industries, like hospitality across the SADC region - Botswana, Namibia, Mozambique, Zambia and South Africa

How has the environment for sourcing deals evolved with South African fund managers and companies looking north of their borders to access growth opportunities? 

As majority of our deals are sourced through our local networks, we are seeing some competition for deals, however we also view these companies as potential investment partners, (as they are relatively new to the market) and future exit opportunities. For example, we invested in a local transport and logistics business and then brought in a large multi-national as a partner, and have successfully grown it into a sector leading company.

How do you address the well-documented issues to investing in African SMEs? How do you create value in your investments to maximize your exit potential? 

We’ve found that entrepreneurs and family owned businesses don’t understand the asset class and its value-add, therefore education forms an important part of our investment process. On all our investments, we acquire a significant minority stake, take board seats, establish reporting requirements, instill improved governance procedures and have veto rights on major decisions. It is important to note that a key value addition is developing clear strategies for achieving economies of scale expeditiously, in order to realize value upon exit. 

In addition, we found that constant engagement and proximity to the portfolio company is also key to driving value. To date, the majority of our exits have been strategic sales or sales back to the entrepreneur / founder. 

What is your one key message to the market? 

As investors in Africa, we understand the needs of the local economy. We are primary industry investors and we know where future growth will emerge. These markets require clear, informed strategies that are tailored to the needs of the local economies. Success in our markets is rarely a straight line.

Anthony spoke to Frontier's content partner, the African Private Equity and Venture Capital Association (AVCA)

AVCA promotes and catalyses the private equity and venture capital industry in Africa.

Practical tips for success in Africa

Financial services group reveals the secrets to successful investing.

Mark Tunmer, CEO of financial services group, Imara Holdings, shared with us the secrets to the company's success. The BSE-listed company operates in nine African countries.

What factors are driving the growth of your company at home and on the continent?

Our growth as a financial services group rooted in Africa is underpinned by a range of positive developments, including the growth rates achieved by many economies in sub-Saharan Africa, often above 5% a year, growing liberalisation of most  economies, the growth of the middle class, growing disposable incomes, growing demand for consumer goods and financial services, growing liquidity on some markets, growing share values, and the development of African institutional investors such as pension funds, insurance companies and asset management firms. Another factor is growing awareness among ordinary Africans that provision has to be made for the future through savings, pension funds and other wealth-building instruments such as shares.

Growth can be quite dramatic. For example, in the year up to our fifth annual investor conference in Zimbabwe in early June the market capitalisation of Delta, Zimbabwe’s biggest brewer, rose from US$836-million to US$1.7-billion. Over the same period, the market capitalisation of the Econet telecoms group was up from US$677-million to US$1.1-billion. In the same period, the Zimbabwe Stock Exchange has registered gains of 39% in US dollars.

Gains of that magnitude indicate growing participation by equity investors in African listed companies and explain growing international investor interest in our markets. Rates of growth and levels of sophistication vary tremendously across Africa. The South African and Zimbabwean stock exchanges have been in place for over 100 years while a stock market has only recently opened in Rwanda. Varying levels of development obviously affect the rate of growth of our own business and the prospects in individual markets.

What problems did you overcome to find success that you are enjoying in other African markets?

The fundamental challenge relates to education. At an individual level, it takes time to develop a proper understanding of the need to save and invest. Our offices in all markets engage in on-going shareholder education and commit to constant communication. At a corporate level, you do also confront a similar educational challenge. For a financial services business like Imara to grow, we need instruments in which to trade, meaning market liquidity has to grow.

For this to happen, more private companies need to list on the stock exchanges. However, family owners traditionally grow their businesses out of their own cash flow or borrow money from a bank. The alternative is to issue equity or raise cheaper long-term finance. This in turn means a commitment to transparency and full reporting to shareholders or new partners. This involves a seismic shift in the mindset of owners who might have held total control of their businesses for generations. It is a slow process. Patience is required. Education takes time.

Where do you see future growth for your company coming from, and how do you intend to leverage on these opportunities?

There are specific opportunities relating to developments in certain markets, for instance, the plan to open a stock market in Angola and, hopefully, the opening up of opportunities in financial services in Ethiopia. But, the strategic opportunity for future growth relates to macro-developments such as the realisation in many of the world’s financial centres that Africa represents the last great opportunity, from a low base, to achieve sizeable growth for decades to come. This realisation will tend to support the growth in foreign direct investment and in portfolio investment.

Clearly, oil and gas discoveries in East Africa and other parts of the continent will have sizeable impact, but we also see potential for substantial growth in the non-oil economy across sub-Saharan Africa. The growth of the African middle class will deliver knock-on benefits across the financial services industry as families save, contribute to pension funds or drive the continued growth of listed companies through growing demand for consumer goods and services.

We see this as a 20-year journey. Being well placed on the ground across Africa will enable Imara to identify opportunities at an early date and then offer appropriate solutions.

What do you look for when deciding which countries/markets to enter?

The criteria we use to decide which countries to enter differs from case to case. However, there are some common themes such as political stability and some evidence that government has launched programs to liberalise the economy or has made a firm statement of intent to begin the process of reform.

We also scrutinise the regulatory and legal framework within which we are expected to work. A key factor is the presence on the ground of good potential partners. The search for credible partners may take two to three years. We are firm believers in the need for deep understanding of local conditions and will not enter a market unless we have a strong local partner.

How do you compete and interact with foreign companies in Africa?

Our competitive advantage that has put us ahead of our foreign competitors is our presence on the ground. Every Imara professional, with only two exceptions, lives and works in Africa. Imara has direct representation in eight African countries and has strong links in another two through enduring relationships with local partners. Our researchers do not depend solely on desktop research. They take a bottom-up approach and speak regularly to the executives of African listed and unlisted companies. They visit factories, speak to the local banks and have first-hand knowledge of the markets they study. This level of understanding and our direct, local representation bestow a sizeable advantage versus foreign competitors.

What tips would you have for companies that are interested in the African market?

The need for patience cannot be stressed enough. Coming in as a total outsider can be challenging. Invest time in finding the right local partner. You can’t achieve success from afar. A foreign investor looking to make a success of their investment should visit Africa, take time out to visit companies, speak to executives and local professionals and build a personal understanding of specific markets. Personal relationships count for a lot in Africa. You need to look people in the eye and make personal assessments for yourself.

Once you have developed better market understanding, commit to the long haul. Africa has boundless potential, but it will take time.

Click here to access Frontier's database of investment and business opportunities in financial and insurance sectors in Africa.