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.

Tips for successful investment in Africa

African business analyst, Dianna Games, gives insight on investing in Africa.

When operating in another country, remember you are a guest in that country and should behave accordingly. It can sometimes be difficult to do things the way you would at home because of the different business culture and standards in other countries in Africa. There are times a company may have to take a stand if they are being asked to violate a principle held dear at home by shareholders, owners and other stakeholders. However, at the end of the day, the company has to decide to stay or go based on that. Companies can also be a force for change but cannot do it by putting undue pressure on their hosts.

Regarding the much-publicised growth in Africa – the reality on the ground is not always reflected in the statistics. Countries with high growth figures, for example, are often also the most difficult places in which to operate. Not properly understanding the terrain can mean failure. Often the soft issues can trip up investors.

To do business in a new market, you need to be aware of a range of issues such as what the local business culture is, you need to do deep due diligence on potential partners, look at the shopping habits of potential consumers and understand that what works in one market may not work in another. It can also mean knowing how to get around problems that you encounter along the way and how to mitigate risk.

In terms of Africa’s growth, it is important to note that for all the impressive statistics, most growth is coming off a very low base, often in highly undiversified markets – resource-rich countries - that are unable to deal effectively with exogenous shocks. Additionally, a lot of the growth is on top of a rather wobbly platform of progress that does not necessarily include factors that more developed economies would take for granted such as good public health systems, investment in education and availability of electricity and portable water.

Is Africa on track to realising a truly enabling business and investment climate and good intra-trade numbers? Africa is a long way from reaching a satisfactory situation with regard to an optimum business environment or realising strong intra-African trade. The one often affects the other. For example, a lack of support for manufacturing in many countries means goods are not able to compete effectively with cheaper imports that are also often of better quality.

The high cost and inefficiency of rail transport and the delays at border posts and other non-tariff barriers for exports moving by road are affecting the growth of trade between African countries. These problems also reflect the fact that insufficient attention has been paid to trade facilitation and focusing on not just infrastructure but also to impediments in doing business that push up costs and slow down efficiency.

While there have been many improvements in some countries in terms of the operating environment, as reflected in the annual Doing Business survey conducted by the World Bank, there are many more that could be tackled but have not been. Although governments complain about not having sufficient funds to improve things, there are many improvements they could make that do not cost money but do require political will.

Going forward, a significant rise in investment is expected from emerging markets such as China as well as Turkey, South Korea and others, but also from the more traditional investing nations such as the U.S, which really raised its profile in Africa in 2012. It is also important to watch what improvements African countries are making towards creating a better operating environment for business and whether infrastructure projects and upgrading of key facilities such as ports and railways gain momentum.

Visit www.frontiermarketnetwork.com to view a comprehensive database of business and investment opportunities in Africa.

Expert advise on doing business in Africa

The investment potential of Africa is real, says five experts we interviewed for this report on doing business in Africa. However, companies need to overcome many challenges in order to be successful - from underdeveloped infrastructure, a fragmented retail landscape and unreliable market research to unclear and fickle government regulations, and limited pipeline of experienced managers.

"Understanding the market size and structure before you enter the market is critical to developing a proper approach when planning investments in Africa." - Hendrik Malan, operations director for Africa at Frost & Sullivan

"When operating in another country, remember you are a guest in that country and should behave accordingly." - Dianna Games, African business analyst and CEO of Africa at Work

"Africa's inadequate infrastructure poses a huge logistical risk. Successful companies invest in their own reliable support systems." - Jean craven, head of corporate finance at Export Trading Group

"Perceptions of investing in conflict-affected countries are changing, especially among investors who are seeking new frontiers for growth. Many of the conflict affected countries are enjoying rapid economic growth, albeit from a low base." - Colin Shepherd, the head of the IFC's Conflict Affected States in Africa Initiative

"We are investing in South Sudan because it represented an exciting investment destination, growing rapidly after years of civil war and under investment by the Khartoum government. When investing in such a place we look for investment opportunities that offer near term returns, given the risk profile." - Managing partner at Maris Capital, Charlie Tyron.

Download Frontier's complimentary eBook featuring these five experts and get insight on:

• What companies must take into consideration when planning investments in Africa
• Insight on the reality on the ground for investors in Africa
• Doing business in conflict and post-conflict countries in Africa
• Challenges and opportunities of operating in South Sudan

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