Private equity investment in French-speaking Africa

Paris-based law firm, STC Partners, assists French and foreign investment funds in managing transactions in listed and unlisted companies. In this interview executives at the firm Laurence Elong-Mbassi (Attorney at Law - Of Counsel, Head of the Africa Tax and Legal Practice) and Anne-Sophie Hébras (Attorney at Law - Of Counsel), talk about how reform initiatives in certain countries in West and Central Africa are helping to make investing more flexible and efficient for private equity investors.

How has STC Partners helped private equity fund managers invest in French-speaking Africa?

We have assisted private equity firms in many French-speaking countries in West and Central Africa, and in the Maghreb, notably Morocco and Tunisia, as well as in some English-speaking African countries, such as Nigeria. We have helped teams throughout the deal life-cycle of the investment fund by advising on the legal and tax structuring of the fund itself, drafting and negotiating the fund documents, structuring transactions between the general partner and the advisory and other associated companies, and in performing legal and tax due diligence for investment and exit purposes. Our affiliate, C2A, supports us through their presence in several countries of West and Central Africa, including Côte d’Ivoire, Guinea, Cameroon, Congo and Gabon.

In your experience, how has the Organisation for the Harmonisation of Business Law in Africa (OHADA) benefitted private equity fund managers and investors operating in the OHADA* region?

Firstly, the OHADA Uniform Act relating to commercial companies and economic interest groups (the Uniform Act) benefits private equity investors focused on this region by introducing a common form of law for these groups across OHADA treaty signatories. This greatly enhances efficiency in structuring and administration, and reduces the relative risk when investing in the different countries of the OHADA area.

The Uniform Act has recently been amended (effective 5 May 2014) and introduced greater flexibility in the management of the legal structures available to investors and funds to help secure their operations in the OHADA area. One of the main innovations was the introduction of the “Société par actions simplifiée”, or simplified joint stock company, which allows shareholders greater freedom in structuring their partnership and portfolio company investments. Additionally, the revised Uniform Act brought major innovations relating to securities, which greatly benefit private equity funds. Some examples include the ability to: (i) create preferred shares which can be issued without voting rights, with double voting rights, with suspension of voting rights for a specified period of time, or with a preferred dividend and so forth; and (ii) provide access to capital through the creation of securities or entitling the allocation of debt instruments, which opens up greater funding opportunities, in addition to common equity, for firms incorporated in the OHADA area.

With the increased global focus on Africa, what are some of the issues managers and investors should be aware of when looking to invest for the first time?

One of the main issues faced by clients investing in Africa is the efficient transfer of the proceeds of their investments, in particular the proceeds of sales. There is typically no issue when transfers take place between the Euro zone and the CFA Franc zone. Moreover, as the latter is indexed to the Euro at a fixed rate, there is absolutely no exchange rate risk. Things can prove to be more complicated in North African countries which have foreign exchange control regulations that are much more restrictive than those found in the CFA Franc zone. For other types of transfers, such as dividends and management fees, one must comply with legislation in force (e.g. domiciling service contracts, holding shareholders meetings to approve annual accounts and allocating profits within the time limits prescribed by law).

From a tax perspective, capital gains tax arising from sales of interests in portfolio companies can be an issue, but we find in this respect that the strengthening of the double tax treaties network of African French-speaking countries has allowed a gradual improvement in the profitability of foreign investments by reducing cases of double taxation (wide double tax treaties network with France, and expanding with Mauritius and Morocco).

How have you seen the tax environments in French-speaking Africa change, and are they becoming more efficient from a private sector investment perspective?

In general, we have noticed that, although the tax rules are evolving towards a strengthening of anti-abuse and anti-tax avoidance systems, local tax authorities are becoming more and more aware of international practices. This helps enormously to facilitate effective discussions between the authorities and our clients. In addition, several countries have formalised the possibility for taxpayers to request a tax ruling to validate the regime applicable to a given scheme. While in some cases it is too early to truly appreciate the positive impact this may have due to some practical implementation issues, it certainly contributes to helping secure transactions made by foreign and local investors. 

In relation to private equity in particular, we are seeing tax rules introduced in support of private investment, notably under the lead of the West African Economic and Monetary Union (WAEMU), which has issued several directives which harmonise the taxation applicable to securities among WAEMU members and the taxation applicable to closed-end investment companies within the WAEMU. 

These rules have been implemented in various countries, notably Senegal, Benin and Togo, and provide favourable tax regimes (e.g. exemptions from corporate income tax, exemption from tax on capital gains derived from the sale of securities) for listed and unlisted investments to stimulate regional financial stock markets and offer alternative ways of financing the economy. We believe that this type of legislation, combined with the recent Uniform Act developments, will encourage the emergence of additional local investment funds.

*OHADA is a system of business laws and implementing institutions adopted by 17 countries in West and Central Africa. It is the French acronym for "Organisation pour l'Harmonisation en Afrique du Droit des Affaires", which translates into English as "Organisation for the Harmonization of Business Law in Africa".

Interview sourced from Frontier's content partner, African Venture Capital and Private Equity Association (AVCA)

Top 5 food markets in sub-Saharan Africa

By Kurt Davis

The food sector is the focus of investors who are seeking to capture the opportunity of a rising middle class in Africa. 

They were lost in Luanda, Angola's bustling capital, until they found the McDonalds. Being American in a familiar place in a foreign country is home until you see the price for the burger meal: $14. 

This being Africa means there must be a local twist, says the American tourist John, and sometimes the twist is the price.

Investing in the sub-Saharan African market is the right move at the right time. Call it the “last frontier” or the “last big opportunity.” Either way, the numbers speak to great prospects.

The International Monetary Fund’s (IMF) latest Regional Economic Outlook for sub-Saharan Africa projects GDP growth to reach 5.5% in 2014 from around 5% in 2013. The accelerating growth is expected to be buoyed by large investments in infrastructure and mining, maturing investments in transport and telecommunications, and a rebound in agricultural output.

The sustained boom creates more consumers. Global management consulting firm Mckinsey & Company projects that more than half of African households will have discretionary income by 2020, rising to 130 million households from 85 million today. Restaurants want a piece of the pie.

Kentucky Fried Chicken (KFC) and McDonalds are the big first movers. Other American brands, including Burger King and Pizza Hut, are salivating at the growing opportunity. But franchises are not the only players as local brands, including South Africa's Debonairs Pizza and Nando’s, continue to expand across the region.

Here are the top 5 countries for restaurant expansion in sub-Saharan Africa:

Nigeria

It has a Johnny Rockets! But the entrance of lesser known brands Johnny Rockets and Dominos underline two big things about Nigeria: (1) its approximate 170 million-plus population (biggest in sub-Saharan Africa) and (2) its GDP, which stands north of US$520-billion - the largest in sub-Saharan Africa.

Nigeria’s population is likely to overtake the United States by 2045, according to the United Nations, and its GDP is likely to surpass US$1.6-trillion by 2030 with a yearly growth rate of 7.1%, propelling it into the top 20 for economies by GDP. In a similar time frame, global management consulting firm Accenture in a recent report projects consumer spending to grow to $167-billion by 2020.

Tapping into this market is obviously imperative to gaining market share in sub-Saharan Africa. But creativity is necessary – for example, throw in jollof rice or seafood okra to excite the local palate. Nigerian tastes span local delights to British adoptions and American transformations.

Kenya

Kenya is a favored destination for investment in Africa. It is sub-Saharan Africa’s sixth largest economy and population. And its birthrate remains in the top quartile globally. The IMF projects the Kenyan economy to grow 5% in both 2014 and 2015, compared to 4.7% in 2013. All this being said, the underlining numbers in Kenya indicate more spending consumers in one of Africa’s biggest food-loving countries.

Accenture projects consumer spending to grow to US$38-billion by 2020. back in 2012, an Africa-focused private equity firm invested in Nairobi Java House, a local Kenyan coffee house and restaurant, signifying a new focus of investment firms. A large expansion by Kentucky Fried Chicken (KFC) only further underlines the opportunity. And Subway has entered and likely confronting Subzone, a healthy eating alternative in Nairobi that has a similar look and appeal of Subway.

The Kenyan palate, to a distance observer, initially seems fulfilled by the simple presence of meat – ideally chicken. But locals will suggest that you have only tapped the surface if you leave with that belief. Asian influence, British and American influence (from Kenyans studying abroad), and a well-travelled middle class undoubtedly implies greater diversification.

South Africa

The former “largest economy” in sub-Saharan Africa is still trying to get its growth back on track. The IMF projects the economy to grow 2% in 2014, only barely surpassing the 1.9% growth in 2013. Weaker economic numbers worry investors and politicians alike. Yet consumer spending remains strong with untapped potential.

Consumer spending, projected at US$315-billion in 2020 by Accenture, will be approximately double that of Nigeria. The South African palate is nuanced accompanied by larger pockets. Local brands, including Spur and Ocean Basket, compete strongly against Western brands inside (and outside) South Africa. It is also easy to find a McDonalds and a KFC in country.

Skeptics routinely suggest that the food service business is approaching saturation in South Africa. Yet all the numbers indicate growing competition, but nowhere near any level where investors cannot snag great returns.

Uganda and Tanzania

This grouping will not excite Tanzanians and Ugandans – the countries are definitely different in many ways. But they do have a lot in common too. As the 5th and 7th most populated countries in sub-Saharan Africa, Tanzania and Uganda already possess large consumer bases. This base will only expand with birthrates in the top 20 globally – Uganda at the 3rd highest and Tanzania is the 18th highest.

Tanzania and Uganda embody the East Africa boom. Underpinned by recent natural resource discoveries, both countries possess fast-growing economies. The IMF projects the Tanzanian economy to grow 7% in 2014, compared to 6% in 2013 while the Ugandan economy grows at 6.25% in 2014, compared to 5.75% in 2013. As commercialisation of these resources take hold and pipeline projects mature, these growth figures may very much be higher in a few years.

If not for the supply chain challenges, many investors think these two countries would rise to the top as investment destinations for the food service industry. Yet a lack of commercial quality inputs, ranging from potatoes typically for French fries to meats (i.e. chicken and beef) stymie operators and create deficiencies throughout the value chain. Focused efforts on agriculture from central governments and local investors will continue to improve the industry’s prospects.

Honorable mention: Angola and Ethiopia

This article is re-published with permission from Frontier's content partner, Ventures Africa.

Ventures Africa chronicles business and investment news, and the success stories of African entrepreneurs and business leaders.

Private equity navigates regulatory headwinds

Chief executive officer of tax and management services firm Intercontinental Trust Limited, Ben Lim, gives insight on private equity growth in Africa and the evolution of regulatory environments to make investing more efficient.

With your 15-year history in Mauritius, how have you have built your business, and how has Mauritius evolved to be a gateway for investment into Africa?

Today we see Mauritius as the key financial centre for Africa, and indeed African private equity, having seen a real shift in the investment flows from other emerging markets to Africa in recent years. To provide some context, in the early 90s, I witnessed the emergence of Asia, particularly China and India, through investments passing through Mauritius, and our business was heavily weighted towards those regions. When the financial crisis emerged in 2008, we saw a significant change in investment flows, and we re-focused our business from Asia to Africa. Mauritius on the whole seemed to follow this shift. 80% of all investment companies in Mauritius pre-2008 were Asia-bound, and post-2008, 70% of all investment companies in Mauritius are now Africa-bound. It makes sense; although an island, we form part of Africa, we are a member of the African Union, Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA), and we are building the skills and intermediary businesses that so many of the businesses in Africa need as they grow.

Our business largely serves the private equity fund managers in South Africa, we have a strong foothold in this market. Interestingly since around 2009, these managers have sought to look for investible opportunities beyond their home market, to other countries in Southern Africa and even further afield to other countries in sub-Saharan Africa.

We see this as an increasing trend as well as a general pick-up in the number of fund managers and activity in some of the larger economies of Africa, such as Kenya. East Africa, we believe, is a real private equity growth region of the future. 

How have the regulatory environments in Africa evolved to be more conducive to PE funds and their ever increasing pool of global investors?

If we look at East Africa specifically, I think there are still a number of tax systems that can be inefficient for international investors investing directly in those countries. For example, in Tanzania, the tax system lifts the corporate veil and taxes the beneficial holder, which can result in double taxation exposure for a non-domestic investor. Mauritius is in the process of negotiating a Double Tax Agreement (DTA) with Tanzania to alleviate investors in funds domiciled in Mauritius of this double exposure, as well as other nations, including Algeria, Lesotho, Malawi and Togo. The government of Kenya is about to introduce capital gains tax, which had previously been absent from the tax system, and which can be a significant return drain for private equity investors. While this tax is on the horizon, Mauritius has ratified a DTA with Kenya that is awaiting enforcement. Once enforced, this will significantly benefit Mauritius-domiciled funds investing in Kenya.

One country which has structurally morphed into an attractive region for private sector investment is Rwanda. The government has put in place a number of structural enhancements to consolidate the socio-economic recovery and to generate sustainable and equitable growth and poverty reduction. Further, Rwanda's government has signed a DTA with Mauritius which is awaiting ratification. Rwanda recently ranked second of all African countries in the World Bank Group's Ease of Doing Business Index, behind Mauritius which ranks number one, and ahead of South Africa in third place.

Overall, Mauritius has worked very hard towards increasing efficiency and reducing risk for those investing in Africa, on a relative basis. The below table provides a snapshot of how investing in Africa via Mauritius can benefit investors.

Investor Promotion and Protection Agreements (IPPAs), mentioned in the table can provide comfort to investors who are investing in countries where there are risks of nationalisation or expropriation. The IPPAs encourage and protect investments by virtue of measures to minimise any deprivation of investments, and in the worst case scenario, any deprivation of investments will have to be justly compensated. IPPAs with Mauritius exist with Burundi, Madagascar, Mozambique, Senegal, South Africa, and Tanzania, with a further 14 IPPAs awaiting ratification, including Kenya and Rwanda.

Given the current trends, it is likely that Africa will finally emerge from its history to position itself as one the most affluent and developed regions of the world, developing at a much faster rate than one would have predicted only a couple of decades ago. We are confident that Mauritius will remain the preferred hub as a gateway for investments in African private equity and venture capital markets. 

Intercontinental Trust Limited operates in Kenya, Seychelles, Singapore, and South Africa. The firm serves Africa-focused private equity funds with targeted capital commitments of approximately US$ 5.5-billion. 

Article sourced from Frontier's content partner, African Private Equity and Venture Capital Association 

Top 6 private equity deals in Africa

Consumer-facing sectors are proving to be the most compelling for private equity in Africa, as demonstrated by the type of deals in July.

The Abraaj Group invests in Tunisian private hospital

The Abraaj Group announced its funds had acquired a majority stake in Polyclinique Taoufik S.A., the second-largest private hospital in Tunisia with 164 beds.

The investment will help the hospital to consolidate it’s strong position in the market by further increasing patient capacity and adding new services, upgrading and renovating the hospital, and investing in human resources and training.

To implement its growth strategy for Clinique Taoufik, Abraaj will draw on its extensive experience in the healthcare sector, gained from investing in businesses across the Middle East, North Africa and Turkey.

Population growth in North Africa is expected to reach 190 million by 2020, and with life expectancy also on the rise there is potential for further demand for quality healthcare services.

Tunisian healthcare sector made up almost 7% of GDP in 2013.

The investment is the sixth by Abraaj in Tunisia. It’s portfolio includes baked goods company Moulin d’Or; Unimed, a leading player in sterile form pharmaceutical products; and Plastic Electromechanic Company (PEC), which specializes in plastic injection, the assembly of electrical equipment and harnesses, and medical products.

AfricInvest Group and FMO form SFC Finance

AfricInvest Group and FMO (The Netherlands Development Finance Company) are part of a consortium which created SFC Finance, a senior secured lender providing funding for growth or expansion to small and medium enterprises (SMEs) in Africa.
SFC Finance will structure its loans with tenors adapted to the cash generation capabilities of its customers. Shareholders committed equity of US$20-million, alongside an initial US$50-million debt facility extended by the Overseas Private Investment Corporation. 

Debt financing for SMEs in Africa is poor, particularly the lack of credit facilities with repayment schedules that reflect company cash flows, a factor which has inhibited their growth. SFC Finance will address these needs, and also SME governance and environmental and social responsibility.

Amethis Finance announces final closing at US$530m

Private investment fund, Amethis Finance, saw final close of their first fund at US$530-million, which included institutional investors from Europe, US and Africa, together with close to 40 European and US entrepreneurs and family offices. 

Amethis has already made five investments since announcing their first close 18 months ago, in fast -performing companies in Kenya, Ghana, Cote d’Ivoire and Mauritius - in the banking, oil and gas, retail distribution, and logistics sectors. 

The Fund's shareholding structure mixes classical institutional investors (banks, insurance companies, fund of funds) with successful private entrepreneurs from the manufacturing and services sectors who are investing often for the first time in Africa and are looking to know better the continent. It assists its investors in their expansion, notably through co-investments.

Economic models are rapidly changing in Africa, with consumer and retail oriented companies taking advantage of those evolutions. This rapid growth is creating significant capital needs for local companies, and Amethis’ strategy is to foster long-term ties with well-established, high-growth African businesses that need long-term capital. 

Private European and US entrepreneurs and family offices are increasingly investing in Africa, and see the continent as the next world frontier for growth.

DPI and PIC in consortium acquisition of RTT

Development Partners International (DPI), through African Development Partners II, and the Government Employees Pension Fund (GEPF), represented by the Public Investment Corporation (PIC), acquired 80% of the RTT Group, Africa’s largest privately owned parcel distribution company, for an undisclosed sum. Ethos Private Equity leads this consortium.

The investment will expand RTT's offerings, and help to tailor services to specific customer needs.

RTT is a market leader in third-party logistics and distribution, and a forerunner in break bulk and express distribution. The company operates across sub-Saharan Africa, comprising over 120,000m2 of warehousing and cross docking facilities. RTT has a combined fleet in excess of 1,200 vehicles and employs close to 5,000 people. Revenues exceed R2.5-million per annum.

Fusion Capital buys equity stake in Kenya’s first free newspaper

Fusion Capital acquired a 40% equity stake in Xtra Publishing Limited, a free newspaper and digital content company in Kenya. 

Xtra will leverage free print and digital services in an attractive new media hybrid model. The company launched the region’s first free newspaper in March and is already the third-largest newspaper in Kenya. The newspaper will be supported by online and mobile services targeted at the young professional demographic. IPSOS/Synovate readership surveys confirm that the newspaper has secured the young, urban professional readership, providing near zero wastage for advertisers.

The investment by Fusion will be utilized in advancing IT and editorial systems, and for working capital requirements.

Kenya and East Africa is showing encouraging trends in digital news and entertainment dissemination. The statistics show impressive growth with Internet usage having doubled between January 2010 and 2011, from 3 million to 7.5 million users. Usage further increased by another 65% between October 2010 and October 2011, rising to 14.3 million users.

That figure corresponds to over 36%of the population having access to the Internet (WAN-IFRA 2012).

Helios Investment Partners and IFC in US$630-million equity fundraising round for Helios Towers Africa

Telecommunications towers company, Helios Investment Partners, and the International Finance Corporation (IFC) participated in Helios Towers Africa’s latest equity fundraising round, which raised US$630-million in new equity resources from existing and new shareholders.

Existing shareholders including Quantum Strategic Partners, Helios Investment Partners, Albright Capital Management, RIT Capital Partners and IFC, added to their current stakes and are now joined by new shareholders, Providence Equity Partners and IFC African, Latin American, and Caribbean Fund.

Helios also expects to complete negotiations shortly on new and extended debt facilities of over $350-million with a strong syndicate of international and local lending institutions.

Following this latest injection of capital, Helios will have raised over $1.8-billion in external financing since inception in late 2009 to fund acquisitions and organic growth.

The telecommunications towers industry in Africa has huge potential. There is need for 100,000 Points of Service (PoS) to merely satisfy demand for 2G coverage and associated capacity demand over the next five years. This PoS requirement is underpinned further by the growing demand for 3G and 4G data, which is driving the need for significant additional infrastructure capacity and in-fill across the continent.

Helios owns over 7,800 towers in Africa.

Private equity funds - what works in Africa and why

Private equity firm Augentius's group head of sales, J.P. Harrop, spoke with the African Private Equity and Venture Association (AVCA) about the attractiveness of Africa and how the firm is helping fund managers to tackle the ever-increasing demands of international regulation.

With your relatively recent presence in Africa, Augentius now stands as one of the only global private equity-focused fund administrators. How did your focus on Africa come about?

Augentius’ roots have historically been in Europe, serving private equity, real estate and private equity fund of funds. In 2007 I went to Mauritius for an initial exploratory visit as we were hearing a lot about Indian private equity managers using Mauritius to domicile their funds. On this visit, a wise man pulled out a map of the region and asked me why we were looking to the right (India) when the greatest opportunity was to the left (Africa). That has always stuck with me as there were no private equity-only fund administrators focused on the African market. Fast forward to 2009 when Augentius led to its foray into Africa by being appointed as fund administrator of Citadel Capital's Joint Investment Funds, on the basis that we opened an office in Mauritius and became regulated by the MFSC (financial services commission). From here, we have build our presence and have now been appointed as the fund administrator for 24 Africa-focused funds, with FUM of circa US$6.1-bn based on committed capital and targeted commitments.

Are there any trends that you are seeing with Africa-focused fund managers that are different from other regions?

We have noticed that the fund of funds model seems to be more popular with those investing in Africa than other regions, with firms such as our client Sango Capital, and a few others establishing themselves as key players. We think this is due to investor demand for exposure to African private equity opportunities coupled with scarcity of local knowledge. Investing into an African fund of funds bridges this knowledge gap in a way perceived as more economical than trying to build out their own investment teams, as many in Europe and the US have been doing of late. At this point in the cycle, it is still very much a case of following cash – cash is still king. We have seen a number of funds in Africa that had previously sourced their commitments from local government and domestic institutions, who are now raising their next fund and looking at investors from other regions. In many cases, these investors are not comfortable with Mauritius as a domicile and consequently, they have to establish feeder or parallel vehicles in places such as Luxembourg, the Cayman Islands or the Channel Islands, alongside Mauritius, to satisfy all of the investors. We have managed this process for a number of our clients with investors joining from parts of Europe and the US. 

With the asset class attracting a more globalised pool of investors, fund managers in Africa need to be ever-more conscious of international regulation. Looking at FATCA, the US’s Foreign Account Tax Compliance Act, how do you see this new legislation affecting fund managers in Africa?

The appearance of FATCA, the US’s new tax avoidance laws focusing on foreign investments, initially caused concern for US-based investors, and then for any investor who had a connection with any US-based institution, over compliance, reporting and withholding obligations being imposed by the IRS, the US tax authority. As mentioned, US-based and other international investors typically participate in opportunities in Africa through funds or feeder funds in centres such as Mauritius, the Cayman Islands, and so on. One of the benefits of these domiciles is that they have inter-governmental agreements (IGAs) with the US to make compliance a more local matter, and reduce potential exposure.

Having dealt with FATCA in a number of cases, it is essential that managers and their service providers ensure they have the systems and processes in place to track their investors’ tax status, and are able to report when needed. The OECD have produced a ‘Common Reporting Standard’ on automatic tax information exchange and as this gains traction, we would expect to see a lot more funds needing to report on a greater number of their investors down the road.

AIFMD, the Alternative Investment Fund Managers Directive, which covers the management, administration and marketing of alternative investment funds in Europe, is also having an impact on fund managers in Africa. What has been your experience?

Precisely that, fund managers in Africa should be very conscious of AIFMD. Following its introduction, the European fundraising environment has been continuously evolving and certain EU countries have taken the opportunity to amend their private placement regimes. These changes particularly affect non-EU fund managers, who are not currently eligible for the EU marketing passport. Germany and Denmark are two examples; both now require fund managers to comply with certain aspects of the AIFMD, specifically the appointment of an EU-based Depositary. This means that all Africa-based fund managers planning to market their funds to Germany and/or Denmark under private placement regimes will need to appoint an EU-based Depositary for each relevant fund.

As an EU-based Depositary, Augentius is well-positioned to help Africa-focused funds efficiently comply with these new rules, and our detailed understanding and experience of the AIFMD within the European market is complimented by our dedication to and presence within the African private equity industry. We are currently unaware of any other Africa-focused administrators with a European presence offering this service. Unlike many of the larger banks offering this service, Augentius provides this depositary service as a standalone offering, as well as offering it as part of our broader service offering. 

Any final words?

This is a very exciting time for African private equity. The main concern I have heard from investors globally is whether there are enough experienced African private equity managers to cope with the likely material increase in interest in the asset class over the next three to five years. I expect to see more of the experienced African professionals currently working within the larger private equity houses in the US and Europe returning to Africa to help fill this gap, and participate in what may be a golden age of African private equity. 

Source:  Frontier's content partner, AVCA

What is private equity doing about risk in Africa?

​What does risk look like in the New Africa with its impressive headlines on growth, investment, and the emerging middle class?

The truth is that risk in Africa today is murkier than ever: lessened by reforms, muddled by continued misperceptions and shifting reputations. What does this mean for private equity (PE) investors – buyer beware? Yes and no. You just have to know where to look, and who to ask, according to Deloitte's latest East African Private Equity Confidence Survey.

Many of the elements that characterise African Private Equity portfolios are also their principal risk factors. Investors must plan for longer term engagements: projects in Africa can take triple the time of other markets to get off the ground from inception to income flow. Most deals are growth investments that require hands-on engagement. And the prominence of development finance in African PE means that investors must further contend with impact mandates and consider what acceptable risk looks like for any Development Finance Institution (DFI) partners.

Operational risks are the number one concern for most PE investors in Africa. General Partners (GPs) want to work with strong companies and good management teams, but those can be difficult to find in what is still a relatively immature corporate environment. The lack of larger deals and resulting focus on SME investing lessens the amount of track record information that investors have to work with. Many smaller deals are also minority stakes, and in those cases it is especially important to understand the people you are doing business with. Reputational risk looms large, and can become particularly critical for sensitive DFIs who answer to tax payers in their home markets. Investors need to assess the type and extent of corruption risks they face. In principle, corrupt staff members can be replaced. But if corruption is intrinsically linked to the company, it will be hard to work around.

Political risk today is much more nuanced than exploding headlines, and often linked to corrupt local politicians who like to disagree with the ‘nature of the investment’. Citizens are also legitimately becoming more vocal, helped by stronger media and, importantly, by their ability to expose wrongdoings on social media. However, even for the best behaved investors who tick all the right ESG (environmental, social, governance) boxes, risks remain: In a corrupt environment, it is still easy for vested interests to mobilise the local population against investors, and feed a distorted media campaign. This is a particular challenge for any investment involving land rights, whether in extractive industries or in large-scale commercial agriculture: land is a notoriously emotive and mismanaged asset.

Regulatory risk in Africa varies widely across sectors and countries – as do corresponding political risks. The risk of corruption and the risk of government interference in a deal will increase commensurate with both the strategic status of the sector in the country and also with the size of the sector. For strategic sectors such as oil and gas, mining, infrastructure, land-related agribusiness or financial services, investors face increased risk of political interference, hidden ultimate beneficial owners, corruption and legislative change. Larger, expanding, multi-jurisdictional sectors like retail and fast-moving consumer goods offer a happy medium, with more opportunities and less vulnerability.

Due diligence: Most PE firms do initial due diligence in house. The model, in any emerging market, is very relationship driven and even more so in Africa, where all investors will need to build up capacity on the ground quickly to keep up, whether through local offices, on-the-ground teams, fly-ins or local partners. There is a historical impression that you need to identify a Mr. Whatever-the-Country is that you’re working in who can open doors for you, but that is changing. More PE funds do the ground work themselves these days.

Risk insurance: Once in bed, political risk insurance as offered by MIGA and ATI or guarantee schemes can hedge further risks, but PE funds have not traditionally gone this route. Cost is a disincentive for GPs and LPs alike – just a few percent per annum can cut into your returns. And for private investors, most of whom still avoid real frontiers like CAR, insurance is not enough to make them comfortable with the risk. At that level, you’re either in or you’re out. Many investors in Africa hedge using mezzanine structures, pure debt or convertible loans.

Veterans and newcomers: Overall, seasoned investors that have been in Africa for years – Aureos (now Abraaj), ACA in Nigeria, or ECP to name a few – are better equipped to manage these risks. They are more accustomed to long-term investments, more familiar with local regulations, have more support built up in house, and more deeply rooted networks. They may have also already made mistakes that taught them crucial lessons. But there are so many opportunities across Africa that even PE outfits new to the market can find their way around it as long as they invest time and resources identifying the right deals for their investment profile and finding partners they can trust.

This article is extracted from Deloitte's latest issue of the 'East African Private Equity Confidence Survey'.

See the full report here

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.

Top 9 private equity deals in Africa

The month of March saw an abundance of activity in the private equity sector in Africa. Below are some of the transactions realised.

1. Citadel Capital Subsidiary acquires additional stake of Rift Valley Railways (Kenya, Uganda)

Africa Railways, a core subsidiary of investment company Citadel Capital, has acquired a 34% stake in the national rail operator of Kenya and Uganda. The US$ 37.8m transaction brings Africa Railways’ total ownership of Rift Valley Railways (RVR) to 85%.

The selling party is TransCentury, a Nairobi-listed infrastructure company.

As part of this transaction, Africa Railways shareholders including Citadel Capital have together committed US$80m to increase Africa Railways’ capital to US$200m. Of that USD$80m in fresh capital, US$37.8m has been used to finance the acquisition of shares from TransCentury, while the balance will be injected into RVR to support the ongoing five-year turnaround program.

Citadel Capital first acquired a minority stake in RVR in 2010, eventually becoming lead shareholder via Africa Railways. The firm has since led the creation and full financing of a five-year, US$287m turnaround program for what was then an ailing railway at risk of defaulting on its concession agreements with the governments of Kenya and Uganda.

The first phase of the rehabilitation of 500 kilometers of track that links Kenya with Tororo in Eastern Uganda and Gulu in the north has been completed. The railway is now more efficient and is supported by world-class technology.

2. AfricInvest Group achieves third closing of its AfricInvest Financial Sector Fund (Africa)

The AfricInvest Financial Sector fund, which garnered €60.6m in commitments, will focus on financial inclusion in Africa through investments in financial institutions that service, amongst others, micro, small and medium-sized enterprises (SMMEs). It is one of the first funds to focus on these market segments.

New commitments came from KfW,BIO, Desjardins Group, and the Adolf H. Lundin Charitable Foundation and other private investors.

The AFS was initially launched in June 2007 with a capital commitment of EUR 20m by FMO5, the Dutch development bank, and was then increased to EUR 31m in April 2010 with additional capital commitments by PROPARCO through its FISEA fund6, and by Développement international Desjardins.

The AFS fund has made 13 investments and has realized two full exits and one partial exit. Given the track-record, opportunities and the high impact of the Fund, the shareholders and the Manager of the Fund decided to increase its size and term in order to create a real pan-African Financial Sector Portfolio. The Fund now has the ability to both increase its exposure to promising and fast-growing portfolio companies and to execute a pipeline of new investments.  It makes investments in the range of EUR 1 to 5-million.

This closing comes at a time when many African Central Banks are increasing minimum capital requirements and tightening regulations across the financial sector.

3. AIIM’s IHS Holding Ltd secures $490m to fund expansion in Africa (Africa)

IHS Holding Ltd., Africa’s largest independent telecommunications infrastructure company by number of towers managed, has secured US$490m of equity and debt in its latest financing round.

Existing shareholders contributing alongside new investors are Goldman Sachs, the IFC Global Infrastructure Fund (GIF) and African Infrastructure Investment Managers. Standard Chartered Bank is providing senior debt, for expansion of IHS’ business in Zambia.

This funding round brings the total amount of capital raised by IHS to more than $1.5bn over the last 12 months.

IHS will utilise the proceeds of the round to finance acquisitions, help its customers expand coverage and capacity by building new towers and continue investing in alternative energy and green solutions.  

IHS Towers currently owns and manages over 10,500 towers and has built over 3,500 for its clients in Nigeria, Cameroon and Côte d’Ivoire. In Q4 2013, IHS signed agreements with MTN in Zambia and Rwanda to acquire over 1,200 sites in Zambia and Rwanda.

4. Emerging Capital Partners invests in bottling business, Atlas Bottling Corporation (Algeria)

Pan-African private equity firm Emerging Capital Partners (ECP), has announced a 33% stake in Atlas Bottling Corporation (ABC), the exclusive PepsiCo bottler of carbonated soft drinks (CSD) in Algeria, as part of an $80m investment plan.

Founded in 1995, ABC signed an Exclusive Bottling Agreement with PepsiCo in 1998, and has grown to become one of Algeria’s leading beverage players with a portfolio of global brands including, Pepsi Cola, Pepsi Max, Mirinda and Seven-up.

A mix of growth equity, provided by ECP, and debt, from commercial banks, will be used to increase bottling capacity, build a new production site and give the company flexibility to develop new product categories. ECP will also provide technical assistance to the management team, supporting them in professionalizing business functions such as governance and compliance.

Algeria is Africa’s third largest soft drinks market

5. Fusion Capital acquires stake in REMU Microfinance Bank (Kenya)

Private equity firm, Fusion Capital, has completed buying a 25% stake in REMU Microfinance Bank, in a move that will see it inject working capital and divest its ‘debt only’ portfolio to focus on providing pure equity and real estate financing to mid market companies in East Africa.

This is in line with Fusion’s current strategy to invest only in private equity deals between US$1million to 5 million targeting this segment.

REMU is a Microfinance Bank that offers deposits and credit services to small and medium size enterprises. Presently, there are eight regulated microfinance banks in Kenya.

The partnership will see the bank implement its new strategic plan to grow and expand its branch network and widen its product offering to include mortgage and housing products and electronic banking.

The banking sector in Kenya has seen more than a decade of rapid growth, as institutions aggressively moved to bring people who were previously excluded to using banking services. It is estimated that over 30% of the population remains unbanked, offering opportunities for further growth, according to FinScope Survey report 2012.

6. PIC invests €19m in Phoenix Capital Management’s West Africa Emerging Markets Growth Fund (Cote d’Ivoire)

South Africa’s Public Investment Corporation (PIC), the largest asset manager in Africa with assets under management of about US$150bn, entered into a strategic alliance with Cote d’Ivoire-based financial services group, Phoenix Capital Management (PCM) S.A.

PIC will, on behalf of the Government Employees Pension Fund (GEPF), invest an initial investment of US$30m in the West Africa Emerging Markets Growth Fund (WAEMGF), the Private Equity (PE) fund sponsored by PCM. PIC will take a 30% shareholding in PCM Capital Partners (PCP), the Fund Manager.

This dual investment reflects the group’s developmental strategy for sub-Saharan Africa, which revolves around investing some 5% of its assets under management on the continent.

The partnership envisages potential co-investment opportunities between the two groups and will give PIC a solid channel for any investments in the ECOWAS region.

7. PROPARCO extends US$10m Loan to Central Africa Building Society (Zimbabwe)

PROPARCO signed a 5-year loan agreement of US$10m with Central African Building Society (CABS) to support its growth in Zimbabwe.

With total assets over US$575m, a strong mortgage asset base and a range of financial service offerings, CABS ranks in the top three of Zimbabwean banks.

PROPARCO’s loan will allow CABS to finance the development of its credit portfolio and extend the maturity of its financing for Zimbabwean businesses as funding is only available on a very a short term basis.

8. Swicorp lists paper producer, Sotipapier, on the Tunis Stock Exchange (Tunisia)

Swicorp, a leading investment banking and asset management firm focused on the MENA region, listed Sotipapier on the Tunis Stock Exchange.

Sotipapier manufacturers paper for industrial use in North Africa.

Swicorp acquired a strategic stake in Sotipapier in May 2012 through Intaj Capital II (Intaj II), a private equity investment vehicle managed by Swicorp.

The listing, which covered 9.5 million shares representing 40% of the company’s shares, was oversubscribed nearly 10 times, with demand for the shares exceeding TND400m  (US$ 250m) for a total expected market capitalization of TND120m (US$76m).

Sotipapier is poised to drive further growth in the coming years, by investing in expanding its production capacity and geographic footprint, while continuously improving the quality and performance of the products it manufactures.

The deal demonstrates the compelling investment opportunities that the MENA region, specifically Tunisia and Egypt, provides to private equity investors with in-depth insights into the region.

9. Anjarwalla & Khanna enters into a strategic relationship with ATZ Law Chambers (Tanzania)

Anjarwalla & Khanna (A&K) has entered into a strategic relationship with ATZ Law Chambers (ATZ), a law firm in Tanzania. Shamiza Ratansi and Amish Shah (both formerly of Adept Chambers) set up the new firm in March, shortly after Fred Ringo of Adept Chambers was appointed Head of the Fair Competition Commission in Tanzania. Shamiza and Amish are joined by substantially all of the other Adept staff members.

The increasing number of Tanzania-Kenya cross border deals makes a tightly knit strategic alliance between A&K and ATZ valuable to each firm. The new connection will allow for seamless interaction on deals, sharing of know-how and the exchange of lawyers between the firms.

Tanzania has a rapidly evolving market with exciting developments across multiple sectors. The relationship will allow the firms to help clients to take advantage of the new economic opportunities in Tanzania.