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PRIVATE EQUITY | AFRICA July 2011 – Issue 1

RISE OF THE BULLS Global players charge into Africa

CHANGING FACES AIFM changes fundraising game




Top deal highlights

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Private equity in Africa Herbert Smith enjoys a market leading and long established reputation in Africa, having acted on numerous transactions and projects throughout the continent over the past 30 years. We have lawyers specialising in specific geographic regions: North Africa, Francophone sub-Saharan Africa, Anglophone Africa (comprising notably Nigeria and much of East and Southern Africa) and the Spanish and Portuguese speaking jurisdictions. The team includes a number of lawyers of African nationality, or who have lived and worked on the continent. Our private equity practice group advises on all aspects of work for private equity and other financial investors, acting for sponsors, lenders, investors and managers on fund raisings, investments, secondary transactions, management equity arrangements, restructurings, refinancings, exits and disputes. The practice builds on the strengths of our market leading M&A and acquisition and leveraged finance practices and disputes practice (where we have a strong track record of acting on highprofile deals and complex transactions), and our clients are increasingly seeking advice on a broad range of legal areas and across a greater geographical spread. For example, our private equity practice has recently been particularly active in advising a number of substantial private equity sponsors on the implications of the Bribery Act. Lawyers in the group work together with experts in key sectors such as real estate, energy and natural resources, technology, media and telecoms, financial institutions, infrastructure/ utilities, and – increasingly – renewables and other ‘green’ investments, giving us practical and in-depth knowledge of how these sectors work.

Our private equity practice is active in Africa and has recently advised Investcorp Gulf Opportunity Fund I, a $1 billion Bahrain based private equity fund investing in the Gulf Cooperation Council (GCC) and Middle East and North Africa (MENA) region, in its negotiations with a significant sovereign wealth fund investor, and Abu Dhabi based Al Qudra Holding on various ongoing acquisitions and joint ventures in the Middle East and Africa. Our knowledge of Africa’s local laws, business practices and cultural etiquette, our excellent and close relationships with local counsel and other local players and authorities, and our deep understanding of sociopolitical considerations, mean that we are able to provide rapid and effective advice tailored to the specific needs of our clients. Ranked in the top tiers for Africa: Corporate/Commercial and Africa: Projects & Energy Chambers Global 2011

For more information please contact: Gavin Davies Partner, head of private equity +44 20 7466 2170

Michael Walter Partner, corporate +44 20 7466 2841 9055 Private equity Africa advert (PRESS)_d4.indd 1 PE-Africa_issue-001_covers.indd 2

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Published in the United Kingdom by Rho Media Ltd Post: St John’s House, 54 St John’s Square, London, EC1V 4JL Telephone: +44 207 127 0402 Email: Web: Publisher Richard Tandoh Managing Editor Gail Mwamba

Cover Story: RISE OF THE BULLS (Page 20)

Production Editor Tim Kimber Editorial Team Tom Minney Francinia Protti-Alvarez Tendai Sixpence Production Team Federico Parodi Stefano Tambellini Conrad Taylor No part of the Private Equity Africa journal may be reproduced, stored in retrieval systems, or transmitted in any other form, or by any other means, electronic, mechanical, photographic, recording, or otherwise without the prior written consent of the publisher. July 2011 – Issue 1 ISSN 2047-0606 © 2011 Rho Media Ltd All rights reserved Subscription The Private Equity Africa print journal is available by subscription only. A standard one-year subscription is £250. See inner back cover for further details. Corporate subscriptions available on request.

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Letter from the Editor


News Latest industry developments

10 People moves Appointments and promotions 12 Analysis Investors dispel Africa risk fallacy; Global LPs’ interest in Africa picks up 14 Event report Extracting African alpha 16 Q&A Five GPs speak out 20 Cover story Rise of the bulls 24 Feature Changing faces

27 Deals overview Deals bounce back 28 Deals Recent deal activity 33 Funds overview Slow off the mark 34 Funds Recent fund closings and launches 36 Market view Opinions from GPs, advisers and analysts 38 Technicals In-depth examination of African returns and regional macroeconomics 48 Global view Looking at Africa in context


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SECTION | Subsection

Clarifying African private equity

News I Analysis I Events I Research I Consultancy 2

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July 2011

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First steps are the hardest


irthing a new publication is never an easy process, especially one focused on an industry that is itself still in its infancy. The journey can be riddled with unexpected turns, discoveries and difficulties that make one question the wisdom of venturing into the project. Fortunately, the process for Private Equity Africa has been helped along by the strong appetite for information on the market and the growth prospects of the industry. The recent uptick in deal-making (page 27) suggests that the market is emerging from the slump brought on by the global credit crisis. Positive noises out of the global investment community are also now translating into firm commitments with Africa-focused managers raising $1.49bn for the market last year. At least 45 vehicles are raising funds for the industry, targeting an aggregate $13.6bn (page 20). The total commitments secured so far are a drop in the ocean in global private equity terms. To take the industry to the next level, GPs may have to speak louder in order to be heard in the right circles. As more success stories and accurate data filter into the market, the more confident investors will become in African private equity as an asset class. With global LPs now pushing for more transparency across all regions, this will increasingly become critical for the African industry to move forward. The South African industry, under the leadership of the South African Venture Capital Association, has achieved great strides in promoting the disclosure of key data to help the market grow (page 42). Established players, such as Emerging Capital Partners, have also learnt the value of being more forthcoming with information on success (page 36). Such revelations not only aid managers when they return to the fundraising trail, but help improve global perceptions of the market. Sadly, this level of transparency is still lacking on the part of the majority of players in the African market. Hopefully, this is an aspect that will improve as more global players enter the market and change the rules by which the game is played.

Gail Mwamba, Managing Editor

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PRIVATE EQUITY | AFRICA Awards Clarifying the market. Celebrating the best. Private Equity Africa will in 2012 host its maiden awards to celebrate the achievements of the best-in-class investors and advisers in the African private equity industry. The exclusive awards have been created to showcase best-in-class transactions in Africa’s private equity industry and provide a platform for global investors to recognise the leading players in the field. The accolades will cover the complete private equity deal making and fundraising cycles, with emphasis on ground-breaking achievements, innovation and commitment to the industry.

Awards structure The awards will be structured and endorsed by a panel of General Partners currently active in the market.

The judging panel Winners will be selected by a panel of judges made up of Limited Partners, nonAfrica-focused General Partners and advisers. The voting results will be collated by the Private Equity Africa editorial team and forwarded to the judging panel, which will then make its final recommendations.

SELECTION PROCEDURE Winners will be selected through a three-stage process: Phase I – Private Equity Africa will partner with key market data providers and analysts to generate deal making and advisory league tables, which will be used to create shortlists for the respective categories. Phase II – Nominees will be invited to submit a short write-up to support their nomination with key reasons as to why they believe they should win the specified category. Phase III – The independent judging panel will be invited to analyse and vote on the finalists, based on both the nominee submissions and industry data. Winners will be announced at the Private Equity Africa dinner gala to be held in London on 24 May 2012.

Awards entry opens in September 2011. To request an entry form, email


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July 2011

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Awards & Dinner Gala

Celebrating the best dealmakers, fundraisers and advisers

Thursday 24 May 2012, London Join the leaders of the industry as they celebrate with dinner and entertainment

For table bookings, partnerships and sponsorship opportunities please contact: Richard Tandoh T: +44 207 127 0402 E:

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Citadel postpones exits due to unrest CITADEL CAPITAL has postponed exiting its

portfolio companies for up to 18 months, following recent political unrest in the Middle East and North Africa (MENA) region. Although mainly focused on Egypt, Citadel has portfolio companies in a number of African countries, including Kenya, Uganda, Ethiopia and Sudan. The investor operates 19 platform companies with investments worth more than $8.6bn across MENA. “We have postponed planned exits for 12-18 months,” said Hisham El-Khazindar, managing director at Citadel. “It is not a case of value destruction, but of delayed realisations.” El-Khazindar was speaking at the International Finance Corporation’s annual private equity conference, in Washington DC. He added that the company had spent a significant amount of time since the start of the Egyptian revolution on evaluating

and implementing cost-control and capital preservation measures. “That said, we see sub-Saharan Africa as being largely unaffected by events and growing strongly this year,” noted El-Khazindar.

Hisham El-Khazindar, Citadel Capital

Africa returns 12% for CDC THE COMMONWEALTH Development Corporation (CDC) achieved returns of 12% on its African portfolio in 2010, as the group continues to allocate more of its capital to the region. The returns were part of the total £269m the UK government-owned developmental investor returned across its overall emerging market portfolio. The overall 2010 returns were 30% higher than the 2009 figures. CDC currently has an African portfolio worth £877m, which includes the £122m it invested in new businesses in 2010. The investor additionally committed funds to eight Africa-focused managers last year, including the maiden East Africa-focused fund Catalyst Principal Partners I. CDC is currently working on plans to commit at least 50% of its new investment to Africa’s sub-Saharan region. This is 6% more than the 44% of its new investments 6

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it allocated to Africa over the last five years, while 48% went to Asia. “There were encouraging signs in 2010 that the economies of Africa and Asia are attracting more investment but there still exists a desperate shortage of commercial capital for promising businesses in the world’s poorest countries,” said Richard Laing, CDC’s chief executive. However most of CDC’s new capital commitments are likely to be directly into businesses, as opposed to the fund-of-funds structure, following pressure from the UK government to change its investment model. CDC is currently under the scrutiny of the Department for International Development (DFID) into its operations and structure. DFID last year launched consultations into CDC’s model following media criticism of the activities and remuneration of CDC senior executives.

ILPA publishes new edition of private equity guidelines THE INSTITUTIONAL Limited Partners

Association (ILPA), a global organisation serving global private equity institutional investors, has released a new version of its private equity principles. The association has also released the first of its five recommended standardised reporting templates, as part of its efforts to promote global private equity best practices and support long-term partnerships between limited partners (LPs) and general partners (GPs). The amendments follow 2010 consultations with GPs, LPs and other industry participants, in a bid to increase focus, clarity, practicality and adoption. “Since the Principles were first launched in 2009, communication between LPs and GPs has been enhanced, improvements with respect to alignment of interests have been recognised and GPs have been proactively contributing to the ongoing development of the ILPA best practices,” said Tim Recker, ILPA’s chairman. The 2011 version has been upgraded to include carry claw-back best practice guidelines, clarify the three existing guiding principles and expand the context around the purposes of key guidelines. The association’s guiding principals are built on alignment of interest, governance and transparency and were first published in 2009. “Moving into 2011, alignment of interest, governance and transparency will become even more important to strengthen private equity as an asset class, especially as liquidity returns to the market.” The ILPA has a global membership of more than 240 organisations, including public and corporate pensions groups, endowments, foundations, family offices and insurance companies. PRIVATE EQUITY | AFRICA

July 2011

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Vital signs up eFront VITAL CAPITAL has selected eFront’s

FrontInvest Alternatives as its investment information management platform. FrontInvest offers software that enables fund managers to centralise portfolio information, including financial, administrative and legal data. The platform also has tools to build valuation models by generating samples of structures, such as discounted cash-flow, within a database. Vital adopted the software to bolster its fundraising efforts, as it works to close its maiden $500m Africa-focused fund.

Grandview gets $25.5m IFC backing SPHINx PRIVATE EqUITy’S Egypt-based

portfolio company, Grandview Investments, has received a $25.5m capital injection from the International Finance Corporation (IFC) to fund the completion of its paper mill project, El Motaheda. The deal sees the IFC take an equity stake in the El Motaheda project. The deal has been structured as a $10m equity investment and a $15.5m loan. “Sphinx has worked diligently with the IFC over a period of one year to finance

the debt and equity for this project, which will satisfy regional demand for a critical product in the paper packaging industry,” said Sphinx Private Equity chair person Marianne Ghali. Launched in 2009, the project is expected to create about 300 direct and 550 indirect jobs in Eqypt. The El Motaheda mill is to be located outside Cairo and will use recycled fibre from local waste paper to produce duplex board, which is used to make cardboard boxes.

World Bank: Rwanda, Cape Verde and Zambia top regulations charts

Kingdom Zephyr opens Lagos office


office in Lagos, in a bid to bolster its deal sourcing operations across West Africa. The office will be headed by Seyi Owodunni, a partner at the firm. Owodunni joined Kingdom Zephyr from Starcomms in Lagos, where he was the chief financial officer. Kingdom Zephyr’s current portfolio companies in Nigeria include United Bank for Africa and Ecobank Transnational Incorporated. The investor backed the companies through its pan-African Investment Partners Fund I.

have topped global charts as the most improved regulatory environments for starting a business, according to a joint International Finance Corporation (IFC) and World Bank report. The three countries are among the top 10 world economies that implemented the most changes to ease doing business for local companies in the past year. The research analyses regulations covering

Janamitra Devan, World Bank

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start-up and operations, trading across borders, paying taxes and closing a business. The research is published in the IFC’s Doing Business report. “These welcome developments are another reminder that regulatory cooperation between economies pays off,” said Janamitra Devan, the World Bank’s vice president for financial and private sector development. “About 30% of global trade facilitation reforms in the past year took place in sub-Saharan Africa alone.” Of the three, Rwanda topped the list for having implemented 22 business regulatoy reforms between 2005 and 2010, reducing the number of procedures required to set up a company to only two. This is compared to nine procedures in 2005. The country also cut the cost of start-ups to 8.9 % of income per capita, from 223% in 2005. Cape Verde ranked second, making starting a business easier by computerising its licensing system, easing property registration and abolishing some stamp duties. Zambia came in third for eliminating its minimum capital requirement, computerising customs declarations and introducing an electronic case-management system in the courts.

KINGDOM ZEPHyR has opened a new

Seyi Owodunni, Kingdom Zephyr 7

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Blackstone and Warburg raise Kosmos Energy IPO to $620m PRIVATE EqUITy-OWNED oil and gas

exploration and production company Kosmos Energy, based in the US, is to increase the size of its initial public offering to $620m. The company had originally targeted to raise $500m through an IPO on the New York Stock Exchange. Kosmos is expected to use the new funds to bolster its capital spending budget, which has reportedly been set at $400m for 2011. Credit Suisse, Citigroup and Barclays Capital are underwriting the IPO. Kosmos owns a 23.49% in Ghana’s Jubilee offshore oilfield, which is operated by UK-based Tullow Oil. Jubilee holds about 1.6 billion barrels of light crude. Gross oil production from Jubilee is expected to reach 120,000 barrels of oil per day by June 2011. The IPO follows Kosmos’ high profile unsuccessful $4bn bid to sell its Jubilee stake to ExxonMobil in 2010, after the deal failed to garner the Ghanaian government’s support. However, at the end of last year Kosmos signed a deal with the Ghanaian government and its state-owned Ghana National Petroleum Corporation to amicably resolve their differences. The resolution included a settlement regarding data related matters, Kosmos’ debt facility and its corporate structure. The deal also saw Kosmos released from prosecution for previous criminal or judicial actions. Following the agreement, James Musselman retired as the company’s chairman and chief executive officer.


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Jubilee Field, Ghana: floating production storage and offloading platform

Aureos health fund to close on target AUREOS CAPITAL is understood to be on

track to hit the $100m target on its Africa Health Fund. The fund has reportedly so far raised $75m, and is understood to be in the process of concluding the legal agreements with two institutional investors. Launched in 2009, the fund will invest in companies requiring early-stage and growth capital funding. The manager has already identified 26 companies in which it is looking to commit a total of $69m – investing between $0.25m and $5m per deal.

Brait restructures BRAIT is undergoing an intensive restructuring, which includes raising R5.9bn in capital through a rights offer. The changes see Brait become a European company through a merger with its Malta subsidiary. Following the changes, Brait will move its registered office from Luxembourg to Malta. As part of the new structure, Sam Sithole, Brait’s financial director, will resign from his role as an executive director of Brait SA. Dr Christo Wiese, an anchor shareholder, has been appointed as a non-executive director.


July 2011

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The Aureos Way

Private Equity+ FULFILLING POTENTIAL Leveraging strong corporate culture Growth capital Cash management

ALIGNMENT Empowerment Sustainable impact Minority investin

LOCAL & REGIONAL EXPERTISE Entrepreneurialism Modern managerial disciplines Global collaboration

The Aureos Way is, we believe, quite distinctive. We call it Private Equity+. To help businesses meet the challenges that face them as they scale up, Aureos combines elements of the best in private equity practice with a local, entrepreneurial and personal touch, built up over almost 20 years. This is an approach that has enabled us to deliver a positive impact on our investments in the challenging environments of the emerging markets. Our investments help to empower stakeholders – from owners to employees – to make decisions and act with greater freedom from historic loyalties and ways of working. This often proves attractive for world-class management, who appreciate the clear incentive schemes and increased clarity in roles that our private equity involvement provides.

To help businesses meet the challenges that face them as they scale up, Aureos combines elements of the best in private equity practice with a local, g entrepreneurial and personal touch, built up over almost 20 years. But the local, personal part of this approach is vital to maximising the long-term benefits and characteristics inherent in small and medium-sized emerging market businesses. Quiet determination and modesty, coupled with the highest professional standards and an intolerance of mediocrity are the hallmarks of Aureos’ personal style. At the heart of the Aureos approach are nine principles which can be categorised under three themes –


“Mutual trust lies at the heart of our relationships with portfolio companies. That is the essence of the Aureos Way and it is something that unites us all at Aureos, across all our offices, countries, cultures and languages.”

Sev Vettivetpillai, Chief Executive Officer

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ROUNDUP | People

Emerging Capital Partners appoints Brown as CIO Emerging Capital Partners (ECP) has appointed Andrew Brown as chief investment officer (CIO) to oversee investments across its six funds. Brown has been brought in to fill a newly created role, based in Paris. He is charged with overseeing and facilitating the implementation of ECP’s investment processes and strategy. He joins from Amundi Private Equity, formerly Société Générale Asset Management Alternative Investments, where he has been

Renaissance hires Ndebele for research

since 2006. While at Amundi, he was chief investment officer of the Kantara Fund – a North Africa-focused vehicle. Brown has more than 13 years of private equity experience in the African market. He has previously worked for the Commonwealth Development Corporation where he established its Egyptian office. Brown’s previous roles include stints at Actis and Coopers & Lybrand.

Andrew Brown, ECP

Carlyle Group selects Africa team

Nothando Ndebele, Renaissance Capital

Renaissance Capital has appointed Nothando Ndebele as its head of sub-Saharan Africa research. Ndebele has been brought in to develop and expand Renaissance’s research product offerings to service its growing client base. She arrives with 13 years of experience in the financial services sector, which includes roles in asset management, private equity and sell-side analyst services. Her previous experience includes roles at Deutsche Bank, Goldman Sachs and Investec Asset Managers. Ndebele is a founding member and partner of Afena Capital, and has recently acted as an economic adviser to the Zimbabwean government. 10

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Daniel Jordaan, Carlyle Group

Marlon Chigwende, Carlyle Group

Carlyle Group has appointed Daniel Jordaan and Marlon Chigwende as the coheads of its sub-Saharan Africa investment team, to spearhead its private equity strategy across the region. Chigwende joins from Standard Chartered, where he was heading the bank’s private equity unit. Chigwende has previously worked at Goldman Sachs, Greenhill and JP Morgan. Jordaan was most recently a partner at Ethos Private Equity. Genevieve Sangudi, former partner at Emerging Capital Partners, has also joined the Carlyle Africa group. The team will work from Carlyle’s Johannesburg and Lagos offices.


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Norton Rose adds Odubeko to Africa PE team Norton Rose has bolstered its Africa private equity advisory services with the appointment of Bayo Odubeko. Odubeko has been brought in to boost corporate finance advisory services, which also include private equity, initial public offerings and natural resources transactions. He joins from SJ Berwin’s London office, where he was head of the Africa Group and advised on sub-Saharan Africa private equity transactions. Norton Rose hired Odubeko as part of a bigger move to strengthen its Africa

advisory services, which also saw the firm bring in Poupak Bahamin. She will work in the mining, oil & gas and environmental services sectors in Francophone African countries. Poupak was most recently a partner at Toronto-based legal practice Heenan Blaikie, focusing on Africa. Norton Rose also recently bolstered its Africa team through the internal promotion of Arun Velusami to partner. He will focus on building out the company’s energy projects advisory services across the continent.

Leonard succeeds Leeds as EMPEA chairman

Laing to step down as CDC head will step down from his role as chief executive of the Commonwealth Development Corporation (CDC) by 2012. Laing has worked for the CDC for 11 years, seven of which he has served as the chief executive officer. The CDC will appoint a replacement for Laing following the findings of the UK’s Department for International Development (Df ID) into the group’s operations and structure. Prior to joining CDC, Laing was group finance director at De La Rue, a global security print and engineering company, where he had spent 15 years of his career. He had also previously worked

Richard Laing

Richard Laing, CDC

at PricewaterhouseCoopers and Marks & Spencer, and has experience working in agribusiness in developing countries.

John Gnodde has been appointed as chief executive officer of Brait Private Equity, following a major restructuring of the company. He takes over from Antony Ball who has resigned from the role. Ball will remain a non-executive director and will retain his commitments and responsibilities to the Brait IV fund. Gnodde, who joined Brait in 1995, has been responsible for investments in consumer products, construction, pharmaceutical manufacturing, beverages, resources, mobile telecommunications and recruitment outsourcing. Prior to joining Brait, Gnodde was at Goldman Sachs in London for six years, working in the investment banking division.

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has been elected as chairman of the Emerging Markets Private Equity Association (EMPEA). Leonard succeeds Roger Leeds, who has been chair of the organisation since 2004. Leeds is also one of the founders of EMPEA. Elected to the EMPEA board in 2005, Leonard has been a member of the executive committee and co-chair of the membership committee. Leonard is also the chief executive officer and founding partner of the Global Environment Fund (GEF), an emerging markets private equity investor with approximately $1 bn in assets under management. GEF invests in clean technology, energy and natural resources. EMPEA has also elected Sanjay Nayar, chief executive officer of Kohlberg Kravis & Roberts (KKR) India to its board of directors. Nayar leads KKR’s investment strategy in India, and was previously chief executive officer of Citi’s Indian and South Asian operations. Jeffrey Leonard

Brait Private Equity appoints Gnodde as CEO

Bayo Odubeko, Norton Rose


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ROUNDUP | Analysis

Investors dispel African risk fallacy


fricA hAs often been profiled

as a high-risk investment region, but in reality the risks are significantly lower than generally perceived, according to a number of investors active in the region. The sentiment was raised at a recent Africa Investor conference in London, at which both public and private equity investments across Africa were discussed. Investors agreed that although committing capital to the continent carries some risks, the challenges are not very different from those posed by other emerging market regions. “Perceptions of the risk in Africa are out of kilter with the actual risks,” said Sven Richter, managing director for frontier markets at Renaissance Asset Managers. “To a large extent, people do not really know the continent, and people always fear what they do not know.”

Zimbabwe opens up Zimbabwe was cited as one of the countries suffering the largest gap between perception and reality. With the Mugabe regime still at the helm of power, global investors fear political interference in investments. Investors active in the country, however, say policy makers have taken significant strides to make investors feel welcome. Recent regulatory changes include slicing corporate income tax rate from 30% to 25%, and capital gains tax from 20% to 5%. “The biggest gap I have found between perception and actual risk is in Zimbabwe,” said Nicolas Clavel, chief investment officer at Scipion Capital. “We travelled to Zimbabwe to see companies and policy makers, in order to gauge the extent of political risk, and we came away very bull12

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ish on the country, based on the economic prospects and policy choices likely to be made moving forward.” The speakers admitted that political risk is still a concern across a few African nations, but cited a number of innovative ways of mitigating the risk. One buffer that investors are increasingly looking at is the use of the World Bank’s Multilateral Investment Guarantee Agency (MIGA) contracts. A typical MIGA contract is structured to protect investors against the risks of expropriation, war, civil disturbance, and breach of contract. The protection also covers the non-honouring of sovereign

financial obligations and transfer restrictions, including inconvertibility.

Creativity needed for exits Exit risks were also highlighted as an area of concern, particularly in private equity deals. With a good number of African stock exchanges still marred by poor liquidity and the secondary private equity market still in its infancy, exiting deals remains a challenge for investors. However, some are working around this by listing on multiple exchanges. Others are opting for mezzanine deals, combining debt and equity, so that the investors receive an income while waiting to exit.

“In [some countries] you cannot be too optimistic that you will be able to exit through a listing on the stock market in three to five years,” said Zain Latif, principal at TLG Capital. “So we have to be creative in the way we come out of investments, and try to employ structures like convertible loans, which provide an income stream every year, and also create an incentive for management teams.”

Trust in management Other key risks cited by the investors include management risk – the importance of ensuring that they can trust management teams to run portfolio companies, both in private and public equity investments. For most of Africa, availability of accurate data continues to be elusive, across the good part of the financial markets. Being thorough in management due diligence and achieving a level of high trust in management teams is therefore key to mitigating this risk, the investors said. Meanwhile, there was universal agreement that better education for global investors on the true risks inherent in the region was needed to narrow the risk perception-reality gap. Primary research, including investor visits to target countries to meet management teams and regulators, would also go a long way to bolster confidence. Prospective investors will also have to take a closer look at Africa’s demographics and how they compare across emerging markets. “Perception is a major problem for Africa,” said Clavel. “There are more families in Africa earning $20,000 per annum than in the whole of India and yet more people put their money in India, because they perceive it as an opportunity, and Africa as a risk.” PRIVATE EQUITY | AFRICA

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Global LPs’ interest in Africa picks up


ot loNg Ago any mention of

investing in an Africa-focused private equity fund would have been preceded by words such as ‘opaque’ or ‘risky’. However, Africa is now rapidly entering the emerging market investment mainstream, as global limited partners (LPs) seek greater diversification and look to vehicles that can deliver higher returns than their traditional assets. Historically, Africa-oriented private equity funds were known to be heavily weighted towards developmental capital, as managers struggled to convince global LPs to allocate capital to the region. Indeed, very few, if any, of the vehicles that have closed over the last decade have escaped carrying such names as the Commonwealth Development Corporation and the International Finance Corporation in their basket of commitments. However, this imbalance is shifting, as Africa transitions from bearing the image of being just a needy philanthropic cause to the latest frontier for financial returns. About 44% of the global LPs surveyed by Coller Capital for this year’s annual survey said they find Africa as an attractive investment region, compared to only 21% in 2010. In this year’s survey, Africa has surpassed key frontier markets such as Turkey, the Middle East and the North Africa region, Russia, and Central and Eastern Europe.

Africa lures funds Africa’s rapid ascent up the LPs’ ladder of preferred investment regions is also evidenced in the rate at which fundraising for the region has grown. Year-onyear fundraising for the African subSaharan region grew at the rate of 156% in 2009, while Russia, the Middle East and North Africa, India, Emerging Asia and the collective Central and Eastern European region and Commonwealth of

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Independent States suffered decline in their fundraising figures. Investors nevertheless continue to be wary of the low number of established fund managers in the African market, with 47% citing this as a primary deterrent to committing capital to the region. Interestingly this concern ranked above political risk, which was singled out by 39% of the group. Almost a quarter of the LPs expressed worries over the scale of opportunity to invest, believing that for Africa this is still too small.

Bargain valuations The poor choice of exits was surprisingly not a huge concern for the LPs, with only 14% of the respondents saying it was a discouraging factor. Valuations were the least concern for investors, with only 2% listing this as a deterrent. This is compared to India, where 58% of the investors believed the market is becoming overheated in terms of asset valuations. “In reality, where competition is increasing in emerging private equity markets, [investments] tend to be concentrated within a handful of sectors or a particular tier of the market where deals are large enough to attract global funds,” said Erwin Roex, partner at Coller Capital in London. “Investors recognise there are still plenty of opportunities for skilled managers to supply value-added capital and to create returns for LPs.” According to the survey, economic growth is the primary

driver for investors’ increasing their commitments to emerging market regions – the desire for exposure to highgrowth markets. More than half of LPs expect their emerging markets private equity commitments to generate returns of at least 16%, with about a quarter expecting this to be as high as 21% over the next three to five years. Only 9% of the respondents surveyed expect similar returns from their developed markets portfolios. Despite the lure of returns, investors are still careful to ensure environmental, social and governance compliance, with the majority of LPs saying this influenced their fund investment decisions. The investors would also like to see higher participation from local investors, although some saw a potential misalignment of interests as likely to cause the most friction between the two sets of investors. Coller Capital partnered with the Emerging Markets Private Equity Association in the annual survey, which covered 156 global LPs. Funds-of-funds made up 32% of the group and 15% were direct foreign investors, while pension funds filled 14%. Bank and asset managers made up 13%, while 11% represented government-owned organisations.


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ROUNDUP | Events

Extracting African


Unique market opportunities are opening up for investors willing to roll up their sleeves and dig deep within Africa. there is clearly abundant alpha to be harnessed from the growing spending power and sophistication of the African consumer. Tendai Sixpence reports


iElDiNg AlPhA from African

investments was the core theme at Private Equity Africa’s first quarter seminar in London. Over 180 delegates converged to listen to senior Africa-focused private equity professionals share their deal-making experiences and views on future trends. A case in point was Actis, which found an unusual gem within the fashion industry. Last year it wholly acquired West African waxed clothing material manufacturer Vlisco Group for $151m. Vlisco designs, manufactures and distributes 51 million yards of branded fabric a year for the West and Central African mar-

kets. The acquisition was the largest private equity deal in the region last year. The company creates traditional and contemporary wax fashion fabrics, including the Vlisco luxury brand, mid-tier business brand Uniwax, and the more contemporary GTP and Woodin brands. “One has to scratch under the surface to find value,” said Actis partner Murray Grant at the event. “It is hard work, but when you find it, the value is great.”

Harvesting agri-food Increasing consumer sophistication and rising demand for high-end products has

also filtered into such basic necessities as drinking-water. Zain Latif, principal at TLG Capital, highlighted the opportunities in the sector when he outlined the drivers behind his company investing in Uganda-based agri-food business Vero Foods. TLG bought a 20% stake in the company last year, not only to expand existing rice and water production, but also to branch into offering glass-bottled flavoured water to high-end consumers. Vero will seek to promote and strengthen indigenous food production and increase local distribution in a bid to shift consumer focus from imported brands.

Riding the political risk Investors at the seminar did however admit that the great opportunities in the region came with their own strains. Although most parts of Africa have shed the image of having extreme levels of political risk, the risk remains a key concern, with eruptions sometimes occurring in the least expected regions. Henry Obi, partner at Helios Investment Partners, recounted his nervousness when violence erupted in Kenya in 2008 – a mere six days after his group committed capital to Kenya-based Equity Bank. However, his fears soon dissipated when the feuding political parties reached a resolution, putting Equity Bank back on course to deliver targeted returns. 14

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“Not only has Kenya rebounded, but our investment has performed exceptionally well,” explained Obi. “Investing in Africa requires strong stomachs. However, it is time for investors to follow these examples and invest.” The speakers also noted that African governments are now going the extra mile to ensure adequate private equity capital flows into the countries. After decades of existing on the margins of the global economies, largely ignored as a key emerging market region, a number of African regulators are waking up to the necessity of positioning their countries as strong contenders for global capital. “The need to join the global economy is making governments work hard to accommodate you,” said Grant.

Lifetime opportunity Investors also stressed the importance of backing early-stage deals as the segment of the market continues to struggle to attract investor interest. Geetha Tharmaratnam, investment principal at Aureos Capital, highlighted the healthcare sector as one offering good investment opportunities. Her investment group is working on plans to close a $100m specialist health fund. The vehicle will not only look at businesses that are already generating a stream of income, but also those that are working to get authorisation from the World Health Organisation (WHO) to locally produce pharmaceuticals. Latif agreed with Tharmaratnam, adding that health care is one sector in which investors are able to use models that have been tried and tested in more advanced emerging markets such as India. Latif ’s firm, TLG, has recently backed another round of financing for Ugandan pharmaceuticals manufacturer Quality Chemicals Industries. The company now produces triple-combination HIV antiretroviral drugs and antimalarial drugs under license from Cipla

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“Investing in Africa requires strong stomachs. However, it is time for investors to follow these examples and invest.” — henry obi, helios India, after receiving its endorsement from WHO. TLG first backed the company in 2009 and held an option to invest more tranches based on its performance. Quality Chemicals is also part-owned by South African private equity house CapitalWorks Investment Partners. The evening concluded with an indepth panel discussion followed by an incisive question and answer session. One delegate asked the investors their personal motivations for veering into the African private equity market. Latif summed up the investor responses well when he said: “I got into the game after seeing, quite frankly, the biggest arbitrage opportunity of my life.”

Murray grant, Actis 15

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gail Mwamba speaks to a panel of five senior investors on key topics in the African private equity industry

1 Kofi Bucknor Managing partner, Kingdom Zephyr

Zain Latif Principal, TLG Capital

Idris Mohammed Partner, Development Partners International

Susan Payne Chief executive officer, Emergent Asset Management

Sajjad Sabur Head, Principal Investments – Africa HSBC


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What features of the African private equity market distinguish it from other emerging markets?

African private equity is not fundamentally different from other markets. it is at an earlier stage in its development than many other markets but not far off. one distinguishing feature is that there are 53 countries in Africa with a very low level of regional integration. therefore Africa is really made up of many smaller markets, which tends to limit the size of potential transactions. looking at Africa as just one market can be misleading.

Private equity in Africa has largely been limited to large-cap deals, with capital deployed to large multinationals, which distinguishes it from other emerging market regions. Misapprehensions over risk mean that many potentially lucrative opportunities in Africa are overlooked in favour of deals in more established markets such as china or india. those regions also often offer a wider range of exit options, while in Africa you are somewhat limited by exit restrictions. this is particularly evident for larger funds, which invest millions of dollars but find that African stock exchanges are not yet mature enough to handle large listings.

the African private equity market is at a young age compared with other emerging regions. its characterising features include a dearth of well-established and experienced investing teams; small and illiquid capital markets; and an entrepreneurial sector that is unfamiliar with private equity as a source of capital. however, those features also make it a more interesting and less competitive market. Africa is also the fastest-growing private equity region. there is therefore a significant upside potential for the African market, making it more attractive.

the African private equity market is extremely target-rich and yet not as crowded as other continents. the returns are also the highest in the world, according to a study conducted by McKinsey. the risk versus reward ratio is squarely in favour of investors, although this window of opportunity will inevitably close before long.

the diversity across Africa cannot be overstated. the general view of investors who have not experienced Africa is that the continent is a single investment opportunity with a generally uniform business risk and reward profile. the reality is of course different. in addition to the differing commercial opportunities, dissimilarities between neighbouring countries can be as fundamental as legal systems or as subtle as cultural norms and customs. We find this diversity exciting and potentially highly rewarding but are mindful to tread carefully.


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Are you seeing an improvement in regulations impacting private equity investing in Africa?


How do you expect the new capital from global equity groups now entering the market to impact the industry?

in selected countries, the regulatory framework has indeed improved. for instance, regulations have changed in Botswana enabling companies to be registered as offshore financial services entities and expand into other countries. liberia has been particularly aggressive in improving regulations. Also, there is much more openness in countries such as Uganda, ghana and rwanda.

We are happy that there is renewed interest in private equity in Africa – it is a good thing for the industry. the new funds bring in investors that have not previously looked at Africa – those that would otherwise have avoided the region. the entry of new global investors makes it easier for firms such as us to raise more capital, by accessing a broader investor base that is now more educated about Africa. in addition, it increases opportunities for co-investment and so we can do larger deals – especially around natural resources, if opportunities arise.

obviously private equity investment in Africa is still in its nascent stages, but with many people realising the kind of returns possible in the region, regulations will have to improve. A recent two-day event held in East Africa, with President Museveni of Uganda, highlighted the positive effect of investment. the only way that this can be encouraged is by proving that countries are able to regulate investments sufficiently. south Africa, for example, offers various incentives to encourage foreign direct investments.

With Africa now being viewed as the final frontier for investment, it is only natural that many of these huge private equity groups are now turning their heads towards Africa. there is an estimated $1.07tn in dry powder available globally in the private equity community. But while investment is key for Africa, it must be remembered that the markets are still young. By starting small and focusing on key sectors, the foundation can be laid for a positive impact – creating a robust private equity market in the future. the concern is that funds looking to deploy large amounts of capital in Africa without a deep understanding of how the markets operate may face difficulties.

As the African capital markets become more sophisticated, so too do the regulations in the region. Key industries such as telecommunications and power are being deregulated and governments are increasingly exiting businesses and industries that are best served by the private sector and competitive markets. on the institutional investor front, pension regulators are also increasingly allowing investment into private equity.

Notwithstanding new entrants to the market, demand for capital in Africa still exceeds supply. the advent of newer players will probably lead to bigger deal sizes and more diverse transaction types, but also contribute to the development of the industry by attracting new investors to the market. if there is an overhang in the market, and it is not clear that there is, it is more likely due to the general economic downturn and market pricing considerations.

there have been great strides for regulations in Africa. there are seven subsaharan African countries now ranked in the top half of the World Bank Ease of Doing Business report and countries like Zambia have received recognition as top reformer nations. Many African countries have established task forces on corruption and all now recognise that there is competition for private pools of capital. critically, in order to attract these funds, African nations realise that there must be a constructive regulatory environment as the cornerstone for all local investment.

i expect we will see a J-curve of development – change in emerging markets, when it takes root, is rarely slow. Naturally, the returns will lessen over time, although i expect they will remain sufficiently high to attract continued investment for a long time to come. furthermore, as the market develops and matures, Western attitudes to risk in Africa will soften; more complex financial transactions will be enabled, encouraging other more mainstream sources of funds to enter the investment space; and African governments will be able to tap money markets to fuel their growth on more reasonable terms.

the biggest driver to improving the African private equity environment is an improvement in regulations and legislation governing business in general. An example is the development of the East African Economic community with its ambition to become a single market for the region. free movement of labour, capital, reduction in tariffs and so forth will all help stimulate the inflow of private capital. Elsewhere, Botswana has made significant improvements to establish itself as an investment holding destination similar to Mauritius, while the latest south African pension act amendment aims to facilitate further allocation of funds to private equity.

Private equity in Africa is still in its infancy compared to other emerging markets and significantly behind developed economies. it is true more funds are focusing on Africa, but the impact can only be positive. competition will ensure the private equity industry remains lean, helps create and add real value to its investments and pursues the more ‘difficult’ deals. over the past decade, firms have picked low-hanging fruit; firms must now work harder and reach higher in order to deliver value to stakeholders. firms may need to develop niche specialisations in order to deliver this value. some firms will succeed and some will fail, but in my opinion this can only be good for Africa.

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What can be done to encourage deal flow, considering that getting good quality sizeable deals still remains a challenge?


generally, companies in Africa are not geared to the rigidity of private equity investing and due diligence. A good number of them are still family-run businesses. our approach is to continue working with companies and to do our best to pass on knowledge regarding the quality required to succeed. it takes time – and hence, as investors, we have to be willing to be patient.

it is critical that African pools of capital participate in private equity investing. these investors have the best understanding of the opportunities and risks in Africa and stand to benefit the most from successful investments in terms of job creation and general economic development. furthermore, such institutions tend to have strong linkages with and a good understanding of the local organisations that can effectively benefit from the use of private equity.


stronger regulations, better exit options and more multinational deals will all work to encourage deal flow. of course, some degree of patience has to be exercised in these multinational deals – in order to have large successful deals such as Bharti Airtel’s recent acquisitions. A foundation has to be in place in these sectors to start with, hence the importance of investing in smaller companies. Patience is critical in these markets, as is the ability to build relationships over a period of time.

Without question, local pension funds, insurance companies and sovereign wealth funds are all important for the development of African private equity. in order to build the momentum, local institutions need to get more involved to prove the value and vitality of their markets. this will help the region become more attractive to international investors. the thinking is simple – why should global firms get involved when local investors and pensions funds do not invest in their own markets?


finding good quality deals is a challenge for private equity firms regardless of region. Deal flow can be enhanced by investments in human capital development and more robust information services. Private equity funds will probably also need to be more creative to target a wider range of economic and business opportunities, encompassing earlier stage companies and areas like agribusiness, healthcare and education. some of this is already happening as the African private equity ecosystem develops depth and complexity.

the existence and participation of local institutional investors is very important for the continued development of the industry. it not only increases the available pool of capital for funds, but also has a signalling impact by demonstrating that local investors are willing to invest in the market. this helps local institutional investors become familiar with the asset class and moves the industry into a more advanced phase resembling other emerging markets.


We have no trouble getting very good quality deals in good size. the issue is more about having the right network on the ground.

it is imperative that the local investors back local firms. they should act as a lynchpin, catalysing infrastructure development and general productivity in their own regions. overseas groups will follow more readily if they see a commitment from local funds on the ground. international investors always prefer to see a country has skin in the game.



investors must accept that hard work is essential; the firms they support need nurturing, resources and support. Most of Africa is not a developed market and it is unfair to expect it to have ready-made blue chip companies ripe for private equity firms. the majority of the continent’s large companies, excluding telecommunications firms, banks and natural resource mines, are based in south Africa. the developed world model of buying established firms and creating value through financial engineering, pushing leverage and business restructuring is not a model suited to Africa.

hsBc’s Principal investment business uses the hsBc balance sheet to fund its activities without seeking third party or institutional funds. on a transactional basis we have at times considered introducing local institutional funds as co-investors alongside us. there are obvious benefits that this delivers, such as local insight and understanding, and a degree of political cover, but it is a double-edged sword. local participation in deals can raise a number of challenges as partners need to approach the transaction with a similar mind set. Differences in approach, risk appetite and long term vision can make working with local institutional partners challenging.


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How important is it to have local pension funds, insurance companies and sovereign wealth funds participating in the African market?


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FEATURE | Cover story

Global investors have become increasingly bullish on Africa, seeing it as the last frontier of investing on the back of its high growth prospects and attractive asset prices. The bears are, however, still having their voices heard, as they worry about legacy risks and the market’s level of maturity. Gail Mwamba investigates


frican capitals have in recent times become a popular addition to global investment teams’ travel plans, as a number add to their itinerary cities that a few years ago they had never heard of. Lacklustre returns in western assets have produced a legion of disgruntled limited partners (LPs), forcing managers to look outside their traditional playing fields for growth. Although the broader emerging markets are luring investors, concerns over assets overpricing in traditional sweet spots such as India and Brazil, are prompting managers to get into Africa while prices are still reasonable. Investors have not been alone in their great trek to Africa. Not wanting to lose out on fees, advisers have quickly joined in the journey, usually leading the expedition into previously unexplored parts of the continent. Legal practises and due diligence experts that previously had the odd associate assigned to Africa, are now putting together whole Africa-focused teams, headed by senior partners, some that have been poached from competitors. Africa is luring investors as the last frontier of investing with its high growth projections on the back of growing consumer spending and rising commodity prices. Since 2001, Africa’s gross domestic product has grown by an average of 5.4% a year against 1.6% in western economies, according to the International Monetary Fund (IMF). The IMF expects Africa’s current growth


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rate to continue until 2015. Africa managed 2.8% growth in 2009, when the advanced economies shrank by 3.2%.

Brave new world A decade ago, the current scenario would have been almost unimaginable. Allocating investment capital to Africa was not a very tolerable discussion in mainstream investment teams, with the continent mainly viewed as a global burden and not a source of alpha. Fundraising for Africa was normally a discussion in philanthropic circles, with mainstream investors sometimes pulled onto the scene for charitable donations, moved by images of malnourished, poorly-clothed children. Investing on the continent was largely left to impact investors and developmental agencies, who still dominate the scene. This has now changed, with the continent estimated to hold about 10% of global oil reserves, it does not take a great deal to calculate the impact of the recent spike of oil to $120 per barrel on oil-rich nations like Nigeria and Angola. Concerns over rising food prices has also meant that countries like Zambia that have large patches of unfarmed land are quickly becoming a favourite capital destination. In the private equity industry, the improved investor appetite for African assets saw fundraising in sub-Saharan Africa for the PRIVATE EQUITY | AFRICA

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Cover story

year 2010 close at $1.49bn, with the region registering one of the fastest growth rates across the emerging markets. This is according to research by the Emerging Markets Private Equity Association (EMPEA). The aggregate funds raised for the subSaharan Africa region signalled a 156% year-on-year growth, out-pacing the majority of emerging markets regions, which suffered declining growth in funds raised.

“Regulation 28, which regulates the amount of exposure that a pension fund in South Africa can have to various asset classes, has been moved from 2.5% to 10% for all alternative classes,” explains JP Fourie, the chairman of the South Africa Venture Capital and Private Equity Association in Illovo, South Africa. “This can be fully allocated towards private equity or hedge funds.” For a good number of investors, it is the growing consumer spending that is the main attraction. With the continent being home to approximately one billion people, recent liberalisations and improved management of country resources mean that a larger amount of public resources are now flowing to the growing middle class. The allure of the consumer sector was one of the big drivers behind Silk Invest launching its maiden Africa-focused $150m fund in 2010. “Africa’s macro picture is very solid and the private equity opportunity is very attractive,” notes Zin Bekkali, Silk Invest’s chief executive officer in London. “We believe the best way to profit from this is to focus on one sector and diversify across various countries. We have chosen to focus on consumers, channelling all our investments into food and beverage firms.” The financial services sector has also been attracting significant deal-making in recent times, particularly in Nigeria. One of the largest private equity transactions closed in sub-Saharan Africa

Enter the big guns “Interestingly, LPs that are already exposed to Africa are a lot more bullish about the market’s prospects than those LPs that do not have any exposure,” notes Erwin Roex, partner at Coller Capital in London. “Apart from returns, which are clearly the main driver, the more sophisticated LPs, when evaluating the African market, see an underpenetrated market from a private equity perspective which should also increase the probability of achieving attractive returns as long as they manage to find a professional GP team to work with.” Improved sentiment towards Africa means that private equity brand names such as Carlyle can now convince LPs to back them on an Africa-focused fund. Emerging markets fund managers that previously could only raise commitments for Africa as part of a broader emerging market focus, are now able to get commitments for pure-Africa funds. In excess of 170 global fund managers have included Africa in their regional focus, “Interestingly, LPs that are already according to Preqin, a London-based exposed to Africa are a lot research house. Funds are currently seeking more than $13.6bn of capital to more bullish about the market’s allocate to the continent, which includes the very ambitious $2.6bn African prospects than those LPs that do Agricultural Land Fund. not have any exposure” “When you put all this together, Africa today is a very attractive partner — erwin roex, Coller Capital to dance with, and therefore you really see people turning up to capitalise on that,” says Louis van Pletsen, former partner at Denham Capital Management in London. “We have so far this year has been the $750m Union Bank deal, backed by LPs increasingly understanding that if they want to be part of that African Capital Alliance. With the Nigerian Central Bank earlier dance, then they have to come to the table.” this year introducing higher capital requirements for banks, even more banks will be looking for cash to strengthen their balance Shopping locally sheets. Increased participation from local players is also making it Investors are also spreading their investments across other strong easier for global teams to gain traction in the market. The sectors such as natural resources, energy, telecommunications and recent commodity boom means local managers now have a construction. The opportunities to generate healthy returns are significant amount of capital for co-investments, enabling indeed plentiful across the continent. In most markets demand far them to close the large-sized deals that global players thirst for. outstrips supply and the privatisations currently being implemented Recent regulatory changes in places such as South Africa mean in a number of countries provide ready-made companies for pension funds are freed to allocate more cash to the private dealers. Even regions like South Sudan and Zimbabwe are now equity asset class. increasingly finding their way onto investors’ discussion tables.

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FEATURE | Cover story

“For GPs to make LPs comfortable they have to show them Africa, they have to travel with them to Africa, they have to bring them into deals earlier in the process so that they have more time to internalise things” — Louis van Pletsen, formerly of denham Capital management Bear on the side of caution Even so, a good number of global investors remain bearish. Recent research by EMPEA and Coller Capital revealed that the biggest source of concern for LPs surveying Africa is the low number of established GPs. The lack of specialism among fund mangers is also a source of worry, especially among US-based LPs. The vast majority of funds that have been raised for the continent so far have been generalist vehicles. Interestingly, in the EMPEA survey, concerns over the low number of established GPs ranked above political risks, which historically has been the most cited excuse for LPs not wanting to participate in Africa. Political risks in recent times have been highlighted by the high-profile failure of Warburg Pincus and Blackstone Group to complete their $4bn exit in Ghana last year. The duo’s portfolio company, Kosmos, planned to sell its stake in the Jubilee oil field to ExxonMobil but failed to get government endorsement. However, the parties have since made their peace, with Kosmos opting to retain its asset. Recent reports of a top Citadel Capital executive being slapped with a travel ban by the new Egyptian government over a 2001 deal have also brought political risk concerns to the fore. Turbulence in Côte d’Ivoire and parts of North Africa have also not helped Africa’s image much. The GPs, however, argue that African economies and companies are resilient to political turbulence, and overall political risks are either on the decline or are now more manageable. “Our experience has been that African organisations are used to political and other hindrances to business and are structured to cope with such disruptions,” says William Jimerson, executive director at Musa Capital in New York. “Besides, the political upheavals happening now are very different from the internecine and anti-colonial warfare that has scarred the continent in the past. They’re part of the positive transformation of Africa – leading to democracy and greater stability.”


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Sev Vettivetpillai, chief executive officer at Aureos Capital in London agrees. “We mitigate short-term risk at local level by focusing on the long-term at regional level,” he says. “We get very close to the partners to help structure businesses for the long-term through best practice development of areas like training, governance and information technology.” Van Pletsen adds that Africa has been de-risking at a very fast pace, and has become more politically stable. Other risks that would hinder the successful execution of deals, such as the lack of infrastructure and poor technology have also been gradually fading away. Africa’s technology space has developed services that are not even available in some western economies, such as mobile money transfers.

Where’s the exit? Poor exit options have also been a worry for investors, as a number of African stock exchanges continue to lack depth. Some GPs have however taken the innovative approach, listing on multiple exchanges including London and Toronto-based bourses. Concerns over the scarcity of sizeable deals on the continent have also been tabled. With Africa-based business owners not prepared to give up more than minority equity stakes, and global investors looking to allocate at least $10m per deal, managers have been struggling to close deals in their target range. “Africa is not very experienced as a private equity investment market. It is not a market where you can walk in and easily take a majority stake and control a company,” explains van Pletsen. “You often have to work with minority stakes and work more with the management teams to understand local politics and markets better.” The GPs agree that increased participation from local institutional players such as sovereign wealth funds, insurance companies and pension funds is key to helping the markets develop. The GPs will therefore have to take on the role of educators, not only to local players but to global LPs - to give them an understanding on what deal making looks like on the continent. “For GPs to make LPs comfortable they have to show them Africa, they have to travel with them to Africa, they have to bring them into deals earlier in the process so that they have more time to internalise things,” concludes van Pletsen. “If you go to an LP in Houston Texas and ask for a co-investment in Africa, then it is very easy if the LP has been there 50 times and understands the market, and he then has contacts that he can quickly call to verify the information.” PRIVATE EQUITY | AFRICA

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PRIVATE EQUITY | AFRICA UPCOMING EVENTS Sector focused investing Agribusiness, Oil & Gas, Telecoms and Financial Services Evening roundtable and drinks reception 3 November 2011, London Annual deal-making and fundraising review A review of top deals and funds raised in 2011 Evening seminar and drinks reception 1 March 2012, London Awards Dinner Gala Celebrating best-in-class investors and advisers 24 May 2012, London

PREVIOUS EVENTS A Review of 2010 - Deal Making and Future Trends, March 2011 The event brought together 2010 deal makers in the African Private Equity space, to discuss their deal making and fundraising activities as well as the future of the African private equity market An Overview of the African Private Equity Market, June 2010 The event pulled together investors and advisors in the African Private Equity market, to give an overview of the industry

PARTNERSHIP OPPORTUNITIES Private Equity Africa offers partnership, sponsorship and advertising opportunities across our events, online portal and print publication To discuss your requirements please contact Richard Tandoh at

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FEATURE | Changing faces

Changing faces europe has been the main hunting ground for managers looking to raise private equity funds for Africa. However, recent private equity regulatory changes in europe may now see managers look more to the uS, where institutions are warming to Africa as the last frontier for growth. Tom Minney and Gail Mwamba report


or A Good number oF fund managers, looking for commitments for Africa-focused vehicles has been a less painful exercise in Europe than in the US. Europe-based institutions have been able to leverage legacy ties from their days of empire, which has also given them a better understanding of Africa’s business cultures across different regulatory jurisdictions. A quick scan of private equity fundraising activity for the African market over the last decade reveals the heavy involvement of groups such as UK-based Commonwealth Development Corporation (CDC), which is understood to have committed more capital to the region than any development financial institution (DFI). CDC currently has an African portfolio worth $1.4bn (£877m) and is planning to commit about 50% of its new commitments to investments in sub-Saharan Africa (SSA). Other top Europebased institutional players in the market have been Germanybased DeutscheInvestitions- und Entwicklungsgesellschaft mbH (DEG) and Proparco, a French DFI, and Netherlands Development Finance Company (FMO). Tapping Europe-based investors for commitments is however going to become a very complicated process, as new European Union rules come into play. Non-EU fund managers, as of 2015, will be required to apply for a ‘passport’ that will enable them to market their funds across Europe. The new set of rules, called the Alternative Investment Fund Manager (AIFM) directive, has 24

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been structured to add new compliance requirements, primarily targeted at private equity and hedge fund managers. Despite rigorous debate concerning the overreaching supervision of managers, the European Union (EU) Parliament Economic Committee have provided backing to the directive. The directive stipulates increases to initial capital requirements, greater transparency and operational changes that affect all fund managers. The rules broadly impose stricter rules on non-EU investors, who among other things will be additionally required to appoint an EU-based legal representative as a point of contact.

Tarred with the same brush Private equity managers have tried to argue that they should not be placed in the same basket as hedge funds who traditionally tend to take more risks. However, their complaints have so far mainly fallen on deaf ears. Criticisms of the directive have included its ambiguity in many areas, which has left a number of managers scratching their heads to figure out implementation. For instance, EU member states are expected to have fully implemented the new regulations by 2013. Non-EU managers, however, will only be able to apply for the ‘passports’ in 2015. It therefore remains unclear how the regulation will pan out in the short term. The implication is that the managers will be able to market their funds as they do at present. PRIVATE EQUITY | AFRICA

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Changing faces

The bigger issue for non-EU managers, however, is the amount of capital they will have to hold to be able to be given a passport to market their vehicles in Europe. This rule applies to all managers, including EU-based groups. Fund managers will be required to have at least €125,000 of their own funds and an additional 0.02% of the amount by which the value of their portfolios exceed €250m. The European parliament and council put a cap of €10m on the total capital required for an initial investment (the minimum is at least €125,000 + 0.02%). Managers must also ensure that at least 25% of the fund’s target is made up of their own money before they can try to market the fund in Europe. Smaller funds have an opt-in provision, if they want to obtain the passport. As such, managers seeking funds from groups such as the CDC will also have to ensure they abide by these rules. Although the rules stifle the growth of the global private equity industry, emerging markets will be the worst hit, according to Sarah Alexander, chief executive at the Emerging Markets Private Equity Association. “The directive could effectively kill private equity as a source of development finance in the world’s poorest countries,” she says in a letter to the Financial Times. “In the developing markets private equity is often the only finance option available, and it is the most efficient, driven by professional investors who manage the funds.” Recent developments in the UK also mean funds should expect to get less commitments from the CDC. The UK secretary of state for international development, Andrew Mitchell, is leading a public consultation into the reform of CDC, which would include the resumption of direct investments – a move away from its current fund-of-funds investment model.

US investors know what they are missing While a cloud of uncertainty hangs over future commitments from Europe, US-based institutional investors are opening their doors wider to Africa-focused fund managers. US investors are quickly realising that they have spent too much time on the back bench, when it comes to Africa, and have lost out on opportunities to snap up reasonably priced assets and generate mouth-watering returns.

“US investors will be coming into Africa in a big way,” says Rafael Stone, a Seattle-based attorney at Foster Pepper, a provider of investment advisory services to institutional investors looking to invest in Africa. “There are tremendous opportunities, and I think you are going to see a lot more than $750m funds coming into Africa from the US.” Private equity funds flowing into the African market will also be bolstered by giant US-based fund managers structuring Africafocused funds. Carlyle earlier this year announced that it was setting up local presence in Johannesburg and Lagos, which to some signalled that equity investment in Africa is indeed going mainstream. The significance of the move lies in the fact that, as investors hunt in packs, the global giant putting its stamp of approval on the continent means that others will soon follow suit. Carlyle was ranked as the second largest global private equity group by Private Equity International in 2010 – having raised nearly $48bn in the preceding five-year period. The group was only surpassed by Goldman Sachs which had raised $55bn for direct private equity investing – over the same period. Carlyle’s backers include the California Public Employees’ Retirement System (CalPERS), one of the biggest private equity institutional investors in the US. “Our experiences speaking to American institutions about investing in Africa have been quite positive,” says Walé Adeosun, chief investment officer at Kuramo Capital Management, a New York-headquartered company that invests on behalf of US-based endowments and foundations. “Capital flows from US investors will come, for as long as Africa continues to offer good returns.”

Education, education, education Even so, managers may have to wait a little while longer before the capital floodgates fully open for Africa. A good number of US-based investors are yet to gain an adequate understanding of the African terrain, in terms of differences in business cultures, opportunities and risks across different regions and countries. As such, managers are still faced with the task of having to spend a significant part of their pitching time educating the investors.

Alternative Investment Fund Manager Directive – Implementation timeline APRIL 2009 Original AIFM proposed

JULY 2009 Parliament appoints ECON to review the directive

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OCTOBER 2010 Text of Directive agreed by EU Finance Ministers

EARLY 2011 Entry into force

BEGINNING 2013 EU Member States to have implemented directive

2015 Non-EU funds to apply for passport rights


31/5/11 01:18:21

FEATURE | Changing faces

“One problem with Americans is that we seem to think that Africa is one country,” says Stone. “There is a lot of education that has to take place with respect to Africa.” Even those that have adequate knowledge of the market have, however, been deterred by the low number of specialist funds operating in Africa. Specialist managers remain a strong preference for a significant part of the US investment community, according to Stone. This is because they can rest in the knowledge that the manager has an in-depth understanding, expertise and skills to be able to generate healthy and sustainable returns in a specific sector. In the past, some US investors have opted to co-invest in specific deals that they feel the manager has expertise in, and not in the whole fund. “The problem that we have had is that Africa has funds that invest across multiple sectors, and we really do not invest that way,” explains Stone. “We are more comfortable in investing in a manager that is a specialist in a particular sector, than someone that has an array of options with our dollars.” Some managers are waking up to the merits of differentiating themselves as specialist players in the market. Adlevo Capital last year announced the first closing of its maiden $100m technology fund, which has received backing from a number of US investors. Phatisa Group also entered the market with a $135m vehicle, targeting the agriculture sector. Aureos Capital is also on track to close its $100m healthcare fund, which counts the Bill & Melinda Gates Foundation among its backers. A number of market participants, however, say that the US interest in Africa is a lot of talk, and not much action. Whether this is true or not remains to be seen. However, what the industry is certain to see over the medium- and long-term is a change in the faces of institutional investors backing Africafocused managers.

“One problem with Americans is that we seem to think that Africa is one country. There is a lot of education that has to take place with respect to Africa.” — rafael Stone, Foster Pepper

Sample of specialist funds investing in Africa Fund manager

Fund name

Fund size

Key investors

Adlevo Capital Managers

Adlevo Capital Fund



Phatisa Group

African Agriculture Fund



Seven Seas Capital

Africa Healthcare Fund


IFC, AfDB, Gates Foundation, DEG

East Africa Capital Partners

Africa Telecommunications Media & Technology Fund


OPIC, private US investors, Emerging Capital Partners

African Capital Alliance

Capital Alliance Property Investment Company



African Health Systems Management

Investment Fund for Health in Africa


Goldman Sachs, African Health System Management Company, AfDB, Pfizer, FMO, APG, IFC, Social Investor Foundation for Africa. Contributors to SIFA include: ACHMEA, AEGON, Heineken, Shell, SNS-REAAL and Unilever

Source: Preqin


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DEALS & FUNDS | Deals overview

Deals bounce back Deal-making in Africa’s private equity market exhibited strong recovery in the first half of 2011, as investors put capital to work


t leAst 12 DeAls were revealed to have been closed in

the first five months of 2011, just seven short of 2010 fullyear total, according to Preqin data. Disclosed values touched $1.8bn, about three times the $600m reported in the whole of 2010. At least five other investments are set to be closed by June this year, according to Private Equity Africa sources. “We have been very busy this year,” said a partner at an Africafocused private equity investment firm, in London. “We have already done more deals in 2011 than we did in the whole of last year.” This year’s deal values have been bolstered by Nigeria’s financial services sector which saw ACA Capital lead a $750m Union Bank deal. Vine Capital Partners also completed a deal in the financial services sector, by backing the recapitalisation of Lagos-based Afribank. The first half of the year also saw Adlevo Capital execute the first acquisition from its specialist technology fund, backing the $110m InterSwitch deal alongside Helios. Also active in the financial technology segment was Sarona, which injected $0.6m into Lusaka-based money transfer business Mobile Transactions Zambia. Citadel Capital fanned North-African deal making, by backing a $39.5m turnaround investment in Tenth of Ramadan for Pharmaceuticals and Diagnosing Products (Rameda). The deal was structured through its subsidiary Sphinx Private Equity

Private Equity equity Deals deals Africa private in Africa: 2006 to 2011 2006 to 2011

Management. Elsewhere, Horizon Equity Partners exited its financial technology portfolio company, Peresys, in a $56.4m trade sale, generating 14x returns on cost. The investments closed so far this year see the deal values return to levels last seen in 2008. Deal volumes have been declining since the 2007 bumper year, when investors closed $7bn across 34 deals, according to Preqin data. Last year recorded the lowest number of deals since 2006, with total annual deal values slumping to record lows.

Africa private equity deals per sector January to May 2011

Pharmaceuticals Financial Services Consumer Products Technology Support Services Media

Aggregate Value of Deals ($bn)



Number of Deals



Aggregate Value of Deals ($bn)















2011, year to date




Aggregate Value of Deals ($bn)

24 19



1.0 0.0

Number of Deals






7.0 bn

12 1.8bn 2.0 bn 0.7bn

0.8 bn








(year to date)

Source for table and graphs: Preqin

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DEALS & FUNDS | Deals highlights

BUYOUT sector:




Deal metrics Deal value: $110m Deal eqv: N16.4bn Aquired stake: 67% Founded:


Deal advisers Advisers to Helios Adviser: Ft Advisors, KPMG, Roland Berger strategy Consultants Type of advice: Corporate finance; transaction services Adviser: Debevoise & Plimpton llP and Aelex Type of advice: legal Advisers to Shareholders Adviser: FCMB Capital Markets Type of advice: corporate finance

Helios & Adlevo buy into InterSwitch Helios Investment Partners and Adlevo Capital have partnered to acquire approximately 67% of Nigerian payment processing company Interswitch. the deal value is understood to be worth $110m. the deal was structured as a buyout, with a new investment vehicle set up to buy shares from preexisting shareholders in the company. the duo joins the company’s current investors, which include Nigerian information and communication technologies company techinvest, Dotun sulaiman head of Arian Capital Management and a number of Nigerian banks. techinvest developed the switching software underpinning Interswitch and helped set up and incubate the company. the International Finance Corporation (IFC) is also expected to invest up to $20m in equity and mezzanine financing for a stake in the company. the deal gives the private equity investors a controlling stake in Interswitch. the investors backed the deal because they believe in the strength of the management team and the innovation and support of its founding shareholders.

Growth strategy the company is pursuing a $117m strategic redirection and capital expenditure programme to take advantage of growth opportunities in the West African financial sector. the new funding is expected to bolster Interswitch’s growth plans, which include expanding into chip-and-pin card processing from magnetic strip card-based services, both in Nigeria and regionally.

Company profile Interswitch was formed in 2001 by techinvest, Accenture and a consortium of seven Nigerian banks to offer nationwide electronic fund transfers, transaction processing and switching services. It also operates Verve card, a local payment card issued by about 24 banks across Nigeria. Interswitch has more than 10,000 AtMs and 11,000 point-of-sale terminals across Nigeria. the company also offers regional MasterCard processing services

Investor profiles Helios Investment Partners Helios is an Africa-focused private investment group that manages more than $1bn in capital commitments across a family of funds and related co-investment entities. Previous deals include an investment in shell assets across Africa, south Africa’s Independent News & Media and the acquisition of telecommunications towers across Africa, through its subsidiary Helios towers. established in 2004, Helios is led by co-founding partners tope lawani and Babatunde soyoye.

Adlevo Capital Adlevo Capital Adlevo is an Africa-focused specialist private equity firm that focuses on the technology sector. the investor is currently fundraising for its $100m maiden fund, which announced its first closing at $52m in June 2010. the Interswitch deal is the fund’s first investment. Adlevo is expected to close a number of deals in the second half of 2011.


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Deals highlights

Citadel backs Rameda turnaround Citadel Capital and Compass Capital have led a $39.5m (e£232m) turnaround investment in egyptian pharmaceutical company tenth of Ramadan for Pharmaceuticals and Diagnosing Products (Rameda). the deal sees the investors acquire 100% of the company. the transaction was also backed by sphinx Private equity Management, a Citadel subsidiary, and the International Finance Corporation. Raya Holding for technology and Communications participated in the deal, taking a 30% stake in the company. the rest of the stake, 70%, has been allocated to Granville Investment limited a special holding company created to structure the deal for the financial investors. Compass Capital has taken 14.3% of Granville, while 23.8% has gone to sphinx, understood to be in connection to debts owed to Citadel. the deal’s total value includes a e£139m equity investment and e£93m debt repayment to previous shareholders.

turnaround strategy

BUYOUT sector:




Deal metrics Deal value: $39.5m Deal eqv: e£232m equity:




Deal note the egyptian pharmaceutical sector grew by 18.7% to reach $2.4bn in 2010, according to Us-based healthcare research company IMs.

the investment is set to support the company’s turnaround and expansion plans, which are set to be boosted by an expected growth in demand for generic pharmaceuticals. A new management team has been brought in to lead the turnaround strategy. It is understood that the company has been running at less than 25% of capacity.

Company profile established in 1994, Rameda develops and manufactures a wide range of human and veterinary pharmaceutical products. Headquartered in Cairo, the company produces tablets, capsules, powders, syrups, suspensions, creams and ointments. Rameda employs approximately 450 people.

Investor profiles Citadel Capital Citadel is a Cairo-based private equity group with $8.6bn in investments under control, across 19 platform companies. established in 2004, the investor is currently invested in 14 countries across the middle east and Africa. the group has raised and invested more than $4.3bn worth of equity across its portfolio, including more than $750m of its own capital. since inception, Citadel has generated more than $2.5bn in cash proceeds from five exits (three full, two partial) on investments of $650m. Ahmed Heikal is the chair of Citadel.

Sphinx Private Equity Management sphinx is a subsidiary of Citadel and has $230m in assets under management. Based in Cairo, the investor also manages a $100m turnaround fund, sphinx turnaround Fund.

Compass Capital Compass is a Cairo-based investment group that focuses on private equity, investment banking and asset management. the company was established in 2010.

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DEALS & FUNDS | Deals highlights

BUYOUT sector:

Financial services



Deal metrics Deal value: $750m Deal eqv: N112.5bn Founded:






* for year ending March 2009

Deal note Union Bank of Nigeria was bailed out by the Nigerian government in 2009, when the Central Bank injected $4.1bn (N620bn) into nine troubled banks.

ACA leads $750m Union Bank deal Nigeria-based private equity investor, African Capital Alliance (ACA) has led a $750m (N112.5bn) investment in Union Bank of Nigeria. the deal is subject to regulatory and shareholder approval. the investment has been structured through the ACA Consortium, which is made up of ACA B-Holding, FMO Netherland, tRG Management, the Keffi Group, ABC Holdings and the Discovery Group. the investors have signed a memorandum of understanding with the bank and are investing as Union Global Partners. the deal is subject to the approval of the bank’s shareholders, the Central Bank of Nigeria (CBN), the Nigerian securities exchange Commission (seC), the Nigerian stock exchange (Nse) and the Federal High Court.

Growth strategy the investment is expected to boost Union Bank’s liquidity, corporate governance and capital adequacy, as it works to attain a leading competitive position in the Nigerian banking industry.

Company profile Union Bank was established in 1917 as Colonial Bank, but operated as Barclays Bank from 1925 to 1979. Headquartered in lagos, the bank offers consumer and corporate banking services through a network of 405 branches. Union Bank reported a loss of N5.37bn in the year ending March 2009, on revenues of N147.3bn.

Investor profile Founded in 1997, the African Capital Alliance is a lagos-based private equity investor that manages $650m across four funds. the investor has previously backed First Hydrocarbon Nigeria, an upstream oil and gas company and Bankers Warehouse, a provider of cash-in-transit and cash processing services. Okechukwu enelamah is the founder and chief executive officer of ACA.

BUYOUT sector:



south Africa

Deal metrics

Brait in R4.2bn Pepkor deal Brait Private equity is working on plans to acquire 24.6% of south African clothing retail company Pepkor for $596m (R4.178bn). the transaction places the company’s enterprise value at R16.8bn and has been valued at an ebitda multiple of 7.4x. Brait is structuring the acquisition through its whollyowned subsidiary Capital Partners Group Holding limited.

Deal value: $596m Deal eqv: R4.178bn enterprise value: R16.8bn ebitda multiple: 7.4x Founded:


the deal also sees Brait subscribe for preference shares in a R671m geared special purpose vehicle (sPV). the sPV will provide Brait with an additional 10.3% interest in Pepkor. Rand Merchant Bank and a number of unnamed financiers are providing a debt package for the deal. the deal is subject to the finalisation of Brait’s plans to raise capital through a rights offer.

Deal note

Company profile

Pepkor was delisted from the Johannesburg stock exchange through a deal estimated to be valued at R2.1bn. the company had been on the bourse for 32 years.

Investor profile

Headquartered in Parow east, Cape town, Pepkor is a clothing investment holding company with retail outlets in 10 African countries, Australia and Poland. the company was founded in 1965, and manages a group of retail chains focused on a high volume–low margin clothing, footwear and textiles mix. Pepkor portfolio companies include Ackermans, Pep, and Best & less. the group trades from more than 2,800 stores, employing almost 28,000 people.

Brait was established in 1988 as tolux sA, which was formed from a merger of the merchant banking unit of Capital Alliance Holdings and the private equity assets of Capital Partners Group. Based in sandton, south Africa, the Brait group has R13.6bn of assets under management invested across its private equity, mezzanine and hedge funds. the investor also manages a R630m private equity fund-offund, Alternative equity Partners. John Gnodde is the chief executive officer of Brait.


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Deals highlights

3i-backed SLR buys Metago for $11m 3i portfolio company slR has acquired south African mining environmental consultancy Metago International Holdings for an estimated $11.4m (R71.6m). UK-based slR has bought the company as part of wider plans to expand its global footprint into the resource-based economies that it expects will be high growth markets. slR believes Metago’s services will continue to garner significant demand on the back of the global commodities boom, which is expected to drive mining companies’ expansion into environmentally-challenging and remote locations.


support services



Deal metrics Deal value: $11.4m Deal eqvt: R71.6m Revenues: R76.6m*

Growth strategy


slR expects Metago to benefit from investors increasingly adopting the equator Principles – a framework for determining the social and environmental risks and sustainability of financing projects in developing countries.

Deal note

Company profile Headquartered in Johannesburg, Metago is a consultancy company that focuses on providing engineering and environmental advisory services. the company employs 70 people across in its offices in Pretoria, swakopmund, Accra and Perth. established in 1994, it generated R76.6m in turnover for the year ending February 2011 – a 28% year-on-year rise from the previous period.

Investor profile 3i is a UK-based listed private equity investor with 119 portfolio companies across 13 countries. the investor had £12.7bn in assets under management, as of March 2011, £719m in investments, and had generated realisations of £609m.

Leapfrog backs Apollo with $14m Us-based leapFrog Investments has acquired a minority stake in east African financial services company Apollo Investments for $14m (Ksh1.15bn). the investor was attracted to Apollo because of what it believes is a strong track record across its multiple business lines, long-standing leadership in its region, and the capacity to tap the vast market of lower-income clients.


* year ending March 2011

In 2008, 3i invested £32.5m for a significant minority stake in slR, valuing it at approximately £100m. 3i replaced IsIs equity Partners as minority shareholders in slR. Richard Bishop, a 3i partner, represents 3i on the slR board as a non-executive director.


Financial services



Deal metrics Deal value: $14m Deal eqv: Ksh1.15bn

Growth strategy



leapFrog’s capital will be used to extend Apollo’s regional reach, with the company seeking to expand its services to target 7.9 million self-employed people across east Africa’s informal sector. the investor believes the growth of the company will help reshape the regional insurance market.



Deal note

Company profile established in 1977, Apollo is an investment holding company with four subsidiaries in the asset management, property development and general and life insurance segments of the financial market. the company’s assets reached Ksh9.9bn in 2010, a 782% growth since 2000. In the same period, Apollo’s premiums have grown from Ksh472m to Ksh5bn. Apollo’s pre-tax profits reached Ksh355m in 2009. Headquartered in Nairobi, Kenya, Apollo also has operations in Uganda and tanzania.

Apollo’s insurance arm is one of the few companies offering medical coverage to Human Immunodeficiency Virus (HIV) infected policy holders.

Investor profile LeapFrog Investments manages a $137m fund that is focused on micro-insurance companies. the fund invests in insurers, retail chains, religious groups, and mobile phone networks, deploying around $5-15m in each portfolio company. the fund has already invested in Alllife, a south Africa-based life insurer that exclusively serves people living with HIV and diabetes. Andrew Kuper is the president of leapFrog.

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DEALS & FUNDS | Deals highlights





Deal metrics Deal value: $300,000 Founded:


Sarona backs MTZ with $300,000 sarona Asset Management has invested $300,000 in Zambian mobile transaction processing company, Mobile transactions Zambia (MtZ).

Growth strategy the funding is expected to facilitate expansion, which includes replicating the MtZ business model in other African countries over the next five years. MtZ currently only has operations in Zambia.

Deal note

Company profile

MtZ’s key clients include the Food and Agriculture Organisation, Care International, the World Food Program, the swiss Agency for Development and Cooperation and Vision Fund.

Headquartered in lusaka, MtZ manages a network of outsourced cash access points, with 100 agents across Zambia. the company offers mobile money transfer services, including electronic vouchers and electronic payment systems. MtZ primarily targets the agriculture sector, to enable electronic processing of small-scale orders and payments. Mike Quinn is the company’s chief executive officer.

EXIT sector:



south Africa

Deal metrics sale value: $56.4m Deal eqv: R375bn Returns:


Holding period: 7 years Founded:


Deal note Peregrine sold Peresys to Horizon following a sharp decline in profits. the company saw its earnings drop from R3.4m in 2002 to R800,000 in 2003.

Investor profile Sarona Asset Management is based in Waterloo, Canada and manages assets worth $180m across its sarona and MicroVest group of funds. the company was created in 1953 and is headed by Gerhard Pries, the president of the group.

Horizon reaps 14x return on Peresys exit Horizon equity Partners (HeP) has exited its financial technology portfolio company, Peresys, in a $56.4m (R375m) trade sale to Australia-based IRess. the exit has generated for the private equity investor, returns of 14x its initial investment and costs. the sale sees Peresys join the IRess Market technologies group, an Australian company with a A$1bn market capitalisation.

Original deal Horizon backed the management buyout of Peresys from Peregrine in 2003, in a deal valued at R2.1bn. the deal was structured through a new holding company, Castellina Investments. Other investors in the deal include Old Mutual and entrepreneur Christo Wiese. the management was offered a 10% stake in the company.

Company profile established in 1997, Peresys offers financial trading technology across equities, securities lending and portfolio management services. tools offered include execution, post-trade, and FIX-based routing. Peresys is headquartered in Johannesburg, and currently has more than 10,000 Windows-based desktop users and more than 5000 Java-based retail users through white label partnerships with brokers.

Investor Profile Horizon Equity Partners commenced its investment activities in 1992, operating as sMC Capital. the investor launched its first formal vehicle in 1997 and currently has R900m in committed capital across four funds. Previous deals include investments in eC-Hold, an internet security supplier, and Renaissance Retail, a specialist bedding retailer. the investor has also previously backed Denny Mushrooms, a mushroom producer, and e-payment company Prism Holdings. each of these transactions returned at least 5x cost, with gross IRRs ranging from 30% to 136%. Richard Flett is Horizon’s managing director.


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Funds overview

slow off the mark Fundraisers have struggled to replicate 2010’s heady and successful year of closed capital commitments


RIVAte eQUIty FUNDRAIsING for Africa has had a sluggish

start, following a record 2010. So far this year, no managers have announced a final close, although it is understood that the Aureos healthcare fund is set to close on or above target by June. However, five funds achieved an interim close, raising a total of $300m during quarter one of 2011. The biggest of these was held by the New African Mining Fund II, which is being raised by Decorum Capital Partners. This fund held a first close on

$110m towards an eventual target of $200m. An analysis of the top 10 funds raising in 2011, as compared to those closed between 2007 and 2010, reveals an increase in the number and the size of the funds. There is also a marked improvement in the diversity of the location of fund managers, with an increased interest by players from the Middle East and Asia. Last year, fund managers raised a record $1.49bn for the continent, a 156% year-on-year growth.

Top 10 funds currently raising, with Africa central to their regional focus African Global Capital II 8 Miles Fund I Carlyle Africa Fund Ethos Private Equity Fund VI Helios Investors II Ivora Africa Property Fund Vantage Capital Mezzanine II Capital Alliance Private Equity III African Agriculture Fund BGL Private Equity (Mauritius) Fund I 0







Source: Preqin

Top 10 funds currently raising, with Africa as part of their regional focus Abraaj Buyout Fund IV Corsair IV Financial Services Capital Partners Kerogen Energy Fund IFC Fund II KIPCO Opportunity Fund Millennium Private Equity Global Energy Fund Millenium Private Equity Media & Telecommunication EVI Capital Partners Real Estate Fund PineBridge Gateway Partners Fund EVI Capital Buyout Fund 0



Source: Preqin

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DEALS & FUNDS | Funds highlights

Fund metrics target:


Deal size: $5-15m Returns target: 30% Deal stakes: 15-30%

Fund notes Geography: Zimbabwe sectors:

Financial, agriculture, natural resources

structure: Private equity Investment type: Minority

Brainworks launches $20m Zimbabwe fund Brainworks Capital Management has launched a $20m fund targeting Zimbabwe’s agriculture, financial services, mining and telecommunications sectors. the fund is understood to have already secured $6.8m, and is in talks with institutional investors for the additional capital. Brainworks will seek to invest in companies that have strong regional and global brands that currently operate in Zimbabwe or plan to enter the market. Brainworks plans to invest $3.6m in gold mining and $2.5m each in investment banking and agriculture. Micro-financing and insurance investments will each be allocated $0.5m each. It is understood that the manager plans to use $2.6m to repay acquisition finance debt used to fund its current investments.

Investment criteria the fund will look to invest growth capital in Zimbabwe-based companies seeking local equity partners and capital to support expansion. Brainworks is targeting an internal rate of return of 30% on its investments, in equity stakes of between 15% and 30% per deal. the investor plans to holds assets for three to five years.

Current investments Brainworks reportedly already owns a 12.9% stake in ecobank Zimbabwe, with an option to raise this to 30%. George Manyere is the head of Brainworks.

CONTACT George Manyere, 4 Arden Road, Newlands, Harare, Zimbabwe tel: +263 4 776 52

Fund metrics target:

$750m (est.)

Fund notes Geography: sub-saharan Africa sectors:

Consumer goods, financial services, agriculture, infrastructure and energy

structure: Private equity

Carlyle to launch Africa fund Us-based private equity investor Carlyle Group is set to launch an Africa-focused buyout and growth fund. the vehicle, understood to be sized at $750m, will seek out buyout and growth capital investment opportunities in private and public companies. Carlyle believes that sub-saharan Africa is one of the fastest growing regions in the world, driven by favourable demographics, expanding domestic industries and an improving political environment.

Investment criteria Carlyle plans to invest in companies that have a distinctive competitive advantage. the fund will particularly look at companies in which it believes it can create tangible value, also through industry specialisation. the fund will initially target the consumer goods, financial services, agriculture, infrastructure and energy sectors. Carlyle has selected Marlon Chigwende and Danie Jordaan to manage the fund.

CONTACT Marlon Chigwende, Danie Jordaan 1001 Pennsylvania Avenue, NW, Washington, DC 20004-2505, United states tel: +1 202 729 5626


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Funds highlights

Catalyst I reaches $70m first close

Fund metrics target:


Catalyst Principal Partners has reached a $70m first closing on its maiden east Africa-focused fund, Catalyst Fund I. the fund is targeting $100m at final close and has attracted investments from International Finance Corporation, Commonwealth Development Corporation, Africa Development Bank, Deutsche Investitions- und entwicklungsgesellschaft mbH (DeG) and Proparco.

First close: $70m

Catalyst Fund I has also received backing from local institutions and private investors, while regional pension funds and insurance companies have also expressed interest.

Fund notes

the fund’s investment focus is on sectors with strong underlying fundamentals driven by demographic trends such as rising consumer demand. It will also look at rural mass markets, and companies that seek to converge and integrate across regional economies.


Investment criteria Catalyst I will invest between $5-15m for strategic minority or controlling stakes. Investments will cover expansion, replacement capital, re-capitalisations and pre-initial public offering investments. the fund has a four- to six-year holding period. Catalyst will seek to exit via trade and financial buyers, capital markets and self-redeeming instruments, with a target return of 20-25% in cumulative net returns.

Deal size: $5-15m Returns target: 20-25% Deal stakes: 15-30%

Geography: east Africa Consumer, financial, industrials, technology

structure: Private equity Investment type: Minority & majority stakes

Current investments the fund has already made its first investment – committing an undisclosed amount to Chemi and Cotex Industries limited (CCIl), a company backed by HsBC and satya Capital. Biniam yohannes is Catalyst’s managing director.

CONTACT Biniam yohannes Purshottam Place – 7th Floor, Westlands Road, P O Box 1482-00606, Nairobi, Kenya tel: +263 4 776 52

Vital I reaches $250m first close Vital Capital Investments has attracted $250m at the first closing of its maiden Africa-focused agriculture and real estate fund, Vital Capital Fund I. the fund is targeting $500m at final close and has been structured as a British Virgin Islands vehicle.

Investment criteria the switzerland-based investor will back early-stage, growth and buyout deals across Africa, investing a minimum of $10m per transaction to attain a controlling stake in the targeted companies. Vital I seeks to primarily deploy its funds in Angola, Congo Brazzaville, Gabon, Ghana, Uganda and Mozambique. the fund has already invested in Kora Housing, an Angola-based real-estate developer. the fund is headed by eytan stibbe.

CONTACT eytan stibbe Quai du Mont-Blanc 5, 1201 Geneva, switzerland

Fund metrics target:


First close: $250m Deal size: >$10m

Fund notes Geography: sub-saharan Africa sectors:

Housing, agriculture, education, health

structure: Private equity Investment type: equity and debt/control positions

tel: +41 22 716 43 95

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MARKET VIEW | GP opinion

heading for the exit carolyn campbell, founding partner of private equity group emerging capital Partners, based in Washington Dc, has first-hand experience of completing successful investment exits in Africa. The firm’s track record allays popular fears that the continent lacks exit options


fricA’s rich resources and potential for rapid

economic growth continue to attract yield-seeking investors to the continent’s private equity market. Increased capital allocation saw fundraising for sub-Saharan African (SSA) private equity in 2010 exceed 2009 levels, with vehicles raising nearly $1.5bn, according to research by the Emerging Markets Private Equity Association. Even so, limited partners continue to focus on exits when considering whether to invest in Africa for the first time, with concerns over Africa not having a robust exit environment. Having invested across Africa in a range of sectors including telecoms, financial services, natural resources and infrastructure for over a decade, we at Emerging Capital Partners (ECP) are well placed to challenge this misconception. ECP has achieved 20 successful exits, generating an average of almost a 3× money multiple return on invested capital since it first entered the African market. While the majority of successful exits in the SSA region have been strategic sales to operators and company sponsors, a number of other options exist for exits. Investors in our latest fund, Africa Fund III, will benefit from the improving exit environment in Africa, with the region’s strong economic growth resulting in increased liquidity.

Trade and strategic partner sales Exits can be executed through sales to firms looking at expansion opportunities across regions or sectors. In 2005, ECP sold its stake in Celtel International, a leading pan-African telecommunications provider, to Kuwaiti mobile operator Mobile Telecommunications Co (MTC). MTC acquired the company for an enterprise value of $3.6bn, attracted to Celtel’s five million subscribers and widespread penetration. Proceeds from the sale totalled 4.3× the original $50m investment. Indeed, strategic sales will continue to prove a powerful source of exits to investors in the near term. 36

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July 2011

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GP opinion

The investment in SIPH was the consequence of a strong partnership developed with Michelin, a tyre manufacturer and one of the world’s largest purchasers of natural rubber. In 2006, ECP had assisted in the acquisition of Michelin’s rubber plantations in Nigeria in exchange for a 20% stake in SIPH.

“Limited partners continue to focus on exits when considering whether to invest in Africa for the first time, with concerns over Africa not having a robust exit environment.”

Local stock exchanges Public markets in Africa have historically been characterised as lacking depth. This perception is no longer accurate, with over 18 countries in the region now hosting stock exchanges. Stock market capitalisation in SSA alone now exceeds $1tn. Compared with 1989, when only five bourses were in existence in SSA, this is a significant increase. Meanwhile, the average price earnings multiples for the main pan-African stock exchanges more than rival the ‘hot’ emerging markets of Brazil, India and China. A good example of an exit transacted via the African equity markets is Starcomms, a Nigerian mobile telecommunications operator that ECP exited through a private placement transaction in 2008. The shares were then listed on the Nigerian Stock Exchange (NSE), making Starcomms the first listed Nigerian telecommunications company on the country’s bourse. The exit represented 2.9× ECP’s initial investment, with total proceeds of $99.1m. ECP has also achieved exits via multiple listings on regional markets. A case in point is the listing of Ecobank Transnational, a pan-African bank now listed on three exchanges across Nigeria, Ghana and the Bourse Régionale des Valeurs Mobilières (BRVM), a regional exchange in Côte d’Ivoire. The fund sold its $12m investment for $36m via the exchanges in April 2008.

Structured exits Another viable way to exit is through structuring deals to allow for a put, swap or share buyback as a fall-back exit option in the — carolyn campbell, ecP event that an exit via an initial public offering or strategic or trade sale is not optimal. Global equity markets In effect, creative exit solutions can be put in place from day one, In achieving exits, ECP has on occasion sold its stake in companies built into the investment trajectory and tailored to the investment in the global equity markets. A perfect example is Société in question. Internationale de Plantations d’Hévéas (SIPH), a natural rubber Opportunities for exits are constantly evolving and producer and exporter in Africa. ECP exited the company through improving across the continent. The best advice I would give block sales on the NYSE Euronext Paris exchange in 2007, which to limited partners seeking to allocate funds to African private included call option sales. The exit generated total proceeds of equity vehicles would be to look into fund managers with a $49.8m, representing a return of 3.4×. strong track record.

PE-Africa_issue-001_36-45_TK.indd 37


31/5/11 01:17:31

MARKET VIEW | Adviser opinion

The balancing act ravi Vish, chief economist at the World Bank’s Multilateral investment Guarantee Agency (MiGA) and hal Bosher, MiGA’s senior underwriter, look at the risks and rewards of investing in Africa, outlining the importance of hedging political risks


fricA’s coMPLeXiTY presents one of the best

environments for fund managers to offer value to institutional investors seeking exposure to the continent’s growth story. However, the region’s increased capital flows have not been matched with risk management strategies suited to larger, sophisticated investors with no mandate for frontier investing. Rather, challenges such as political instability in some African countries are typically dismissed alternately as part of doing business in frontier markets, or as circumstances that can be mitigated through local knowledge and relationship management. Dramatic events in the Middle East and North Africa suggest that African private equity practitioners will need to offer more nuanced hedging strategies to continue to increase mainstream capital to the continent – particularly in the context of 16 African national elections in 2011. Africa is ripe for consideration and offers significant opportunities for investors seeking higher returns and lower corporate valuations compared to other emerging markets. Having recovered quickly from the financial crisis, the continent is now the second fastest growing region in the world with real gross domestic product (GDP) growth rates projected to range between 5.4% and 5.9% over the next five years. Commodity producing countries stand to improve their terms of trade from strong commodity prices. Financial sector reforms are yielding results, providing credit and mobilising domestic resources. Post-crisis, net private financial flows have rebounded strongly and are projected to reach a record $38.2bn in 2012, most of which ($31.4bn) will be foreign direct investment.

Multinationals bullish about Africa Sixty-eight percent of global multinationals responding in the 2010 MIGA-EIU Survey said they expect to increase their investments in the region over the next three years. Their views concur with those of a 2011 survey carried out by the 38

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Ravi Vish Chief economist MIGA, World Bank

Hal Bosher Senior underwriter MIGA, World Bank

Emerging Markets Private Equity Association (EMPEA) and Coller Capital. The survey of limited partners’ investment strategies over the next 12 months revealed that Africa’s weighted attractiveness score has increased considerably compared to the 2010 Survey. In terms of attractiveness, Africa now ranks above Central and Eastern Europe, Middle East and North Africa, and Russia and Commonwealth of Independent States. The EMPEA/Coller survey also showed that LPs expect annual net returns of at least 16% across all emerging markets. The expectation is higher for LPs who do not have prior exposure to the region, underscoring the existence of an information asymmetry between ‘outsiders’ and the picture ‘on the ground’. PRIVATE EQUITY | AFRICA

July 2011

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Adviser opinion



ro o


He who dares Elections and referenda in Africa, 2011 High expected returns are not without risks. Key deterrents for LPs beginning to invest in Africa over the next two years are political risks, cited by 39% of respondents in the MIGA-EIU Survey. Tunisia African countries are fragmented linguistically, Morocco religiously and politically. Local dynamics, weak Algeria Libya institutional structures, colonial overhang and ethnic Western Egypt Sahara tensions are interwoven – making it difficult for foreign investors to accurately calculate and assess macro risk Mauritania Mali Niger versus return opportunities. Chad Sudan Not surprisingly, this leads to extreme outcomes, Gambia Djibouti Guinea Benin or a bar-bell effect, whereby risks are miscalculated Nigeria Ethiopia Ghana and are either over- or under-estimated. This effect C.A.R. Liberia Somalia is exacerbated by so-called ‘headline’ risk, when Côte d’Ivoire Uganda civil unrest or instability confirms the perception of Kenya Gabon Rwanda volatility in African economies. Seychelles DR Congo Historically, investors have managed African risk Tanzania with blunt tools. For example, some have increased Elections* hurdle rates to balance the risk–reward ratio, while Mozambique during 2011 Angola Zambia others have invested through strong local connections No elections in government and businesses. Others on the other Zimbabwe Madagascar during 2011 Namibia hand have rejected the risk thesis altogether. No elections Botswana held Risk impacts both market leaders and laggards alike. * Includes presidential and For example, telecommunications is widely credited legislative/parliamentary elections, and major referenda South with establishing Africa as a credible destination Source: International Foundation for Africa Electoral Systems, for investors seeking uncorrelated returns and new growth markets. Its exceptional performance has not only attracted new investors to the continent but the As African markets broaden and deepen, mainstream invesattention of African governments seeking new sources tors are likely to seek concrete risk management solutions more of taxable income. However, some international operators have been affected tailored to hedge individual country volatility. This will allow negatively in several African countries, showing that outsized them to invest with more confidence. Political risk insurance can be part of a more sophisticated risk returns cannot necessarily compensate investors for events that lead to a total investment loss or significant earnings mitigation solutio for investors and can in particular help fund managers to expand their investor base. impairment. In addition to providing insurance for loss mitigation per se, Infrastructure lacks investments multilateral political risk insurance providers such as MIGA can In contrast to the growth of telecoms, investment in infrastructure also mediate between investors and host governments before a has lagged behind in Africa1. It is difficult to attribute this deficit loss takes place, helping investors realise the value proposition purely to macro volatility. These ‘long-tailed’, capital intensive that drew them to the investment in the first place. assets must offer investors stability over a minimum 10-15 1. Africa: Continent needs US$480bn for infrastructure devt, year period in order to attract necessary capital. As such, risk SA leader tells BRICS, 15 April 2011 (APA News). management is critical to moderate capital costs, to make them Note: Data referred to in this text are from the IMF or the World Bank, unless otherwise specified. affordable for sponsors and governments alike.

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31/5/11 01:17:32

MARKET VIEW | Analyst opinion

The challenges ahead Luca Del conte, director of capital markets at GMP securities, explores the challenges facing the private equity model in Africa over the next decade


hen We Look at the history and current state of the

private equity industry in Africa, it is clear that the market is still in its teenage phase and a few more years are required to enter adulthood. This can create confusion, especially for institutional investors, but entice excitement at the same time at the potential for superior returns. When considering a 10-year outlook for African private equity, we have to be aware that what the future holds is current trends altered by changes in the broader global environment. In fact, this is the same way that we need to look at all things: from football league tables to the price of gold. To fathom what lies ahead, we first must have a strong understanding of what currently defines the African private equity market. We therefore need to begin by analysing some of the aspects that have been particular to this niche asset class since the beginning of the 2000s. We will examine the definition of the asset class in the context of the African market, by looking at its history, the current generation of deal makers, the Celtel legacy and the exit conundrum.

Defining African private equity The history From a technical perspective, defining the private equity industry in Africa should be a simple exercise: private equity deal-making focused on sub-Saharan African consumer-driven markets. But the history shows that although this is the path many have sought to follow, the vast majority have ended up mostly investing in South-African businesses due to constraints we will discuss later. It should be noted that although natural resources have also been a recipient of private equity funding for many decades, the asset class is rarely considered part of the private equity family. The current generation When we look at managers and principals in the African private equity market, more than 50% of the current generation is still comprised by individuals who have traversed from working in the broader emerging market industry into African private equity. This means that we are still missing a generation that has spent a full career on the ground, which is extremely important for this niche market. 40

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“No matter what challenges lie ahead in the next decade, a new age of Africa private equity associates, vice presidents and principals is entering the asset class. These, in my view, have the best incentive and brains to overcome any barriers.� — Luca Del conte, GMP securities PRIVATE EQUITY | AFRICA

July 2011

31/5/11 01:17:32

Analyst opinion

On average, it takes about 10 years for masters of business administration (MBA) graduates to be considered as having spent a full career in the private equity industry. As the bulk of the MBA inflow into the market only started in 2007, this generation will only reach its maturity at the end of this decade. The Celtel legacy The acquisition of Celtel by Zain took place in summer 2007, but in Africa’s private equity circles the deal is still seen as one of the top CV-making deals in recent times. The deal ticked all the boxes in terms of what defines a successful private equity enterprise. It was a large consumer driven company, pan-African, had a clear exit, and generated above 2x return. However, by continuing to use it as the main reference point for deal assessment, it has created a barrier for new deals. The deal happened four years ago, but is still used as a recent yardstick when approving and closing deals. The deal brought in more than $2bn for developmental and private equity investors who were major Celtel shareholders. The exit conundrum For the most part, private equity deal-making in Africa looks excellent; growth prospects are even better and pricing is decent. Nonetheless, exits are a considerable concern for the industry – despite a significant proportion of managers struggling to admit this. With the exception of South Africa and Egypt, the rest of the continent still does not have enough depth in its stock markets to support exits. This, in addition to the legal challenges surrounding the treatment of complicated structures and legal agreements to facilitate future trade sales, creates a major conundrum. The hope is that, by the time managers create value and get ready to exit current portfolio companies, the markets and regulations would have grown up. Clearly we are at a tipping point, and the birth of the Private Equity Africa trade journal is one of the many proofs.

The challenges Deal size Sourcing reasonably-sized deals is currently one of the market’s biggest challenges and will remain so for a few more years. I have learned during my first years in mergers and acquisitions that ‘there is no small deal, only small fees’. A good number of Africa-focused private equity fund sizes, especially those based in London and

PE-Africa_issue-001_36-45_TK.indd 41

New York, are quite large and tend to target $30m and above tickets. And that is just for minority stakes! This naturally shrinks the deal pool. Joint ventures between fund managers will hopefully help address the issue of size. Education Private equity education in Africa is still at an early stage. Local businesses, particularly large family-owned enterprises, are still struggling to understand the role of private equity in creating value. It seems they are only convinced by high valuations. New money A lot of players in the sector are quite passionate about the market – including me. We therefore welcome news of brand-name global private equity firms creating new pools for African investment. However, we need to ensure that new money from outside is matched by new money on the ground. For this to happen, there has to be rapid development of Africa-based domestic insurance and pension funds’ participation in the overall equity market. Unfortunately, we need to rest our hope on local governments and private institutions creating an increased level of incentives. One thing is for sure: no matter what challenges lie ahead in the next decade, a new age of Africa private equity associates, vice presidents and principals is entering the asset class. These, in my view, have the best incentive and brains to overcome any barriers.

The Celtel story celtel was created by a team of people of African descent led by Dr Mo ibrahim. The team took the company from a licence-hunting entrepreneurial unit to a $1bn revenue company in only seven years. celtel built a reputation for being very well managed, easing its ability to repeatedly raise debt and equity funding for expansion. investors included Bessemer, Alba, citigroup, capital international, Actis, the commonwealth Development corporation, Deutsche investitionsund entwicklungsgesellschaft mbh (DeG), netherlands Development finance company (fMo) and emerging capital Parnters (ecP). other investors were AiG infrastructure fund, WordTel Africa and Zephyr Management standard Bank. celtel was acquired by MTc kuwait for $3.4bn in 2005, one of the biggest corporate deals in sub-saharan Africa. it is estimated that overall, investors made returns of at least 250% on the deal.


31/5/11 01:17:32

TECHNICALS | returns

Analysing returns rory ord, head of private equity at riscura solutions, examines the performance of south Africa-based private equity funds


riVATe equiTY in souTh AfricA has certainly come of age in

recent years, with funds under management in excess of R100bn ($14.7 billion) and around 70 managers actively investing and managing portfolios of private companies. With this increased level of activity has come increased scrutiny and a desire of fund managers and investors alike to understand the performance of this asset class. Investing in private equity is a long-term commitment that differs in nature from most other assets, including listed equity. Typically, private equity fund investments show low correlation to quoted equity markets and are relatively illiquid, particularly in the early years. Private equity will normally show a drop in net asset value before showing any significant gains. This is often the effect of management fees and start-up costs on the relatively small capital base of a new fund. In South Africa, private equity funds typically follow a commitment and draw down model, which means that investors commit a certain total of capital at the start of a fund, but are only requested to transfer cash to the private equity manager as investments are identified or costs are incurred. These funds typically return capital during the course of the fund’s life as investments are realised. South African private equity offers institutional investors the opportunity to invest in an asset class which has historically outperformed listed equity; but it does have a different nature from quoted equity and it is crucial that an institutional investor considers the appropriateness of private equity to its particular objectives.

Measuring performance The most widely used method for calculating returns of private equity funds is its annual internal rate of return (IRR) achieved over a period of time. We measure performance in two ways: by the ‘since inception’ and ‘end-to-end’ methods over three, five and 10-year periods. This is the most widely used IRR measure of private equity performance. It measures the return of a private equity fund based on all cash flows in and out of the fund, as well as the remaining net asset value of the fund. It therefore most closely reflects the return an investor would achieve if they invested at the start of the fund. This is the most likely scenario in South Africa where investors in private equity funds are locked in for the life of the fund, and must catch up on initial fees when joining a fund after the initial investors.

IRR since inception.


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End-to-end IRR. This method allows the computation of the return

of groups of private equity funds which do not necessarily have the same inception date. This calculation also allows a better comparison of private equity returns to those of other asset classes over similar periods. While this method has advantages, it must be noted that it allows the returns of funds at different life cycle stages to be combined. Where the period selected contains more new funds than older funds, the return will likely include a higher balance of fees than a time period with older funds. The longer term IRR is considered to be the most indicative of private equity performance across different stages of the economic cycle and is the headline measure. One year returns should be viewed with caution as private equity is a long-term investment. However, one year returns may be indicative of the general performance of private equity over this short period.

This measures the ratio of total capital invested to total capital returned and remaining value. This is a useful crosscheck of IRR measures and is easily understandable. While IRR calculations are heavily dependent on the length of time that capital has been invested, ‘times money’ does not take time into account. A ‘times money’ result in excess of one means that value has been created for the investor. Times money.

This measure seeks to equate the timing-dependent returns of private equity funds with the returns of public market indices. The measure is a ratio of the net outflows from private funds re-invested into the public index to the end of the fund’s life, divided by the inflows into a private equity fund invested in the public index until the end of the fund’s life. A ratio of above one reflects outperformance of private equity, while a ratio under one reflects underperformance. Public market equivalent (PME).

Our analysis We have collected cash flow and portfolio value data from 15 South African private equity fund managers and established a confidential database to enable the preparation of the performance statistics. The database accounts for cash flows on a monthly basis and net asset values (NAV) on a quarterly basis, but adopts annual values for reporting purposes. Only South African Rand funds have been included in this analysis, and therefore none of the returns included are affected by exchange rate movements. PRIVATE EQUITY | AFRICA

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Returns: Pooled IRR by Time Period 25%


Returns: Times Money by Time Period



Realised Times Money


Unrealised Times Money







0.6 0.4





0.49 0.21





Returns: Pooled IRR by Vintage Year




Returns: Times Money by Vintage Year



Realised Times Money



Unrealised Times Money







1.19 2.08







5% 0%




0.90 0.15





Pre 2000


Returns: Pooled IRR by Fund Size 50%






Pre 2000


Returns: Times Money by Fund Size






1.5 21.1%



Realised Times Money Unrealised Times Money 0.85 0.83


1.0 1.37




0.0 Under R500m

R500m – R1bn

Over R1bn

Pooled IRR compared to three listed indices Pooled IRR



(formed 2002)

Under R500m


R500m – R1bn

Over R1bn

Public Market Equivalent









(formed 2002)


1.05 1.00

0% 10-year



10% 5%




Note: Listed index returns are before fees.

0.95 10-year



Note: Listed indices are total return indices before fees.

Source for all graphs: RisCura Solutions

PE-Africa_issue-001_36-45_TK.indd 43


31/5/11 01:17:33

TECHNICALS | economics

Growth and inflation standard chartered’s Razia Khan, head of macroeconomics and regional head of research for Africa, outlines with economist Victor Lopes Africa’s growth outlook, rising inflationary pressures and monetary policies


fricA’s GroWTh has gradually improved since the global

economic crisis, when gross domestic product (GDP) declined to just more than 1%, although the region managed to avert an outright contraction. A number of factors were responsible for this – good growth momentum before the crisis, the relatively quick stabilisation in commodity prices post-crisis, and not least, within the region itself, an unprecedented level of fiscal and monetary stimulus in response to the slowdown.

GDP is back to pre-crisis levels In 2011, with growth expected to rise closer to pre-crisis trend levels (above 5%), an increasing number of African countries will come under pressure to remove some of this policy stimulus. The sustainability of the economic recovery beyond 2011 will depend in part on the external environment. Despite strong trade gains by Asian economies (especially China), Europe (largely the core) remains Africa’s largest trading partner. Moreover, African export shares of GDP are probably too small for increased trade with Asia to compensate for a renewed downturn in the West. For now, Africa’s economic recovery appears to be intact, helped by strong Asian growth and the support provided to commodity prices by quantitative easing in the West. However, the external environment is still characterised by some uncertainty, and overall risks remain. Domestic factors were a strong driver of Africa’s pre-crisis trend growth, and 2011 should see the re-emergence of consumption as the key driver of GDP gains. In some ways, this will represent a maturing of the ‘Africa recovery story’ beyond the immediate lift from higher commodity prices. While the efficacy of monetary easing in response to the crisis has been questioned by many – there are well-documented problems with the transmission of monetary policy, and loan rates did not always match policy easing – private-sector credit should at least recover across a broad swath of African economies. Much of the focus will be on Nigeria, which experienced the worst fallout, with a domestic banking crisis in which loan-loss provisions eroded two-thirds of the banking sector’s capital. Efforts to recapitalise the sector, in part through an asset management company, should allow credit growth to recover. 44

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Economies such as Ghana and Angola, which ran up considerable crisis-related fiscal arrears, have also experienced some banking-sector fallout, with rising NPLs. Improved fiscal receipts and official efforts to clear these arrears should benefit the bankingsector outlook. Near-term, the strongest growth gains should continue to be in oil-producing economies that were hit hard during the crisis. Countries transitioning to oil-producer status, such as Ghana and Uganda, are also likely to see a multi-year period of healthy growth based on this structural shift. In Ghana’s case, the benefit of a well diversified economy is expected to pay dividends, with non-oil growth of 7% expected in 2011 (when oil is factored in, projected growth rises to 12.3%). Zambia, whose output in the copper belt doubled before the crisis, looks set for another output surge, although questions will persist about effective taxation of the mining sector and making this growth more meaningful. East Africa was the clear winner during the latest crisis as Africa’s other, more commodity-dependent regions were hit harder. Growth momentum there is expected to continue, led by gains in the region’s largest economy, Kenya, which should continue to benefit from a stabilisation of its political outlook. The Southern Sudan referendum in early 2011 will be a key influence, with the potential redrawing of East Africa’s geographic landscape. Access to ports will be an important consideration; Kenya looks set to benefit strongly from regional infrastructure development.

Southern Africa still recovering During the crisis, southern Africa was hardest hit. This was partly owing to South Africa’s greater level of development and closer links with the global economy. The diamond mining economies of Botswana and Namibia were also affected, experiencing outright contractions. While 2010 showed little more than a recovery from a weak base, countries such as Botswana, which saw substantial fiscal deterioration in response to the crisis, must now undergo a steep fiscal adjustment, even as diamond prices recover. Weak growth for a multi-year period looks likely. In South Africa, the initial recovery boost provided by the supply side may lose momentum, especially as the country’s external sectors – mining and manufacturing – struggle with a strong currency. Nonetheless, household consumption continues to recover and a more normal consumer cycle is set to reassert itself, helped by interest-rate easing. Zambia, also a mining economy, has proven to be the exception to the southern African picture of sluggish growth, helped by the strong China-driven rebound in copper prices. Record agri-yields PRIVATE EQUITY | AFRICA

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during the crisis also helped. In Zimbabwe, positive growth is expected in 2011 given the low base following years of crisis.

Rising yields in domestic debt markets Already, yields in domestic debt markets have risen from their lows. In some cases, such as in Kenya, this is driven by economic recovery and the appeal of asset classes other than government securities. In Nigeria, a steep rise in official borrowing, reflected in increased issuance of government debt in recent months (although borrowing was more subdued in January 2011), has driven this correction higher. A common theme across an increasing number of markets is the expectation of higher inflation from higher oil and food prices. This will most likely bring about an end to the disinflation that has been in place for some time now, a feature that is increasingly observed across a number of African countries. Even in South Africa, the beneficiary of the most significant capital inflows (which has driven currency appreciation), the inflation cycle has already turned. With the cost of borrowing in domestic debt markets no longer as favourable as during the crisis, governments are likely to find their fiscal room for manoeuvre more limited in the months ahead. More meaningfully however, with growth improving, the justification for maintaining overly expansionary fiscal policy is fading. Risks to GDP growth Rising oil prices can have an adverse impact on the GDP growth of oil importers. Oil prices above USD 120/bbl would push regional growth below 5% in 2011. Also, this would cause a spike in inflation as well as more currency weakness. This risk is exacerbated by rising food prices, which can lead to social unrest. Headwinds associated with continuing global uncertainty persist. With intra-regional trade estimated to account for as little as 11% of total trade (poor infrastructure is largely to blame), Africa’s export growth remains highly correlated with world growth. Rising South-South (trade between Asia and Africa) trade has cushioned African economies from the brunt of the global slowdown. However, more subdued growth in Asia and other emerging regions would pose risks to the African outlook. Politics Nigerian elections, held in April 2011, brought the victory of the incumbent Jonathan Goodluck, but there is some unrest in the north. Also the restive Niger Delta will be closely watched given the potential disruption to oil output. Politics could all too easily influence real economic performance. The political stand-off in Côte d’Ivoire has ended, but the new president faces the challenges of unifying a country after a decade of instability. Attention will also be focused on the Southern Sudan independence due in July following the referendum held in January 2011, which is likely to

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alter the East African landscape if it peacefully leads to the emergence of a new oil-rich, albeit landlocked, African country. Elections due in 2012 will also influence events in the coming year – such as Kenya’s investigation into corruption, Ghana’s plans for increased spending and Senegal’s plan to tackle energy shortages ahead of the elections. In South Africa, political manoeuvring ahead of the ruling ANC’s internal congress in 2012 may also shape policy outcomes.

Structural issues Africa’s infrastructure deficit remains a key constraint on the longterm outlook. The issue has started to be addressed, thanks to the greater involvement of emerging economies, notably China, which has provided significant financing for infrastructure projects, often in ‘infrastructure for resources’ deals. Addressing the infrastructure issue, along with improving access to credit and tackling the informal economy are key for Africa to realise its potential. Poverty and the high rate of unemployment remain crucial structural concerns. Much remains to be done, but there has been some progress. Recent research has highlighted the success of poverty alleviation efforts in Africa, demonstrating that poverty rates may have fallen faster than previously thought. For most African economies, and for the region as a whole, charts showing rising per-capita GDP growth over time are almost the mirror image of falling poverty rates1. 1. ‘African poverty is falling… Much faster than you think!’, Sala-i-Martin and Pinkovskiy, 2010

Standard Chartered African Currencies Outlook Country

Q2-2011* Q3-2011* Q4-2011* Q1-2012*
















Côte d’lvoire





The Gambia




















Sierra Leone





South Africa




















* Rate per USD 1.00 Source: Standard Chartered


31/5/11 01:17:33


exploring the african option Toyin Johnson, co-president of the London Business School’s africa club, reports on the group’s recent african expedition to investigate private equity activity


hroughouT The academic year at London Business

School, student-run clubs scramble to organise their flagship annual treks. From Silicon Valley to Hong Kong finance fairs, students run around the globe to expand their knowledge and contacts. However, nearly everyone seems to forget about the ‘Dark Continent.’ Last March, the Africa Club took 12 students to explore the dynamic business landscape of East Africa, from private equity investments and mobile banking in Nairobi to consumer growth strategies in Dar-es-Salaam.

Safaricom introduced M-PESA (a Swahili reference to ‘mobile money’) in the mid-2000s to facilitate electronic transactions within the informal economy. Minimal set-up is required of the end-user; all that’s needed is a mobile phone. Citing the same East African consumer trends as EACP, and implementing a crafty marketing strategy to dominate the emerging mobile banking sector, M-PESA is a regional accomplishment that will be a tough act to follow.

Tanzania The trip to Tanzania was designed to be the safari leg of the trek, Kenya but curiosity got the better of us. After an amazing experience Our adventures began in Nairobi, Kenya’s cosmopolitan capital, in the famed Ngorongoro Conservation area, we couldn’t resist where we met with East Africa Capital Partners (EACP) and dropping in on InfoTech Investment Group, the technology Safaricom/M-PESA. EACP is a successful Nairobi-based private conglomerate headed by local business guru Ali Mufuruki. equity investor that monetises opportunities in the information He took time to articulate the consumer trends transforming and communications technology (ICT) space. Our question and the region. We also toured Tanzania Breweries, a SABMiller answer session with EACP’s head Richard Bell gave us an in-depth subsidiary, where we received a crash course in marketing understanding of the key drivers of EACP’s interest in the region. strategy. The trip educated us on how the company had With annual regional growth over the last few years exceeding 6%, implemented an aggressive marketing plan to keep up with the the region is clearly a macroeconomic success. More specifically, evolving consumer base across Africa. We walked away hugely EACP is ahead of the curve of what many are only just beginning impressed and wishing we had seven-figure bank accounts to to realise: with a massive ‘informal’ economy, and a population invest in the expanding opportunities here. eager to embrace technology, the ICT sector in East Africa is set The Africa Trek ended all too quickly! We returned to London to erupt into its full potential. inspired by all the success stories we’d witnessed, and marvelled Another driver of EACP’s successful strategy is that, contrary at the breadth of untapped potential. Not surprisingly, we were to common perception of governments in Africa, leaders in this also left puzzling over the ‘Dark Continent’ label where the lights, region have recognised ICT’s importance to the sustainability of slowly but surely, are beginning to shine brightly, lighting the way the region’s growth. As such, they work together with pioneers to the world’s best-kept investment secret. like EACP to ensure that alpha-seeking capital is directed to the region’s strongest sector. The region has also been boosted by an Africa Club at London Business School emerging consumer base, inflation-conscious monetary policy, The africa club at London Business School is an active student-run and increased diversification of local economies. organisation that promotes the professional, cultural, and socioSafaricom/M-PESA, the second business we visited, has economic interests of africa in all facets of the university community. also picked up on the same threads as EACP, and accessed the on campus, we bring together students, alumni and professionals opportunities rather cleverly. As the largest telecommunications through a thrilling range of exciting activities. outfit in Kenya (and an emblem of fierce national pride!), Safaricom contact and request to be added to our has a well-placed brand, technology and network infrastructure mailing list. upon which a successful industry could piggy-back. In this manner, 46

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July 2011

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GLOBAL VIEW | opinion

Life goes on T

he gLoBaL economic and financiaL Backdrop in 2011 has been far from ideal

francinia protti-alvarez is a financial analyst and former editor of Southern europe unquote, a premium private equity trade journal that focuses on italy, portugal and Spain.


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by anyone’s standard. In the current environment, it is difficult to say whether we have already hit rock bottom and are now ascending towards better days. Three years on from the onset of the crisis, recovery remains elusive, or at best, protracted. Most mature economies seem to have lost their lustre and in Europe, a debt crisis is roiling in the southern geographies and threatening the eurozone, all of which can only conspire to dampen investor appetite. However, in the private equity world, life must go on. A number of firms are beginning to feel the pressure to hit the fundraising road, following a quiet spell that has lasted a good number of years. While global private equity giants like Carlyle and Kohlberg Kravis Roberts (KKR) will not find the task of attracting investors too difficult, the same cannot be said of most other players. Therefore, offloading valuable assets to deliver returns to their backers is becoming a theme in the market. Although the glamorous golden days of global private equity now seem far behind, large trade exits are materialising. Take for instance the sale of French power conversion and engineering company Alstom Power Conversion. The trade sale saw General Electric pay LBO France and Barclays Private Equity a whopping €2.3bn. Cinven also this year offloaded a valuable asset, selling Swedish in-vitro allergy diagnostics company Phadia to US-based Thermo Fisher Scientific for €2.47bn. Another gigantic trade sale this year was Nordic Capital’s exit of pharmaceutical company Nycomed to Japan’s Takeda Pharmaceutical Company, in a deal valued at €9.6bn. Certainly not all buyout houses are enjoying the luxury of having desirable assets in their portfolios, but the need to divest has become quite important. As for emerging markets, these continue to attract the attention of investors, showing that although the global private equity industry has not emerged from the crisis unscathed, it has survived and is doing what survivors do: evolving. Indeed, in May this year, USbased private equity groups KKR and TPG Capital were said to be looking to set up offices in Brazil, as the industry increasingly seeks to tap emerging markets for growth. Certainly Brazil may pose some challenges to private equity investors. Among other things, high interest rates will certainly limit leveraging, and big players such as KKR and TPG will definitely need to adjust their deal sourcing strategy to the Brazilian reality. But then every new endeavour requires going through some trial and error. Then there is Africa… Seldom is the continent portrayed in a positive light, but things may be changing and looking up, at least for some African countries. Certainly, Africa is still far from attaining most of the Millennium Development Goals. Job creation has remained an issue as demonstrated by recent social unrest in such countries as Tunisia and Algeria. Nevertheless, the latest Economic Report on Africa, produced by the UN Economic Commission for Africa and the African Union, found the continent’s economy grew by 4.7% last year and is likely to increase by another 5% in 2011. Private equity on the continent is still in its very early stages – it may not have started ‘teething’ yet – and this certainly opens the door to opportunity. As the industry is still in its infancy, it has enough time for Africa to take advantage of western tools, absorb them and shape them into models that will work for continent. Although most economies in Africa are still quite small, they might yet be instrumental in helping to pull the rest of the industry out of its current state. Hope, I am told, was the last thing to come out of Pandora’s Box… PRIVATE EQUITY | AFRICA

July 2011

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Private Equity Africa Journal - Issue 1  

Private Equity Africa Journal - Issue 1