Private equity activity grows
Private-equity (PE) activity in Africa has increased significantly in the last 30 years
From a dozen or so active general partners (GPs) in the region in 1990, there are currently at least 140 GPs active in Africa. Between 2010 and 2016, GPs invested around US$25.6bn across sectors that ranged from consumer goods to water and sanitation.
GPs’ approach to investment in Africa is, in several ways, distinct from how the asset class functions in other parts of the world. For instance, PE fund raising and deal execution have a longer lead time in Africa than PE funds focused on other regions; the deal sizes are usually smaller; the average holding periods sometimes extend over eight years; and the exit options are weighted towards trade sales. Trade sales are associated with corporate buyers purchasing assets in their core line of business. PE, therefore, plays an important role in facilitating the presence and strategic expansion of corporates in the region.
Moreover, PE investment in Africa tends to focus on growth capital, helping investees to improve governance, and strategy, expand their footprint and (at times) contribute positively to the region’s broader commercial ecosystem, for example by deepening capital markets and expanding supply chains. The focus on growth capital is the opposite of the financial engineering accusations often directed at GP activities in other regions. Rather than buying a business, significantly increasing its debt levels, aggressively reducing costs and exiting after a short holding period, the GP approach in Africa centres on holding and scaling businesses with limited, if any, debt capital included in deal structures.
GPs operating in Africa have surpassed benchmark levels of return: between 2007 and 2015, they generated an average return well over 150% the MSCI Emerging Market Index. This notwithstanding, PE has low penetration relative to performance in other regions. Reforms have been enacted in some countries in the region in order to encourage Africa-based institutional investors to allocate capital to the asset class.
However, more remains to be done to harness fully PE’s potential to contribute to Africa’s socioeconomic development. Each investment counts: every 0.01% in concluded PE transactions as a percentage of African GDP (US$2.1trn) translates to over US$200m of much needed incremental annual investment in the region.
The impact of private equity
Capital to grow: PE plays a catalytic role in Africa. The general shallowness of African capital markets and the high cost of debt finance mean that PE plays an important role in helping to unlock and grow the potential of individual companies and ecosystems. Unlike in other regions, where transactions may be driven by a financial engineering objective, the asset class is primarily applied to fund enterprise growth in Africa.
GPs generally approach transactions by assessing the potential to expand a targeted portfolio company’s market reach and/or combine it with a complementary business or service offering. “We play at the larger end of the PE spectrum. Investments start at US$50m and may go up to US$250m,” says David Cooke, partner at Actis, a GP that invests in emerging markets. “Baked” deals—those that are acquired at scale and run efficiently—are not as common in the region.
“We find very few baked transactions. We may take a successful national business and expand it regionally; everything we do is around growth,” adds Mr Cooke. Debt, when used in deal structures, is generally sparingly and judiciously applied. “We typically use a lot of equity, no more than one third debt,” says Nhlanganiso Mkwanazi, director at Medu Capital, a Johannesburg-based firm. “In the mid-market space, we want to generate investment returns by growing the businesses. The businesses need to have strong balance sheets, not onerous structuring, to enable them to grow effectively,” adds Mr Mkwanazi.
Geographic expansion and job creation
Various indicators point to the value of GPs’ involvement with their portfolio companies. For example, between 2009 and 2015, Africa-based PE investee companies grew their employment “Private equity in Africa is primarily used to support growth, whereas, in the developed world, it may have more of a financial numbers by over 15%, according to The African Private Equity and Venture Capital Association (AVCA). One of Actis’s South Africa-based investments, Food Lover’s Market, is adding an average of five new employees daily.
Fanisi Capital, a Kenya-based GP, has had success growing smaller enterprises into national and regional enterprises. “We do earlystage investments, sometimes with a single entrepreneur, and help to corporatise them,” says Ayisi Makatiani, managing partner at Fanisi Capital. He adds, “For example, we made an acquisition that had two pharmacies and helped to build it into a chain with 53 outlets.”
“While the typical size of our PE investments is between US$50m and US$100m, we will look at anything from US$30m to US$200m. In terms of size, we care less about where we start out, and more where we can end up. Our focus is on the capacity to grow and develop a company into a market-leading business of scale,” says Souleymane Ba, partner at Helios Investment Partners, a London-based GP that invests exclusively in Africa.
“We put investment and growth first, before anything else.” Bruce MacRobert, chairman, Consol Holdings Improving environmental social and governance (ESG) performance says ESG is a generic term used by investors to evaluate corporate behaviour. GPs, and the limited partners investing in their funds, prioritise investees meeting acceptable ESG standards. These standards include financial and non-financial indicators geared to measure how well a company is performing and give an indication of its long-term prospects. Energy efficiency, staff training and qualifications, green house gas emissions and litigation risks, as examples, form part of a host of ESG factors.
Often a GPs involvement in an investee results in a dramatic improvement in ESG performance. “All of our portfolio companies in some way are making life better for people and businesses in Africa,” says Dabney Tonelli, investor relations partner at Helios Investment Partners. “Through our investment activity we’re developing the next generation of business leadership potential, enhancing lives through access to information and technology, creating financial security, increasing financial inclusion, improving environmental care and quality and improving governance standards,” she adds.
Transactions: doing deals
The period 2010-16 for some GPs 2016 was their busiest year. “We do two to three deals a year, flowing from an annual pipeline of over 160 potential opportunities. In respect of transaction volumes, last year was our biggest year as a firm,” says Mr Ba. Out of 54 African countries, only five had a GDP that exceeded US$100bn in 2016, according to The Economist Intelligence Unit. Large PE transactions are, therefore, few and far between in the region.
Over the seven-year period, transactions greater than US$250m composed a little under half (US$12.5bn) of concluded deals. GPs biased towards larger deals generally do not conclude transactions that exceed US$250m. “The typical size of a deal is US$50m to US$100m,” says
Ngalaah Chuphi, executive director at Ethos, a In 2010-16, around US$25.6bn of PE transactions were concluded. The annual investment level averaged around US$3.7bn. However, this figure does not tell the entire story. For example, 2013 and 2014 stood out within the period: over US$12bn, or 48% of total value, was invested in those two years alone.
Three large telecommunications deals by IHS Towers, a company that builds and operates base stations, averaging around US$1.4bn each, and one US$630m deal by Helios Towers Africa, which also builds and operates base stations, accounted for around US$4.8bn of the total value of concluded deals.
Notwithstanding slower macroeconomic growth in the region, in 2016 the total amount invested by GPs was US$3.8bn or US$160m more than the average annual investment over the Larger deals dominate overall, but not in every year. Johannesburg-based GP. In fact, in the period 2011-16, only around 3% of PE-transaction volume involved deals valued at US$250m or more, according to Prequin, a firm that provides data on the PE industry. Deal mix: Regional focus
Over 1,000 PE deals were concluded between the beginning of 2010 and the end of 2016, according to data from AVCA and Prequin. Transactions that involved investees that operated across a single sub-region composed the largest share of deal value over the seven-year period. The Southern Africa region accounted for around 30% of completed transactions. South Africa is the largest and most sophisticated single PE market in Africa, accounting for around 22% of concluded transactions by volume and 13% of concluded transactions by value between 2010 and 2016.
West Africa contributed one-quarter of the capital invested in Africa PE transactions over the period, while accounting for around 25% of total transactions. The East Africa region contributed 18% of PE transactions, but just 8% of total deal value. Between 2011 and 2016, there may have been as few as seven concluded deals in East Africa valued at US$50m or more; other East Africa-based deals concluded over the same period averaged around US$8.5m per transaction, according to Prequin.
The smaller average size of East African deals suited Fanisi Capital, a Nairobi-based GP focusing on transactions in the range of US$3m to US$5m. “Africa is big, and it is complicated; that leaves opportunities for regionally based GPs like us,” said Mr Makatiani. He adds, “The challenge has been that East Africa has become very popular.
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Grit divests from Letlole La Rona
Grit Services Limited, a member of the pan African real estate group, London Stock Exchange listed Grit Real Estate Income Group is divesting from Letlole La Rona Limited (LLR), a local real estate company established by government investment arm Botswana Development Corporation over a decade ago.
The Board of Directors of Letlole La Rona Limited this week announced in a statement to Unitholders that Grit Services Limited (‘Grit’) has informed them of its intention to exit its investment in the company.
Grit has been a material shareholder in LLR since 2019. On 07 March 2023, Grit sold 6 421 000 linked units, representing 2.29% of the Company’s total securities in issue, at a market value of BWP 22 537 710.
This trade follows previous sales of 6.79% in December 2022, as communicated to Unitholders on 10 January 2023, as well as a further sale of 4.78% (representing 13 347 068 linked units) on 24 February 2023 to various shareholders.
In aggregate, Grit has sold 13.9% shareholding in the Letlole La Rona between December 2022 and March 2023, resulting in current shareholding of 11.25% in the Company.
Letlole La Rona said in the statement that the exit process will take place in an orderly manner so as to maintain stability of the Company’s share price.
The statement explained that Grit’s sale of its entire shareholding in LLR is in line with its decision to exit investments where it does not have majority control, or where it has significant exposure to currencies other than US dollar, Euro or hard-currency-pegged revenue streams.
“Grit has announced similar decisions pertaining to certain of its hospitality assets in Mauritius recently. The Company would like to advise Unitholders that it remains focused on long-term value delivery to all stakeholders” LLR said
In July last year as part of their Go-to-Africa strategy Letlole La Rona acquired an initial 30% equity stake in Orbit Africa Logistics, with an option to increase this investment to 50%. OAL is a special purpose vehicle incorporated in Mauritius, owning an industrial asset in a prime industrial node in Nairobi, Kenya.
The co-investment was done alongside a wholly owned subsidiary of London listed Grit. The Orbit facility is situated on a prime industrial site on Mombasa Road, the principal route south of Nairobi center, serving the main industrial node, the port of Mombasa and the industrial town of Athi River and is strategically located 11 kilometers south of the international airport and 9.6 kilometers from the Inland Container Depot.
Grit shareholding in Letlole La Rona was seen as strategic for LLR, for the company to leverage on Grit’s already existing continental presence and expand its wings beyond Botswana borders as already delivered by Kenya transaction.
Media reports have however suggested that LLR and Grit have since late last year had fundamental disagreements on how to go about the Go-to-Africa strategy amongst other things, fuelled by alleged Botswana government interference on the affairs of LLR.
Government through LLR founding shareholder – Botswana Development Corporation has a controlling stake of around 40 percent in the company. Government is the sole shareholder of Botswana Development Corporation.
Letlole La Rona recently released their financial results for the six months ended December 2022, revenue increased by 4% to P50.2 million from P48.4 million in the prior comparative six months, whilst operating profit was up 8% to P36.5 million. Profit before tax of P49.7 million was reported, an increase of 8% on the prior comparative six months.
“We are encouraged by the strong results, notwithstanding a challenging economic environment. Our performance was mainly underpinned by annual lease escalations, our quality tenant base and below average market vacancy levels, especially in our warehouse portfolio,” Kamogelo Mowaneng, Letlole La Rona Chief Executive Officer commented.
LLR reported a weighted average lease expiry period of 3.3 years and escalation rates averaging 6.8% per annum for the period ended 31 December 2022.Its investment portfolio value increased by 14% year-on-year to close the period at P1.4 billion, mainly driven by the acquisition of a 30% stake in OAL in July 2022.
The Company also recorded a significant increase in other income, predominantly due to foreign exchange gains on the OAL shareholder loan. “We continue to explore pipeline opportunities locally, and regionally in line with our Go-to-Africa strategy and our interest remains on value-accretive investments,” Mowaneng said.
An interim distribution of 9.11 thebe per linked unit was declared on the 6th of February 2023 for the half-year period to 31 December 2022, comprising of a dividend of 0.05 thebe and debenture interest of 9.06 thebe per linked unit which will be paid to linked unit holders registered in the books of the Company at the close of business on 24 February 2023.
Stargems Group establishes Training Center in BW
Internationally-acclaimed diamond manufacturing company StarGems Group has established the Stargems Diamond Training Center which will be providing specialized training in diamond manufacturing and evaluation.
The Stargems Diamond Training Institute is located at the Stargems Group Botswana Unit in Gaborone.
“In accordance with the National Human Resource Development Strategy (NHRDS) which holds the principle that through education and skills development as well as the strategic alignment between national ambitions and individual capabilities, Botswana will become a prosperous, productive and innovative nation due to the quality and efficacy of its citizenry. The Training Centre will provide a range of modules in theory and in practice; from rough diamond evaluation to diamond grading and polishing for Batswana, at no cost for eight weeks. The internationally- recognized certificate offered in partnership with Harry Oppenheimer Diamond Training School presents invaluable opportunities for Batswana to access in the diamond industry locally and internationally. The initiative is an extension of our Corporate Social Investment to the community in which we operate,” said Vishal Shah, Stargems Group Managing Director, during the launch of the Stargems Diamond Training Center.
In order to participate in this rare opportunity, interested candidates are invited to submit a police clearance certificate and a BGCSE certificate only to the Stargems offices. Students who excel in these programs will have the chance to be onboarded by the Stargems Group. This serves as motivation for them to go through this training with a high level of seriousness.
“Community empowerment is one of our CSR principles. We believe that businesses can only thrive when their communities are well taken of. We are hoping that our presence will be impactful to various communities and economies. In the six countries that we are operating in, we have contributed through dedicating 10% of our revenues during COVID-19 to facilitate education, donating to hospitals and also to NGOs committed to supporting women and children living with HIV. One key issue that we are targeting in Botswana is the rate of unemployment amongst the youth. We are looking forward to working closely with the government and other relevant authorities to curb unemployment,” said Shah.
Currently, Stargems Group has employed 117 Batswana and they are looking forward to growing the numbers to 500 as the company grows. Majority of the employees will be graduates from the Stargems Diamond Training Center. This initiation has been received with open arms by the general public and stakeholders. During the launch, the Minister of Minerals and Energy, Honorable Lefoko Moagi, stated that the ministry fully endorses Stargems Diamond Training and will work closely with the Group to support and grow the initiative.
“As a ministry, we see this as an game changer that is aligned with one of the United Nations’ Six Priority Sustainable Development Goals, which is to Advance Opportunity and Impact for Diversity, Equity, and Inclusion (DEI). What Stargems Group is launching today will have a huge impact on the creation of employment in Botswana. An economy’s productivity rises as the number of educated workers increases as its skilled workmanship increases. It is not a secret that low skills perpetuate poverty and widen the inequality gap, therefore the development of skills has the potential to contribute significantly to structural transformation and economic growth by enhancing employability and helping the country become more competitive. We are grateful to see the emergence of industry players such as Stargems Group who have strived to create such opportunities that mitigate the negative effects of COVID-19 on the economy,” said the Minister of Minerals and Energy.
Food import bill slightly declines
The latest figures released by Statistics Botswana this week shows that food import bill for Botswana slightly declined from around P1.1 billion in November 2022 to around P981 million in December during the same year.
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