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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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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.

He was speaking in  Parliament on Tuesday delivering  Parliament’s Finance Committee report after assessing a  motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.

The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.

The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.

The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.

This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.

Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.

Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.

However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.

Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.

When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.

This  as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.

Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.

The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.

Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.

In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.

Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.

Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.

Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.

Acknowledging the need to draw down from GIA no more, current Minister of Finance   Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”

He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”

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