There was an article in yesterday’s FT suggesting that the term emerging markets is obsolete. Whilst the article makes some valid points, I disagree with Marko Dimitrijevic when you think about emerging markets in the context of Africa. I address those points below:
Even though emerging markets have very large economies, the common misconception is that they have fairly small, illiquid, and volatile financial markets
Emerging markets comes in different shapes and sizes. Apart from South Africa and Egypt, liquidity remains very limited across the continent. To some extent, liquidity was responsible for the closure of the New Star Africa fund in December 2008. It is also why there are very few traded funds focused on Africa (at least in UK). In my experience, the funds tend to have a more general emerging markets theme, rather than focus on Africa only.
Another argument against emerging markets is that they are too volatile and have unstable, unpredictable governments that leave them susceptible to coups or revolutions
It is fair to say that political environment is improving but things remain tense in certain parts of the continent. That itself could be a motivation to invest – high risk, high return (or total loss).
Two other popular knocks against emerging markets is their reputation for poor corporate governance and less market-friendly government policies
South Africa and Egypt stand out for good corporate governance relative to the rest of the continent. I still find that listed companies in Nigeria and Ghana still don’t provide annual reports on their website or the latest annual report is out of date. I would think that’s the first box on the corporate governance checklist.
Whilst Africa as an emerging market has come a long way – there is still some work to be done in terms of increasing liquidity in market and improving corporate governance. This will be helpful for both local and international investors.
The recent announcement by Grofin on its successful US$170m fund rasing, got me thinking about which other funds are focused on Africa. I was particularly interested in funds targeting start-up and growth opportunities. There is a useful reference list on the OPIC website. The Africa Venture Capital Association (AVCA) website also has a list (without description).
VC4Africa is an online community for investors and entrepreneurs dedicated to connecting African SME projects and businesses. Despite its name, VC4Africa is focused on both venture capital and private equity in Africa. The site which has over 1000 members, has developed into a powerful network of individuals dedicated to the promoting African businesses.
One of the great things I like about VC4Africa is the incubator sites created for each country which helps narrow the focus for those looking for just that.
The VC4Africa forum continues to seek innovative ways to harness the full potential of its network. Last week, VC4Africa formed a strategic partnership with Appfrica “to promote social entrepreneurship by making it easier for the entrepreneurs to find the investors”. The partnership hopes to capitalise on business aggregator, Afridex by crowdsourcing funds from potential investors for investment. The details around this should become clearer as the partnership develops.
VC4Africa was founded by Ben White, a freelance consultant currently working through a Master degree at the University of Amsterdam and focusing on ICT as an empowering agent for entrepreneurship
Register at VC4Africa and get plugged in!
I was fortunate to have attended the talk by Babatunde Soyoye, co-founder of Helios Investment Partners today at Clifford Chance’s office in Canary Wharf. He spoke about the impact of the credit crisis on private equity activity in Africa. I have put together a summary of the talk based on my interpretation below. Hopefully someone will find it useful.
Impact of Credit Crunch
- Valuations appear to be more reasonable however execution is taking much longer. Sellers are hopeful that the markets will return and continue to delay sale processes
- Talent pool to recruit from is much bigger today. In the past, it was difficult to attract talent and even if you could attract them – you probably couldn’t afford to pay them. The credit crunch has changed that balance positively
- Post-Lehman, companies with balance sheet constraints are seeking asset sales – it seems logical assets for sale are usually those in Africa – significant opportunities to capture value
- Growth is still commodity-linked in most African countries. With price of most commodities taking a hit – GDP growth expected to slow across the continent
- Overall the credit crunch has had less of an impact on Africa as a whole compared to other regions [time will tell]
On Private equity model in Africa
- Private equity activity in Africa is less about “financial engineering” (i.e. using debt to generate huge returns like private equity houses in the US and Europe).
- The Private equity business model in Africa is about identifying unique opportunities, creating profitable companies and executing as quick as you can! Essentially first to market takes a big chunk!
- Relatively cheap financing is still available in Africa if aligned to infrastructure – IFC and AFD are standing by to finance the “right projects”
- Access to financing in Nigeria is harder today compared to 3 years ago given the issues that Nigerian banks are currently facing
- Banks in Francophone countries (e.g. Côte d’Ivoire) have tons of cash but the regulatory framework restricts how the cash can be deployed
- Challenging to depend on local weathy individuals for funds
- Pension funds remain small players in the Private equity in Africa. Only a number of countries (e.g Kenya, South Africa and Ghana) have pension funds which have asset allocation for private equity. In Nigeria, pension funds are banned from investing in private equity (really!)
On Exits
- Strategic buyers are “tight”. Currently focused on internal development and regaining financial flexibility – not buying assets
- Recapitalisation is harder to implement
- The IPO markets across continent remain open (particularly South Africa, Kenya, Ghana and Nigeria) – obvious exit route for companies of scale and profitable growth
