Private Equity in Africa: A Postcard From Johannesburg

by Natalie Kolbe, Actis

“Africa is the next big thing”. We’ve heard it before. It is a phrase that has been spoken breathlessly in boardrooms across the globe, and shouted from the front pages of the world’s press for at least the last 18 months. Sitting here in Johannesburg in, I can tell them it is still true.

This is an exciting time to be working in private equity in South Africa. It feels like each month brings news of another multinational company moving in to the market. Meanwhile, the signs of development are all around us. Each time I take a trip to Zambia or Botswana, new coffee shops and retail outlets have opened, bigger advertising hoardings have sprung up, and the buzz of consumption is everywhere. The story of the emerging market consumer and their demand for products, services and domestic infrastructure is unfolding before our eyes.

It is worth noting that 60% of expected global spend on domestic infrastructure from 2005 to 2030 is forecast to be channeled to the emerging markets, with US$1 trillion earmarked for African infrastructure. For investors, opportunities lie in the infrastructure projects themselves, but also in the businesses which provide services to the sector.

Actis has tapped into this trend with its current investments in South African based firms, like Actom on the industrials side, Tracker in the consumer sector and Alexander Forbes in financial services. Actom provides manufacturing, distribution and contracting services to the electrical engineering industry; when we made the investment we realised this company would benefit enormously from the South African government’s expenditure on electricity infrastructure. Tracker is a vehicle recovery and telematics company. Alexander Forbes is plugging African consumers into financial services and currently has operations in twelve African countries.

Rising opportunities naturally encourage fierce competition amongst investors. Before the financial crisis there were multiple investors dabbling in South Africa; panning for gold, looking to find a good deal. Many of these were briefcase investors – flying in for a few days, and then flying back home. The downturn cleared this community away. Today, there is a new focus and a widespread realisation that if you are to succeed as an investor in Africa, you require a team on the ground. You need a local office staffed by Africans with the expertise and networks to operate in market.

The competition for differentiated deal flow will continue to intensify locally, just as it is in other emerging markets. Speaking with colleagues in Beijing who find it common to be competing at auctions alongside twenty other bidders, I can see that may well be our future in Africa soon too. Deep sector knowledge and the ability to originate deals from trusted relationships and long-standing credibility in market, significantly enhances competitiveness.

At Actis, Africa continues to be a core part of our success story with close to US$1.5 billion currently invested in 18 African countries. The trends we see in South Africa play out broadly in our other markets – the great rush of growth being driven by ever more sophisticated consumer needs. But just as the micro investment opportunities vary from country to country so too do the risks.

The collective perception international investors have of risk in Africa tends to lag behind reality: ongoing conflicts continue and many countries still suffer from political instability – the unrest in North Africa for example, while more recently security concerns in Nigeria and Kenya, have arisen from the activities of Boko Haram and Al-Shabaab respectively – but, on the whole the region is becoming more politically advanced and stable. Ten years ago, there were just nine democracies on the continent. Today, there are 35, and this number is rising.

Additional concern stems from macro-economic stability. Again, advances in this area seem to have been poorly acknowledged. African inflation in the 1990s averaged 22%; since 2000, it has averaged 8% - this is a remarkable achievement. Trade barriers are falling while central bank autonomy is rising. Foreign debt is low and reduced fiscal deficits could put some developed countries to shame.

I am optimistic for the future. Here in Johannesburg, we continue to shepherd our investments, driving value in each, and identifying opportunities for them to make the highest possible financial and non-financial returns, in this dynamic investment landscape.

Natalie Kolbe is a partner at Actis, the pan-emerging markets private equity specialist.