The successful investor is able to recognise real risk versus its imposter – those shadows that melt away when confronted by clear logic and rational thought.
But in sub-Saharan Africa, the perception of risk continues to exert a strong hold. These fears tend to cluster around a few familiar issues: will I be able to gain a controlling stake? Will political instability undermine my investment? Will the government interfere and hamper my ability to operate? Is there sufficient legal process and protection? Can I successfully exit the investment?
To truly manage risk in sub-Saharan Africa you must challenge these issues one by one. For example, it is certainly true that if you have a non-control stake in a family owned company the risk of misalignment becomes very real, but control deals are possible in sub-Saharan Africa. Political instability in the emerging markets is well documented, but the political and regulatory climate is on an upward curve across the continent. Finally, in terms of exit, we see an increasing interest from trade buyers wanting to expand into well-run companies in Africa.
So, what are the real risks of private equity investing in sub-Saharan Africa? I would begin with the fundamental of any deal (and one which counts in all markets) – are you partnering with the right people? There is no short cut to this question: pain-staking, extensive due diligence and KYC referencing is required; this is made considerably easier if you have a local team on the ground.
Actis’s investment in Nigerian mattress and foam manufacturer Mouka shows the value of this local on the ground knowledge. Mouka was a family owned business, founded half a century ago in Kano, Northern Nigeria. Without a local team in Nigeria, Actis would have struggled to ever discover this business: it was not a big mover in the press, or a company being discussed in the boardrooms of London or New York. It was a local player with a great product, strong potential and an ambitious management team. Actis invested in Mouka in 2007, since then we have built up the business, introducing strong corporate governance, opening new factories and adding value at every stage of the operations. We have been able to make these changes because Actis investment professionals are there on the ground, meeting with management every week: advising and assisting the company as it grows, and mitigating potential risks at every turn. The example of Mouka reminds us that private equity is, at its core, a people business and one which is much easier to execute if you have the right combined team in place.
Building such successful teams is difficult, because of the very shallow talent pool. There has been much anticipation about the highly skilled African Diaspora returning home. I would temper this excitement; the Diaspora is not returning in anything like the numbers required and a lack of senior management expertise is the single most serious risk to private equity investing in sub-Saharan Africa today. The only way to outpace this risk is to cultivate strong and extensive networks which enable the deployment of all your contacts and market wisdom.
The really tough thing about management risk is that it is constant: even with covenants in place, management can walk at any time. Portfolio management teams often need replacing at inconvenient points in the investment process. The solution is to create a virtuous circle where you are completing extensive due diligence on entry, getting the right management team in place right at the start by using your contacts and influence, and then ensuring the team stays in throughout the life cycle of the investment.
Sub-Saharan Africa is the world’s last investment frontier and despite the risks, we remain very optimistic about its future as an investment destination for private equity. Entry prices for sub- Saharan African companies are significantly lower than in other emerging markets, there is limited competition, yet in certain sectors, we see GDP growth on a par with India and China.
There are one billion potential customers in Africa (including North Africa). The businesses that tap into the spending habits of those consumers have a tremendous growth story on their hands. Don’t let a perception of risk blind you to potential; properly managed the risk comes to be seen for what it truly is: an opportunity.
Peter Schmid heads the private equity group at Actis, the pan-emerging markets private equity specialist.