Research

FT’s beyondbrics recently featured an article by Mike Casey, EMPEA Director of Consulting Services, on Africa’s private equity landscape. In the article, Mike shared insights from discussions at the recent UN Economic Commission for Africa’s Ninth African Development Forum, findings from the report Pension Funds and Private Equity: Unlocking Africa’s Potential and statistics from EMPEA on emerging markets private equity activity in the region. In our latest “Views from the Field,” EMPEA Africa Council Chairman Henry Obi continues the conversation on private equity in Africa, specifically in response to a few points from Mike’s original article. Henry serves as Chief Operating Officer at Helios Investment Partners, an Africa-focused private equity firm.

Please let me take the opportunity to make the following comments regarding some of the issues raised in the excellent research piece in the FT titled “Framing Africa’s private equity landscape in a pan-emerging markets context.”

“The biggest challenge LPs confront when evaluating private equity commitments to Africa is the limited number of established fund managers.”

This is true. However, limited partners (LPs) forget that private equity (PE) is still a very nascent asset class in Africa with very few managers who have gone through a full fund lifecycle. Currently, only development finance institutions and some savvy family offices attempt to seed first time managers. LPs need to be more daring and think outside the box. In addition, they need to be more imaginative about the type of manager backgrounds as we cannot all have PE experience prior to setting up a fund. They forget that the U.S. funds below started from backgrounds other than PE. LPs should be looking for diamonds—great people that will turn out to be great managers—in the rough rather than landmines!

• KKR – started out as investment bankers
• Clayton Dubilier & Rice – started out as seasoned industrialists
• Bain Capital – started out as consultants

“The Private Company Landscape – Is There Too Much Capital Chasing Too Few Deals?”

This depends on the region and the size of deals. Helios has hardly come across any private equity funds in any of its deals. When we bid for Shell’s retail assets across Africa, there was no PE player competing against us, and ditto for the Petrobras assets. Both deals were more than US$1 billion and none of them would have come up in the Bloomberg data. Africa is littered with many private family companies and African subsidiaries of multinationals that do not come up in the Bloomberg data. In addition, Africa is a very fast growing continent with very little infrastructure and services. This is seen as an opportunity by many PE funds in Africa to deploy large amounts of capital to provide these services and improve the infrastructure. We created two businesses providing infrastructure services in Africa from scratch that did not exist some years ago and would not have come up in the same Bloomberg data. Today, both companies, Helios Towers Africa and Helios Towers Nigeria, have revenues north of US$40 million. We have also invested a small sum in a company which may become the Alibaba of Africa. LPs need to extract themselves from the desktop data and fly to Africa to kick tires to see the opportunities first-hand. They cannot all wait for the quality of data to improve as it may be too late for outsized returns. Warren Buffet says, “Be greedy when others are fearful, and be fearful when others are greedy.”

“The Limited Partner Landscape – The Rise of Local Capital”

I truly hope that local pension funds will pour money into the PE asset class over time. However, for now, aside from pension funds in South Africa, they still remain reluctant to do so as a result of (1) lumpiness of the distributions as they prefer yield, and (2) lack of an awareness of the asset class. This is quite ironic as international pension funds are planning to increase their allocation to the asset class.

Participation of local pension funds in the PE asset class will be a great signaling effect and will encourage more international LPs to invest in the asset class.