Harvesting growth: The 10th Annual Venture Capital Association Conference
The 10th Annual Venture Capital Association Conference
The 10th Annual African Venture Capital Association (AVCA) conference took place in Cape Town on 9 and 10 April. On the back of exceptional economic growth, a fledgling, but vibrant and growing African private equity market has emerged across the continent, and the industry is well positioned to take advantage of the favourable market conditions Africa now presents.
The conference gathered the industry’s leading fund managers, international development finance institutions, global and African institutional investors, consultants and advisers to discuss the current state of African private equity and expected developments, changes and growth prospects for the future.
The event provided a platform for the launch of the first Africa-focused private equity performance benchmarks; the release of key data on the African private equity landscape; highlighted how fund managers are driving value creation via private equity exits; and provided thought leadership on the legal and regulatory aspects of investing across Africa.
Exiting for growth
Sachin Date, private equity leader for the EMEIA Asea at Ernst and Young, presented the results of the Harvesting Growth study, the first study of private equity exits in Africa. A panel discussion with industry leaders followed on the topic of exits in Africa. With stock markets still small and relatively illiquid and intermediary networks incomplete, there is a perception that exits are hard to achieve and rare. Conducted by the African Venture Capital Association (AVCA) and Ernst and Young, the study suggests this number is higher than expected. The study tracked exit activity by private equity firms between 2007 and 2012 and recorded a total of 118 exits.
By sector, financial services was the most active, accounting for 23 per cent of exits. This is the result of the high volume of financial services investments completed in recent years, as countries such as Nigeria and Ghana have undergone banking reforms. However, the report notes that these exits also demonstrate the overriding investment theme in Africa; the rise of the consumer. As the region’s economies grow and disposable incomes rise, financial services become a more important part of the economic landscape and are therefore attractive to not only private equity investors but also strategic buyers looking for a foothold in new markets. The consumer theme is reflected in other active exit sectors, such as food and beverage (nine per cent) and telecommunications (eight per cent). Other categories included industrial goods (13 per cent), agriculture and forestry (nine per cent) and both technology and construction at six per cent respectively.
While 42 per cent of exits were in the more developed South African private equity market, the remaining 58 per cent were spread across regions where the industry is far younger. West Africa accounted for the second-highest proportion at 25 per cent; with East Africa, North Africa, and Southern Africa each accounting for 11 per cent of exits. Panelists noted that this was a positive finding, demonstrating that African private equity houses can not only source good investment prospects, but also have a focused eye on the exit.
However, panelists suggested that in many cases preparation for exits needed to begin earlier. From the very outset of the investment, private equity firms need to be preparing the exit strategies. Much like a prenuptial agreement, certain aspects should be discussed and clarified before an investment is even made.
ESG drives increased value
A key finding of the study, and one echoed by panelists, was that environmental, social and governance (ESG) improvements made during the investment period were key value drivers at the exit stage. “It is not just a ‘nice to have’, said Jacob Kholi, senior team member at The Abraaj Group Emerging Capital Partner, it adds real value.” It increases functionality at certain core levels and gives future buyers confidence as certain key risks are mitigated.
Governance is perhaps the most important aspect for this, with non-executive directors putting in solid financial reporting and protocols, ensuring that accounts are audited and that monthly reports are produced. The report reveals that where significant governance changes are made, the firms achieve almost twice the returns of companies where limited or no governance changes are implemented.
The future looks promising
Findings suggest the groundwork is laid for significant growth in Africa’s private equity industry. Recent significant growth rates are set to continue as Ethiopia, Mozambique, Tanzania, the Democratic Republic of the Congo, Ghana, Zambia and Nigeria are expected to be seven of the fastest-growing economies over the next five years (China, Vietnam and India make up the rest of the list).
More investors are still needed if the industry is to reach full potential. Continued development of Pan-African players will help attract more international capital to the region, said panelists. The creation of several sovereign wealth funds and continued development of pension funds investing in private equity should provide further sources of capital, particularly over the long term.
The overall outlook is extremely positive, concludes the report, with private equity well placed to become a significant enabler of growth across the continent.
Development Finance Institutions
Sentiments regarding the future of private equity in Africa were echoed by panelists from the continent’s leading Development Finance Institutions (DFI). Line Picard, chief investment officer at the African Development Bank, suggested that with the further development of institutional investors and pensions fund investments, DFIs may be able to move into new sectors, as fewer DFI investors are needed to meet the needs of one fund. “In future we may see two investors in one fund instead of seven, with the rest made up by institutional investors. This will mean a more diverse range of funds can get funding,” says Picard. Andrea Heinzer, investment manager and partner at the Swiss Investment Fund for Emerging Markets, noted that the goal of the DFI is to reach a point where it is no longer needed; when they reach that point they can look for new frontiers and markets.
However, panelists emphasised that it would remain important for a few DFIs to stick with managers into a fund’s second and even third round in order to give institutional investors confidence in the manager. Picard commented that while it was sometimes assumed that a manager would be fine after his first successful round, investors become uneasy if DFIs were seen to be pulling out, and assume there is a problem.
Other topics discussed at the conference included ‘Why Africa will win in the next decade’; African private equity versus global growth markets; institutional investor development; and whether the South African model is replicable in the rest of Africa.