Africa’s private equity practitioners need different skills

PRIVATE equity deals in Africa are financed with far less debt than deals concluded in developed markets — and this means returns have to come primarily from actual profit growth as opposed to leverage.

“On average in Africa, only a third of unlisted investment capital comes from debt, whereas in the developed world it’s about two-thirds,” says Rory Ord, head of valuation services provider RisCura Fundamentals.

The main reason for this, he argues, is the small size of banks outside SA — “many of which are conservative in their lending practices and lack sufficient capital to participate in major deals”.

In addition, Ord says, African banks tend to make excellent returns at low risk from lending to their governments, so their appetite for riskier investments such as private equity has been somewhat blunted.

“The fiscal situation in a country such as Nigeria is excellent. With so much money flowing in from oil revenues, the government’s balance sheet is healthy, much more so than in developed markets.”

Typically, says Ord, the use of debt in private equity deals allows investors to leverage their investment and enhance their returns, as debt funding is cheaper than equity.

“If you’re an investor in Africa, you’re not going to get the return from the leverage that you would if you were investing in private equity in other countries. You have to rely on real growth in earnings to drive the increase in a company’s value when you finally sell,” says Ord.

This means that private equity practitioners in Africa need somewhat different skills.

“In developed markets, the focus is towards financial engineering skills such as gearing, structuring debt packages and optimising the capital structure of the deal. In Africa, on the other hand, private equity practitioners need to be good businessmen who get involved in the companies they invest in, assisting strategically, operationally and financially.”