Har­vest­ing growth: The 10th An­nual Ven­ture Cap­i­tal As­so­ci­a­tion Con­fer­ence

The 10th An­nual Ven­ture Cap­i­tal As­so­ci­a­tion Con­fer­ence

RISKAFRICA Magazine - - CONTENTS - Sarah Bas­sett

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.

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