The private equity landscape in Africa - CDC
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The private equity landscape in Africa - CDC The private equity landscape in Africa - CDC Presentation Transcript

  • Enhancing Development While Reaping EnviableReturns: Assessing The Private Equity LandscapeIn AfricaRichard LaingCEO, CDC Group plc28 February 2010
  • CDC – who we are• CDC, wholly owned by the UK Government, is the world’s oldest development finance institution. We have been investing in developing countries, including Africa, since 1948.• Since 2004, CDC has operated as a fund of funds. We commit capital to emerging market focussed private equity funds, which invest in private sector businesses.• Private sector businesses play a vital part in economic growth and development: they employ and train people, provide decent livelihoods, pay taxes, invest in research and development and build and operate infrastructure and services. CDC’s mission: to foster growth in sustainable businesses, helping to raise living standards in developing countries 2
  • CDC – our portfolioCDC portfolio value by region, 2009 • Through our funds, we have invested in 71 countries in the emerging markets, and across all industry sectors. • CDC has a strong focus on sub-Saharan Africa, Asia and Low Income Countries. • CDC has invested with 71 fund managers, 143 funds and approx 1,000 private sector businesses. • As at the end of 2009: – Net assets: £2.5bn CDC portfolio value by sector, 2009 – Total commitments of £2.9bn. – Total returns of £207m in 2009 – Average annual returns of 16% over the past five years. – 6% ahead of the MSCI benchmark on a three year rolling basis. 3
  • Africa’s macroeconomic outlook: Continued growth & resilience to the crisis2011 GDP growth forecast (% annual growth) OECD 2.3% Brazil 5.2% Russia 4.8% India 8.7% China 8.5% MENA ? 8.3%Sub-Saharan Africa 5.1% SSA excluding SA 6.0% Source: EMPEA 2010 4
  • Africa’s macroeconomic outlook: Continued growth & resilience to the crisis2011 GDP growth forecast (% annual growth) OECD 2.3% Brazil 5.2% Russia 4.8% India 8.7% China 8.5% MENA ? 8.3%Sub-Saharan Africa 5.1% SSA excluding SA 6.0% Source: EMPEA 2010 • SSA was able to combat the financial crisis thanks to improved macroeconomic fundamentals. • A number of reforms implemented across the sub-continent over the past two decades have resulted in improved current account balances, a fall in external debt (also aided by international debt relief) and relatively low inflation. In fact, many of these indicators are better in sub-Saharan Africa than in more advanced economies. 5
  • Africa’s macroeconomic outlook: Continued growth & resilience to the crisis2011 GDP growth forecast (% annual growth) OECD 2.3% Brazil 5.2% Angola 7.7% Russia 4.8% South Africa 3.4% India 8.7% Nigeria 5.7% China 8.5% Kenya 4.9% MENA ? 8.3% Ghana 17.5%Sub-Saharan Africa 5.1% DRC 6.9% SSA excluding SA 6.0% Source: EMPEA 2010 • SSA was able to combat the financial crisis thanks to improved macroeconomic fundamentals. • A number of reforms implemented across the sub-continent over the past two decades have resulted in improved current account balances, a fall in external debt (also aided by international debt relief) and relatively low inflation. In fact, many of these indicators are better in sub-Saharan Africa than in more advanced economies. 6
  • Which countries in Africa? EGYPT Population: 78.2m GDP (2010): $210bnLIBERIAPopulation: 4.3m DRCGDP (2010): $1.0bn Population: 66.7m GDP (2010): $12.6bn NIGERIA BOTSWANA Population: 156.1m Population: 1.8m GDP (2010): $206.7bn GDP (2010): $12.5bn SOUTH AFRICA Population: 49.9m GDP (2010): $351bn 7Source: IMF, World Economic Outlook, Oct. 2010. GDP is in current prices
  • Does the politics matter? • We are closely watching developments in Tunisia, Egypt, the rest of north Africa, Cote d’Ivoire and Sudan. • With 18 elections in 2011 in Africa and increasing food prices, we can expect social demonstrations to gain momentum in the continent. • We are watching particularly investments in the financial and the power sectors, where CDC’s exposure is concentrated. • Governance risk related to close links and relationship between politic leaders and business owners. • Local knowledge and experience is essential – to define investment strategies that protect investments from potential unrest and to take adequate measures to protect value of investments. 8
  • Does the politics matter? CDC’s investment in Cote d’Ivoire • In 1996, through its investment in Compagnie Hévéicole de Cavally (Cavally), CDC acquired 2,000 hectares of rubber plantation located in the Moyen Cavally region of western Côte d’Ivoire. At the time, CDC was still a direct investor. CDC’s investment has been managed by Actis since 2004. • CDC’s investment enabled the Cavally to build a modern rubber processing factory, which is an important source of employment in a remote rural region, with its 1000+ employees. • CDC was one of few foreign investors that remained active in Côte d’Ivoire following the coups détat in 1999 and 2002, and the subsequent civil war. • Despite the long periods of instability experienced in Côte d’Ivoire throughout CDC’s 11 year investment period, Compagnie Hévéicole de Cavally developed one of the most productive rubber plantations in West Africa producing a premium export product. • The plantation was sold in 2007 to a well-established tropical plantation business. Returns were in the range of 3x and 12% IRR. 9
  • Private Equity Fundraising: Africa vs. the rest of the worldGlobal PE fundraising 2001-2010 ($bn) 350 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 United States Western Europe Emerging Asia (ex-JANZ) LatAm & Caribbean MENA Sub-Saharan Africa • PE fundraising was severely hit by the crisis, both in developed and emerging markets. In the US it fell from a peak of $325.8bn in 2007 to $70bn in 2009. • Fundraising in SSA is still very small compared to other markets. Even at the peak in 2007-8, fundraising in sub-Saharan Africa was less than 1% of that in the US. 10Source: EMPEA 2010. Europe data are full year preliminary estimates
  • Private Equity Fundraising in Sub-Saharan AfricaSub-Saharan Africa PE fundraising 2001-2010 ($m) 2,500 2,000 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: EMPEA 2010 • PE fundraising in sub-Saharan Africa fell from a high of $2,241m in 2008 to $964m in 2009. • After the crisis, the recovery of fundraising momentum in sub-Saharan Africa was stronger than in many other emerging markets, including China, India and Russia, and comparable to robust performance seen in Latin America. 11
  • Shortage of capital in Africa and PE investmentPE penetration rates (% of GDP)1.50%1.00% 2008 2009 20100.50%0.00% UK US Brazil Russia India China South Sub- Sub- MENA Africa Saharan Saharan Source: EMPEA Africa Africa • Despite increase in fundraising and investment in the last decade, private equity investment in Africa remains at low levels. Outside South Africa, penetration rates are still very low. • Institutional investors from Europe and the US are very cautious, and require higher rates of return, based on an overly high perceived risk. In fact the main perceived risk factors (political instability, weak legal systems, corruption, etc), are comparable to those of other emerging markets. • Conclusion: there is huge capacity in the African market for higher volumes of PE investment. 12
  • What sectors in Africa? InfrastructureAfrica infrastructure gap ($bn)100 93.3 Spending requirement Existing expenditure Funding gap of $48bn pa 50 45.3 40.8 21.9 Most severe in power 18.2 16.2 and water supply and 11.6 9 9 7.6 sanitation 3.4 0.9 0 ICT Irrigation Power Transport Water supply Total and sanitation Source: AICD, 2008 • Sub-Saharan Africa lags behind other low income countries in all measures of basic infrastructure provision. The most severe deficits are in power generation, transport, telecoms (fixed lines). • There is a huge funding gap for infrastructure, of which part is due to inefficiencies, lack of maintenance, distribution losses, overstaffing but also to inadequate allocation of resources. • Efficiency improvements would save about $17.4bn pa. After potential efficiency gains, the funding gap is $31bn a year, 75% in power 13
  • What sectors in Africa? Consumer and the growing middle classShare of households by income bracket (% of households) Compound annual growth rate, 2000-08 >$20,000 18 25 3.5 $10,000-20,000 31 Discretionary 36 3.2 income $5,000-10,000 35 29 -0.8 $2,000-5,000 14 1.5 $2,000-5,000 <$2,000 9 2 1 2000 2008 -0.2 <$2,000 Source: McKinsey Global Institute, 2010 • The commodity boom explains only part of Africa’s growth in the last decade. Internal consumption is increasing, driven by favourable demographic trends: a growing and young population, and urbanisation. • Consumer facing sectors (consumer goods, telecom, and banking, among others) are already growing three times faster than those of OECD countries. • Africa’s households spent a combined $860bn in 2008, more than those in India or Russia. This is projected to rise to $1.4trn over the next 10 years if GDP maintains its current growth rate. 14
  • What sectors in Africa? Financial servicesFinancial inclusion (% of population) South Africa Namibia Formally included Botswana Semi formally included Informally included Kenya Excluded Tanzania Zambia 0% 20% 40% 60% 80% 100% Source: Finscope Africa, 2007 • Africa’ banking assets totalled $1.2tn in 2008, the same size as India. Financial reforms have enabled growth in the sector, at a higher pace than GDP. • New technology (e.g. mobile telecoms) is increasing formal financial inclusion. • However, access to the banking sector remains low. Banking services are expensive and a majority of African adults rely on informal services. The growing middle class is driving demand for consumer financial services (banking, insurance, mortgage lending and asset management). • Private sector credit is also low with the exception of the biggest economies. 15
  • Private equity investment in Africa: LPs perceptionFactors deterring LPs from beginning to invest in Africa Limited number of 60.0% established GPs Political risk 58.0% Weak exit environments 34.0% Challenging regulatory/tax 29.0% Scale of opportunities to 27.0% invest is too small Source: 2010 EMPEA/ Coller Capital EM PE Survey 16
  • Private equity investment in Africa – how we do it Tolerance for risk Extensive research Long term perspective Successful Local knowledge Best practice approach investing in Africa Diversified portfolio Growth investing Pioneering mentality 17
  • The link between financial and development performanceCDC’s portfolio in 2010 demonstrated a correlation between companies’ financial performanceand their ESG management. IFC’s Monitor newsletter made a similar observation in 2007. ESG management systems and portfolio company returns (mean IRR, %) Result: Correlation between good ESG management systems and 15% higher IRR at CDC portfolio 8 7.4% companies. 5.6% Explanation: Possibly generally better managed 4 companies. ESG management is a subset of company management.IRR 0(%) Next steps: Improved data over time and further (N=143) analysis. -4 For fund managers: CDC ESG Toolkit provides guidance for fund managers on identifying and -8 prioritizing ESG actions as part of their business plan -7.7% for portfolio companies. Poor Moderate Good“ Financial performance of IFC’s client companies is highly correlated with development outcome: over 97%of projects with satisfactory or better financial performance also have high development ratings, whereasonly 5% of projects with unsatisfactory financial performance achieve high development ratings” IFC October 2007CDC encourages its fund managers to identify ESG risks and include ESG improvements intheir business plan for potential investee companies. This is consistent with CDC’s InvestmentCode and CDC’s Toolkit on ESG which seek to implement ESG best practice over time. 18
  • CDC’s Toolkit on ESG for fund managers contains 14 Tools Relevant to all stages of investment cycle: Tool 1 Adding value through ESG improvements Tool 2 ESG policies and guidelines Tool 3 ESG considerations at each stage of the investment process Tool 4 Questions to assess a fund manager’s ESG management systems Relevant to specific parts of the investment process: Tool 5 Rating ESG risks Tool 6 ESG due diligence Tool 7 Environmental and social impact assessments Tool 8 Questions to assess a company’s ESG management systems Tool 9 Investment paper and action plan for ESG improvements Tool 10 Investment agreement Tool 11 Investment monitoring Tool 12 ESG reporting Tool 13 Information for the public: annual reports and websites Tool 14 ESG considerations for exitsCDC’s Toolkit provides tools aimed at integrating and achieving added value from ESGthroughout a fund manager’s investment process. It can be downloaded from CDC’s website:19www.cdcgroup.com
  • Private equity investment in Africa – CDC’s portfolio performance• The IRR of CDC’s total African portfolio between 31 Dec 2004 and 31 Dec 2009 was 25.2%.• This compares with returns of: • 14.1% from the Cambridge Associates Emerging Markets VC/PE Index • 9.7% from the Cambridge Associates US PE Index• As CDC only became a fund of funds in 2004, the majority of the realised returns come from the direct investments that CDC had made with its balance sheet prior to 2004 • Actis has been managing and exiting these investments on behalf of CDC • Between 31 Dec 2004 and 31 Dec 2009 these “legacy” African assets had an IRR of 40.0%• CDC has classed the riskiness of new PE fund 18% investments (ex-ante) in three groups: 16.0% 16% • Best of Breed I 14% (lowest risk – i.e. best-in-class funds) • Best of Breed II 12% 10.0% Net IRR • Frontier 10% (highest risk – e.g. first-time teams, 8% unproven strategies, new markets etc) 6%• As this chart shows, the risk/return relationship 4% 2.5% has held well. 2%(Caution: many funds are still in the early stages 0% of the “J-curve”) Best-of-Breed I Best-of-Breed II Frontier 20
  • Conclusion• Africa has buoyant underlying economic growth• This presents huge potential for private sector investing, especially in infrastructure and consumer based sectors• Africa presents significant opportunities for PE investment: • Valuations remain low, and returns are high, compared to all-time low yields in developed markets • There is little competing capital • Exit opportunities are increasing, due to domestic institutional capital growth (pension funds, insurance companies, etc) and increased buy-out appetite from strategic buyers• There is still opportunity for early mover advantage• Development impact and financial return go hand-in-handbut ………….• There are not enough fund managers and deal flow is limited• Avoid businesses too closely linked to governments• Deep local knowledge is necessary 21
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