Can Private Equity boost African development

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PROPARCO is dedicated arm to private sector of AFD, the French DFI. - It issues a magazine which in it #2 tries to respond a question on Private Equity role in African development

PROPARCO is dedicated arm to private sector of AFD, the French DFI. - It issues a magazine which in it #2 tries to respond a question on Private Equity role in African development

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  • 1. Private Sector & Development proparcos magazine N° 12 / October 2011The Next Chapter for PrivateEquity in sub-Saharan Africa Can privateJennifer ChoiEMPEA 2Profitabilityand development hand in hand equity boost African development?Jeanne Hénin and Aglaé TouchardPROPARCO 6PE Funds Improving CorporateGovernance and Investor ClimateDavinder Sikand and Kiriga KunyihaAureos Capital Private equity divides opinion: for some it is a financial product like any 10 other; for others it is an effective development tool. Can Africa affordLiving with an investment to do without the financial opportunities it offers? This is the – the company perspectiveAlexandre Vilgrain EDITORIAL BY ÉTIENNE VIARD CHIEF EXECUTIVE OFFICER OF PROPARCOSOMDIAA 13 In just the last decade or so, private equity has carved out a new territoryKey figures for itself in sub-Saharan Africa. For the region this is a fantastic opportunityPrivate equity in figures to attract new investors whose funds are entrusted to specialist professional 16 management teams. For many companies – from major corporations to start-ups – it is an opportunity to access not only the long-term funding vitalThe transparency for their growth but also close support in terms of defining their strategy,challenge facing private equity improving their governance and accessing international professional networks.François d’AubertGeneral delegate of the To date private equity has remained over-focused on a few sectors andfight against tax havens geographic areas – yet increasingly it is venturing into new terrain, via specialist 18 funds, and developing innovative strategies. However, this development tool attracts criticism on numerous counts.Private equity and SMEs: And indeed its impact, which is undeniable, should not overshadow thean instrument for growth limitations of this investment model. Focusing on profitability – in itself justified,Jean-Michel Severino in terms of making the business sustainable and attracting investors – can leadInvestisseur & Partenairepour le Développement fund managers to neglect particular sectors, and SMEs in particular. It can instil 22 a short-termist bias. It can also lead some fund managers to distort the model by siphoning precious fiscal resources from national governments throughPioneer role of DFIs aggressive tax optimisation sub-Saharan Africa Yet what makes private equity effective is that it enables economic playersYvonne Bakkum and Jeroen Horsten to build long-term partnerships, selecting and supporting the businessesFMO 25 most capable of generating growth, employment and innovation. The challenge is therefore to make private equity in Africa a virtuous tool of growth and development, creating wealth for the largest possible number of people while also enforcing rigorous standards of governance and accountability. —
  • 2. 2 The Next Chapter for Private Can private equity boost African development? Equity in sub-Saharan Africa Private equity is well suited to the continent and is attracting an increasingly diverse spectrum of investors. It is true that its activities remain focused on a few markets, and that concerns remain regarding the reliability of local teams and that exit conditions are inadequate. Yet the process of diversification is under way, the region’s image is improving and the prices are genuinely competitive. Jennifer Choi This article provides an overview of the sub-Saharan African private equity oppor- Vice President of Industry and External Affairs, Emerging Markets Private Equity Association (EMPEA) tunity in the global context and touches on some unfolding trends in the fundrais- A s faith in the Western buyout model ing and investment environment in the faltered during the financial cri- region, concluding with a commentary on sis, emerging market private equity the investment outlook. cemented its place in investor portfolios and received greater allocations. The risk- Sub-Saharan Africa in the Global Context ier prospects of financial engineering, cou- As with private equity in developed markets, pled with worsening views of sovereign risk, there was a buildup of activity in sub-Saha- is prompting many investors to reconsider ran Africa leading up to the financial crisis. emerging markets. Sub-Saharan Africa is Private equity capital raised for investment among the under-penetrated high-growth in dedicated sub-Saharan African funds markets receiving more attention, boasting between 2006 and 2008 totalled “Private equity six of the 20 fastest-growing economies in USD 6 billion (EMPEA, 2011). capital raised for 2010, with growth rates averaging 5%, com- Even with dramatic increases investment in pared with 3% in OECD compared with earlier years (sub- dedicated sub- markets (IMF, 2011). Saharan African funds raised only Saharan African Private equity first took off USD 2 billion between 2000 and funds between 2006 in South Africa in the 1990s 2005), the scale of private equity and 2008 totalled following a wave of multina- in the region is modest in glo- USD 6 billion.” tional divestment and post- bal terms. Sub-Saharan Africa apartheid reforms. Over the accounted for less than four percent of the last two decades the field has USD 159 billion raised for all emerging mar- JENNIFER CHOI grown beyond South Africa, kets between 2006 and 2008, and less than Jennifer Choi manages to more than fifty firms a half percent of the USD 1.4 trillion raised EMPEA’s external and across the continent manag- globally by private equity funds during the public affairs activities, and ing billions of dollars. same period. Investment volumes during institutional partnerships. The scale of private equity this same period across 47 markets in sub- As its first research director, in the region remains mod- Saharan Africa totalled USD 8 billion, com- she built EMPEA’s industry statistics program and est relative to other markets, pared with the USD 136 billion invested publications. Previously, and its growth slowed during across all emerging markets, including the she was a consultant to the worst of the recent finan- the private equity industry, cial crisis. However, several FOCuS providing due diligence and new vehicles appearing in advisory services. Jennifer holds a Masters in Law recent months – from niche The mission of the Emerging Markets Private Equity Association and Diplomacy from the strategies in frontier mar- (EMPEA), an independent global membership association, is to Fletcher School at Tufts kets to sizeable pools of inter- catalyse private equity and venture capital investment in emerging University (USA) and a national capital managed by markets. EMPEA’s members include institutional investors and private equity and venture capital fund managers across developing B.A. summa cum laude in industry veterans – signal Economics and Political and developed markets. It leverages a global industry network to Science from Augustana that sub-Saharan Africa is deliver intelligence, promote best practices, and provide networking College (USA). poised for significant growth opportunities, giving members the edge in raising funds, making in the medium term. good investments and managing exits to achieve superior
  • 3. 3 USD 59 billion invested collectively in China, ing markets investor Aureos Capital4 raised India and Brazil alone. In 2010, sub-Saha- USD 381 million in February 2010 for its lat- ran Africa’s share rose to 6% of total capital est Africa-focused fund. raised for emerging market private equity – Recent developments point to the region’s an all-time high, and growth is expected to growing ability to attract capital from an continue (Figure 1). increasingly diverse group of investors and When scaled to gross domestic product the potential for eclipsing even pre-crisis (GDP), however, private equity investment fund sizes. The USD 900 million raised in activity in sub-Saharan Africa is compara- June 2011 by pan-African investors Helios ble across BRIC1 markets and greater than Investment Partners – the largest pan-Africa other regions such as Latin America and private equity fund ever raised – sources Central and Eastern Europe. Between 2008 70% of total commitments from outside and 2010, private equity-backed investment the development finance community, tradi- in sub-Saharan African countries accounted tionally African private equity’s most stal- for approximately 0.17% of GDP, versus wart investors. In the spring of 2011, glo- 0.16% for China and 0.10% across Latin bal private equity house The Carlyle Group America (EMPEA,2011). announced the launch of a fund dedicated to sub-Saharan Africa, targeting commit- Fundraising Trends ments of at least USD 500 million. South After bottoming in 2009, private equity fun- African private equity firms Ethos and Brait, draising rebounded in 2010, with improving responsible for two of Africa’s largest funds, investor attitudes towards Africa translating are expected to raise significant pools of new into meaningful fund commitments. Fund- capital over the next 12 to 18 months. Addi- raising for sub-Saharan Africa rose by 50% to tionally, a number of more discretely focused USD 1.5 billion in 2010, thanks to a handful and modestly sized funds are currently in the of sizeable regional funds. Industry veteran market and lining up commitments. Emerging Capital Partners’ third fund2, which closed at USD 613 million in July 2010, was Investment Trends at the time the largest pan-African growth Deal activity in 2010 nearly matched 2008 capital fund raised. Kingdom Zephyr Africa levels with 48 transactions, although capital Management3 captured USD 492 million in invested fell by 54%, pulled downwards by February 2010 for its second Pan African falling valuations,. the result of both a nar- Investment Partners Fund, and pan-emerg- rowing gap in expectations between buyers and sellers, and the disappearance of bank financing, which had previously made largerFIGURE 1: SUB-SAHARAN AFRICA’S PERCENTAGE OF transactions possible. The largest disclosedEMERGING MARKET PRIVATE EQUITY FUNDS RAISED sub-Saharan African private equity invest-100% ment in 2010 was USD 151 million, versus USD 175 million in 2008. 90% A small number of markets continue to 80% draw the bulk of investment activity, with South Africa, Kenya and Nigeria, drawing 70% 27 of 48 deals in 2010. However, invest- ments are becoming more geographi- 60% cally dispersed. South Africa’s share fell from 56% of deals in 2008 to 21% in 2010 50% (EMPEA, 2011). In the last 18 months, pri- 40% vate equity investors have backed compa- nies in Benin, Congo, Ghana, Liberia and 30% Madagascar and Tanzania. 20% 1 BRIC refers to the group of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development. 10% 2 Emerging Capital Partners (ECP) is an international private equity firm focused on investing across the African continent. It is the first private equity 6.4% 4.3% 6.4% group to raise over USD 1.8 billion to invest exclusively in African companies. 0% 3.4% 3.4% 3 Kingdom Zephyr Africa Management (KZAM) is a joint venture between 2006 2007 2008 2009 2010 Zephyr Management, L.P., a New York-based asset management firm, and Kingdom Holding Company, an investment vehicle headed by HRH Multi-region China India Pan-Asia funds, Southeast Asia Prince Alwaleed bin Talal Bin Abdulaziz Al Saud of Saudi Arabia. Both Zephyr and Kingdom Holding have been investing in African private MENA LatAm & Caribbean Eastern Europe & CIS Sub-Saharan Africa equity for over 15 years.Note: CIS: Commonwealth of Independent States (including Russia). 4 See the article by Kiriga Kunyiha and Davinder Sikand, p.10 in this issueSource: EMPEA, 2011 of Private Sector & Development. Private Sector & Development
  • 4. 4 The Next Chapter for Private Equity in sub-Saharan Africa Can private The private equity model is particularly FIGURE 2: PLANNED CHANGES TO LP EMERGING MARKET equity boost African well matched to the African context, appeal- PRIVATE EQUITY STRATEGIES, NEXT 2 YEARS development? ing to an increasingly international and Begin investing Expand investment Decrease or stop investing diverse class of investors. Equity markets offer 50% % of Respondents an alternative to institutions who might oth- erwise prefer to invest directly in companies 40% but are deterred by market opacity. Most Afri- can exchanges are concentrated in a few com- panies and sectors, e.g., financials and natural 30% resources, with minimal exposure to the grow- ing middle class, a fundamental growth driver 20% for the region that forms the core of most pri- vate equity fund strategies. 10% While the banking and extractive industries figure prominently in the private equity space, 0% more than half of transactions in 2010 were in other sectors, such as food and beverages -10% (e.g., South Africa’s Dewcrisp and Foodcorp), As ia pe ina i ia r NA il) Afr ica ) y CIS il ca rke Ind az ng raz uro Ch ME healthcare (Liberia’s Snapper Hill Clinic and rgi uth f Br a/ Tu So n A .B nE ssi e (ex cl. ara ter Em Ru (in -Sah Nairobi Women’s Hospital) and media/tele- r ca as he &E eri Ot S ub Am al ntr communications (Kenya’s Wananchi Group) tin Ce La - EMPEA, 2011. As the asset class matures, fund strategies are becoming more special- Note: CIS: Commonwealth of Independent States. Source: EMPEA/Coller Capital Emerging Market Private Equity Survey, 2011 ised, with niche strategies emerging, such as agribusiness (Phatisa, Chayton Capital, Silk Invest Food Fund), cleantech and renewa- flow is sourced on a proprietary basis, man- ble energy (Inspired Evolution One Fund), agement talent is all the more important. healthcare (Aureos Capital Health Fund) and Encouragingly, the financial crisis may result mezzanine finance (Vantage). in many Western-trained African profession- als returning home to fill this void. Outlook and challenge for Investors in An exit environment is another hurdle to sub-Saharan Africa attracting more capital. Apart from a small EMPEA’s most recent research on Limited number of private equity-backed public list- Partner (LP)5 appetite gives evidence of the ings, primarily in South Africa, trade sales region’s brand improvement, with 67% of LPs accounted for the bulk of exits in 2009 and surveyed viewing Africa as attractive in 2011 2010. Exit activity remains sluggish in 2011, and 39% planning to begin or expand their but signs of an improving exit environment are investments in sub-Saharan African funds emerging. Recent examples include the July (Figure 2) – Coller Capital and EMPEA, 2011. 2011 listing of Ethos-backed sporting goods Concerns – chiefly about the depth of the retailer Holdsport on the Johannesburg Stock fund manager pool – remain, as do residual Exchange, and the sale of Aureos Capital’s stake concerns related to political risk. Investors in Nigerian biscuit manufacturer Deli Foods to without exposure to the region indicated South Africa’s Tiger Brands. Secondary sales in both the 2010 and 2011 EMPEA/Coller remain rare due to the small field of assets ripe Surveys that a shortage of experienced fund for transfer between financial sponsors. managers inhibited their willingness to African fund managers hope for a larger invest in Africa (Table 1). Yet, over the last and more diverse ecosystem coupled with a decade, the number of fund managers active deeper pool of mature private equity-backed in Africa has grown fivefold. companies, translating into more options for Fund managers cite the human capital defi- exiting, including secondary transactions. cit – professionals to develop, screen, struc- ture and execute deals – as limiting their Pricing and Performance Expectations ability to exploit opportunities. The pool of One positive by-product of Africa’s thin skilled management within portfolio compa- domestic private equity market, whether nies, particularly CFOs, is also shallow. Yet due to shallow talent pools or challeng- another constraint facing fund managers is ing exit environments, is more competitive the absence of a robust intermediary network pricing. Assets in sub-Saharan Africa – with – advisors, bankers, brokers and data provid- ers – making sourcing and evaluating oppor- 5 Limited Partner is one of the co-owners of a business organized as limited tunities labour-intensive. Because most deal partnership who does not participate in the management of the
  • 5. 5 entry multiples in the high single digits Private equity in sub-Saharan Africa is not compared with double-digit multiples in new, but the region is certainly under-pene- markets such as China and Brazil – are con- trated. In fact, the nascence of African mar- sidered bargains by many investors. Prices kets may mean a greater upside for inves- are expected to rise, yet most fund manag- tors. Many African economies are less ers believe that good deals abound. correlated to the volatility wrought by debt According to the 2011 EMPEA/Coller Sur- in developed markets. Much of the fore- vey, investors with exposure to assets in casted growth will come from domestic driv- sub-Saharan Africa expect higher returns ers such as consumption and investment than do LPs without exposure, suggest- in energy. Private equity offers tremen- ing confidence in the abilities of experi- dous additionality to capital-starved com- enced fund managers to anticipate and panies at saner prices than are commanded manage the risks of investing in these com- elsewhere in emerging markets. While the paratively nascent private equity markets. data is not present to enable definitive While returns data on the whole of sub- claims about performance prospects, opti- Saharan Africa is not available, mism surrounding the trajectory for private “The pool of skilled a 2011 study by RisCura and the equity is by no means within South African Venture Capitalportfolio companies, Association showed that South particularly CFOs, African private equity out- is also shallow.” performed UK and US private equity funds over three-, ten-, and five- year horizons, with South African funds deliver- ing pooled net internal rates of return of more than 20% over a ten-year period, ver- sus roughly 13% in the UK and 8% in the US (RisCura and SAVCA, 2011). Two of the most active investors in the region - the International Finance Corporation (IFC) 6 An index created by Morgan Stanley Capital International (MSCI) that and the UK’s CDC Group - report that their is designed to measure equity market performance in global emerging African funds have outperformed relative markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance to emerging markets benchmarks such as of emerging markets. The MSCI EM Index consists of the following 21 the MSCI Emerging Markets Index6 (CDC), emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, or to their emerging markets private equity Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, portfolios overall (IFC). and Turkey, as of May 30, 2011. TABLE 1: DETERRENTS TO INVESTMENT, LIMITED PARTNERS’ VIEWS, NEXT 2 YEARS Limited Scale of Entry Weak exit Challenging Political risk number of opportunity to invest valuations environments regulatory/tax established GPs is too small are too high issues China 7% 7% 45% 14% 31% 24% India 14% 0% 58% 14% 8% 11% Other Emerging Asia 38% 19% 4% 35% 12% 19% Russia/CIS 25% 12% 2% 17% 30% 63% Turkey 28% 23% 5% 12% 7% 12% Central & Eastern Europe 19% 16% 5% 27% 11% 16% Brazil 11% 3% 31% 11% 11% 3% Latin America (excl. Brazil) 32% 19% 16% 10% 10% 23% MENA 39% 33% 2% 14% 12% 32% Sub-Saharan Africa 47% 24% 2% 14% 12% 39% Note: CIS Commonwealth of Independent States. Source: EMPEA/Coller Capital Emerging Market Private Equity Survey, 2011References / Coller Capital and EMPEA, 2011. Investor’s Views of Private Equity in Emerging Markets, Emerging Markets Private Equity Survey. // EMPEA, 2011. Database, FundLink. // IMF, 2011. WorldEconomic Outlook database, April. // RisCura and SAVCA, 2011. RisCura South African Private Equity Performance Report, February. Private Sector & Development
  • 6. 6 Profitability and Can private equity boost African development? development hand in hand A question frequently asked is whether profitability is the only criterion to be taken into consideration when private equity is evaluated. By itself, profitability is not an adequate basis on which to assess the effectiveness of private equity. The questions surrounding investment funds go beyond merely securing the required profitability: private equity can also mobilise additional investments and play a key role in developing local economies. But alongside this tangible and quantitative impact, private equity also has a qualitative impact, and while it is not yet systematically measured, it represents an opportunity to make private equity a tool for development in Africa. Jeanne Hénin and Aglaé Touchard see them as a way of boosting the impact of Evaluation officer, PROPARCO their funding, by providing indirect sup- Senior Investment Officer, PROPARCO port to large numbers of businesses, and as a means of influencing the governance and T he arguments against private equity strategy of these businesses. Beyond its func- and investment funds follow a well- tion as a simple funding mechanism, private trodden path: its critics argue that equity can help develop long-term local eco- this funding mode is geared solely to secur- nomic networks and support the transition to ing short-term returns for investors at the inclusive and sustainable business models. expense of the entrepreneurs. This means, Analysing PROPARCO’s equity portfolio the argument goes, that investment funds in sub-Saharan Africa will help to quantify actually create instability for businesses and these impacts and identify ways of maximis- also facilitate tax evasion, since the funds are ing them (see Box). frequently based offshore. It is, however, no coincidence that private The sine qua non of profitability equity and investment in funds form an inte- Profitability is a sine qua non of developing gral part of the range of tools available to private equity. The assumption that it plays development finance institutions (DFIs). DFIs only a limited role has long acted as a brake on the development of a mode of funding that has become more prominent over the past JEANNE HÉNIN AND AGLAÉ TOUCHARD few years. The debate has, however, moved Jeanne Hénin joined After five years spent working on: African private equity, long provided by PROPARCO’s Environmental, in investment banking (with Social and Impacts Unit in Rothschild&Cie) and in strategic development finance institutions, now holds 2010, where she works on consulting (with LEK Consulting), its own with other funding mechanisms. evaluating and measuring Aglaé Touchard joined the French Measuring the yield from equity is, however, the development impact development agency AFD in 2006. particularly difficult in sub-Saharan Africa, of projects. Graduated After initial experience in the since analysts use indicators from the devel- from EDHEC, before joining Risk Department, she has for the PROPARCO, she worked for past three years been involved oped world that do not yet, unfortunately, two years on implementing with capital investments within reflect the situation in developing countries. It employability projects in the Private Equity Division of may, therefore, be helpful to consider the port- Cambodia, followed by five PROPARCO, focusing particularly folios of three development finance institutions years in Ernst & Young’s on the renewable energy sector. that have historically been active in sub-Saha- Sustainable Development She has qualifications from Department. three prestigious Paris-based ran Africa – CDC in the United Kingdom, FMO There, she developed institutions, the Institut d’études in the Netherlands, and France’s PROPARCO. evaluation and advisory politiques (now Sciences Po), the The global internal rates of return (IRRs, both services for the social and École supérieure de commerce societal performance of (Paris School of Management), businesses based in developing and the Université de Paris 1 It is very difficult to compare the internal rates of return of different investors be- cause the reported figures cannot be verified and there is substantial variation in countries. IX-Dauphine. She has also been methodology (in particular in terms of: (i) the scope of equity held, either in the in- lecturing at Sciences Po since 2006. vestment phase or liquidated, (ii) inclusion of the remuneration of the manager as a gross or net IRR, and (iii) the method used to assess latent added value)
  • 7. 7 FIGURE 1: QUANTITATIVE IMPACT OF BUSINESSES BENEFITING FROM INVESTMENT FROM PROPARCO’S FUNDS EQUITY PORTFOLIO IN SUB-SAHARAN AFRICA Sub-Saharan Number of Number of Number Average annuel Contribution Average annual growth Average annual Africa funds businesses of jobs preserved growth in turnover to state revenue in earnings before growth in employment receiving funding or created (in %) (million euros) interest and taxes (in %) PROPARCO 25 229 50 000 +16,54%** 230* + 12%** + 11%** (2010) *EUR 230 million represents the contribution to state revenue over the last financial year by the 87 businesses in the sub-Saharan Africa portfolio which had reported this figure as at 31.12.2010. ** Analysis of 53 businesses in the sub-Saharan Africa portfolio as at 31.12.2010 for which historical data are available. Source: PROPARCO, 2011 actual and potential) on sub-Saharan Africa ple, that for every pound sterling invested in funds are good at between 14% and 23%.1 equity, the same amount is invested by other In fact, their average profitability is better than development finance institutions, while a fur- in France, where – according to figures pro- ther GBP 2.70 is contributed by private inves- duced by the French Private Equity Association tors, increasing the initial investment to a AFIC2 – the net internal rate of return at end- total of GBP 4.70 per pound (CDC, 2010). 2010 was 9.1% (AFIC/Ernst & Young, 2011). For businesses in sub-Saharan Africa, pri- Since 2004, IRRs in France reported by AFIC vate equity is an invaluable source of have ranged from 8.3% to 14.7%. finance: although local financial markets are In terms of the average multiple,3 another constantly improving, access to finance – profitability indicator, PROPARCO’s port- and particularly to equity, which is the key folio in sub-Saharan Africa yields 1.8x on to ensuring growth – remains a major issue “Equity has an equity being managed or dis- for African businesses. economic, social and invested, a higher multipleenvironmental impact than that achieved in other The quantitative on local economies.” PROPARCO intervention zones impact on local development (1.5x in Asia and 1.2x in the Private equity also contributes to develop Middle East and North Africa region). While local economies. To gauge its impact, the creation of long-term value is greater in PROPARCO has strengthened funds portfo- sub-Saharan Africa, though, investments are lio monitoring with a systematic reporting of also held for longer than elsewhere, particu- the results of funds’ investees companies. To larly since the African markets are less liquid do this, it uses quantitative indicators relat- than, for example, those in Asia (Figure 1). ing to non-financial issues (Table 1). Its This demonstrated profitability is beginning to attract a growing number of private and 2 Based on a survey of 475 funds with total assets of EUR 38.6 billion (between 1988 and end-2010). local investors. For example, the Develop- 3 The average multiple on invested capital measures cash inflow against cash ment Bank of Southern Africa (DBSA) has outflow but does not take into account the temporal dimension of IRR. noted that the contribution of development finance institutions to the equity they finance FIGURE 1: TYPICAL LIFE CYCLE OF A PRIVATE EQUITY FUND declined from 54% between 1995 and 2000 Investment phase Maturity / liquidation phase to 36% between 2005 and 2009 (Mamba, 2010). The DBSA also notes that local inves- Development phase tors, too, are contributing more to the funds Calls for funds Distributions in which the Bank has invested, their share Internal rate Cash flows/yield of return from rising from 30% between 1995 and 2000 to private equity 52% between 2005 and 2009. This growth is a good sign: Africa’s image is improving and it is becoming more attractive to the poten- 1 2 3 4 5 6 7 8 9 10 years tial capital investors its businesses need. Investment Development Maturity / liquidation phase phase phase The economic and financial impact Year 1 to years 4 or 5 Year 3 to year 8 Year 8 onwards One of the key roles played by equity funds is (typical situation) (typical situation) (typical situation) their ability to bring with them a wide range Capital call Initial investments Most investments and paid in capital mature have been liquidated of investors keen to spread their risk. This Investment Exit from Some investments enables development finance institutions or in targeted businesses mature Investments still remain to be liquidated Investors remunerated sponsors to act as catalysts by mobilising addi- tional sources of capital, particularly from for- Additional investments eign investors. CDC has calculated, for exam- Source: HSBC Private Sector & Development
  • 8. 8 Profitability and development hand in hand Can private analysis shows that the 229 businesses setting up committees to monitor activ- equity boost funded by its private equity funds portfolio African ity, establishing performance indicators, development? in sub-Saharan Africa employed 50,000 peo- or monitoring budgets. The impact is even ple for both skilled and unskilled labour. For greater where the investor has a majority those companies that reported data, work- shareholding or where he is investing in force grow by an average of 11% a year. a start-up that is still structurally under- In terms of economic activity, average annual developed. In such cases, the investor can growth in turnover has been 16.5% and the boost development of the business, for average growth in earnings before interest example by putting forward key managers and tax (EBIT) 12%.4 The pattern and scale of from within his own networks. growth in these businesses varies The presence of development finance institu- “Private equity meets according to the stage they have tions means that investment is increasinglya specific funding need reached in their development, the being used as a vector for improving environ- that neither the banks country in which they are located, mental and social (E&S) performance. Beforenor the equity markets their size, and the sector within they make their investments, management nor microfinance which they operate. Higher turn- teams assess each business’s main E&S risks, institutions are over is noted in the countries of identify ways in which they can be miti- currently satisfying.” East Africa, for example. gated, and set out action plans for helping This twin growth – a higher pay bill and a the business reach compliance with national higher level of economic activity – also and international standards. These improve- means businesses make a more substan- ments also act as levers for boosting per- tial contribution to state revenue: the formance in other areas: acquiring certifica- 87 businesses in the sample providing tion can, for example, open up new markets, this information contributed more than while reducing energy consumption helps to EUR 230 million in taxes to domestic gov- drive down overheads. ernments in the countries in which they were based during the last fiscal year. How can the impact Comparison with other geographical regions, of private equity be maximised? including France, highlights the greater If private equity is to make a greater contri- impact that private equity has in Africa than bution to developing the continent of Africa, in Europe, where businesses have been harder then high-quality management teams need hit by the economic and financial crisis.5 The to be convened and consolidated that are able added value of a management team in sub- not only to structure and support businesses Saharan Africa is also felt both in increased but also to embed the development criterion earnings and in improved business profita- as a key objective for investment. bility. In more mature markets, such as the Ultimately, however, the tried-and-tested French market, by contrast, the added value criterion of profitability is based on the qual- tends to focus more on financial leverage or ity of the management team. A good team bargaining on the purchase or exit price. should have good operational skills. Creat- ing value in sub-Saharan Africa takes place The qualitative largely through the lever of growth, unlike added value of management teams in European markets, where it relies heav- Beyond these quantitative benefits on ily on the lever of debt and on cost rational- local economic development, though, pri- isation. The organisational skills of the fund vate equity also offers an effective lever for manager therefore become more important value creation within a business. As share- than skills in banking syndication, which are holders, management teams can instigate more highly valued in more mature markets. good management practices, good gov- The local profile of fund managers is also ernance arrangements, more appropri- particularly vital for success in sub-Saharan ate organisation, more transparent finan- Africa, given the greater significance of infor- cial reporting, and more efficient human mal networks there than in other parts of the resources. This added value is particularly world. Finally, it is also important to be able marked in sub-Saharan Africa, where busi- to form partnerships with investors, entre- nesses frequently still operate informally preneurs and other parties involved. or are based on family structures. Some management teams are instigating finan- 4 EBIT reflects net turnover minus operating costs, such as salaries, social secu- rity contributions, materials, energy, and so on. cial reporting arrangements geared specif- 5 AFIC, study by Ernst & Young 2010: as at 31.12.2009, 848,954 jobs in the ically to improving corporate governance, 1,268 businesses receiving investment funds from 213 private equity funds. The dynamic analysis of growth in the labour force and in turnover carried including such measures as increasing the out in France between 2008 and 2009 highlights a 5.9% decline in turnover in number of businesses subject to auditing, France and a 1.8% contraction in numbers employed over the period.
  • 9. 9 A high-quality team is also a team able to sup- as type of business, level of maturity of the port good governance and improvement in a business (start-up, growing business or turn- business’s environmental and social perform- around, for example), quality of employment, ance. As a result, some funds make technical integration of populations excluded from eco- assistance envelopes available to businesses nomic opportunities, or sectors affected (for to strengthen specific aspects of their man- example, social sectors). agement or organisation. 43% of the investee Moreover, there are still no standardised tools companies surveyed within PROPARCO’s sub- for measuring such impact, which may be Saharan Africa funds portfolio had their com- reported in very different ways by management pliance with international environmental and teams. For example, one of the first projects social standards evaluated before investment carried out by the Global Impact Investing was made, and all these businesses reported Network,6 through the ‘Impact Reporting and that they had received support to improve Investment Standards’ initiative, involves their performance in these areas. defining a standard for measuring the social Where local development is considered as impact of an investment on the investor. important as financial indicators, it shifts to In contrast to their public image, private being one of the main objectives of invest- equity funds can be major vectors for devel- ment. A number of specific development opment in low-income countries. Impact on objectives need to be defined and assessment development and financial profitability are tools need to be developed in order to eval- certainly not mutually exclu- uate results transparently through a report- sive. The opposite is true, in “The 229 investee ing standard or by means of an external eval- fact: profitability enables sus- companies funded uator. Governance should also be structured tainability of business and by the PROPARCO’s to achieve these objectives. means that the reach of devel- sub-Saharan Africa There are a growing number of examples of this opment can be maximised but funds portfolio happening. The Africa Health Fund, for exam- also that new investors can be portfolio have ple, which was set up to develop high-qual- recruited. Development organ- contributed to create ity and affordable health care for populations isations have a greater part to or preserve more in sub-Saharan Africa, especially those at the play than ever in terms of pro- than 50,000 jobs.” bottom of the income pyramid has linked fund moting environmental and social performance managers’ remuneration to achieving this spe- and boosting the transition to sustainable and cific objective. Governance has been supported inclusive economic models. They also need to by external evaluation of the targets for popu- fulfil the function of catalyst to cover sectors lations affected by the businesses. and countries that investors have neglected, Effective measuring of impact has become sometimes because they do not know the area one of the key issues involved in boosting the and consider it still to be a risk. effects of private equity in sub-Saharan Africa. Reporting of indicators has limitations and 6 The Global Impact Investing Network (GIIN) brings together about 20 orga- nisations, including banking institutions (such as JP Morgan and Citigroup), does not by itself ensure that all the relevant alternative investment funds (such as Acumen), and philanthropic foundations, qualitative data are taken into account, such including the Bill & Melinda Gates Foundation and the Rockefeller Foundation. ANALYSIS OF EQUITY IN THE PROPARCO PORTFOLIO The 25 funds making up PROPARCO’s and FISEA’s1 Third, the geographical location of the businesses financial services – banking, insurance and portfolio in sub-Saharan Africa as at 31 December highlights their concentration in the English- leasing – and in distribution, services to 2010 provide capital for 229 businesses. Four main speaking countries. 75% of the businesses business, the agrifood sector, and transport. characteristics can be identified. First, most of benefiting from investment are located in just However, sectors, such education or healthcare, the businesses benefiting from investment are ten of the 29 countries of intervention2 (excluding are also represented. mature: the average investment is EUR 5.3 million, multi-country investment): in descending order which shows that development of these of value of investment, these are Nigeria, South businesses is well advanced. Second, however, Africa, Kenya, Ghana, Rwanda, Tanzania, Uganda, 1 FISEA is an investment fund making equity investments in sub- Saharan Africa and was set up in 2009. With EUR 250 million in this average figure conceals a wide diversity, Ivory Coast, Cameroon and Senegal. Moreover, funds, it is held by the Agence Française de Développement (AFD) spanning everything from large companies and just under half (47%) of the businesses funded are and managed by PROPARCO. infrastructure projects to micro-businesses (for located in the first four of these countries. 47% of 2 The countries covered by funding are: Benin, Botswana, Burkina example, three funds have an average investment the business funded are located in poor countries. Faso, Cameroon, Chad, the Comoros, the Democratic Republic of Congo, Djibouti, Gabon, Ghana, Guinea, Ivory Coast, Kenya, Libe- of EUR 250,000). Accordingly, each of the Finally, analysis of the portfolio reveals a ria, Madagascar, Mali, Mauritius, Namibia, Niger, Nigeria, Rwanda, businesses benefiting from investment employs sectoral concentration. The businesses funded Senegal, South Africa, South Sudan, Tanzania, Togo, Uganda, an average of 300 people. operate mainly in growth sectors, such as Zambia, and Zimbabwe.References / AFIC/Ernst & Young, 2011. Performance nette des acteurs français du Capital Investissement à fin 2010, study, 1 June. // CDC, 2011. Annual Review 2010, report. // Mamba, G., 2010. The ChangingProfile of Investors in African Private Equity, EMPEA Insight, Special Edition, Private Equity in sub-Saharan Africa, November. / Wilton, D., 2010. A Comparison of Performance Between First Time Fund Managers & EstablishedManagers Moving Into A New Market. How Important Is Track Record?, IFC, 15 September. Private Sector & Development
  • 10. 10 PE Funds Improving Corporate Can private equity boost African development? Governance and Investor Climate While fund managers may influence public policy geared towards improving the investing environment, they make a more significant impact by improving portfolio companies’ governance standards. This is because the resulting improved performance is transmitted to other corporate entities and entrepreneurs emulating them to replicate success. With increasing acceptance of private equity capital, the probability of best practices being adopted greatly increases. Davinder Sikand et Kiriga Kunyiha emerging economies. Lobbying local autho- Deputy CEO, Aureos Capital rities and improving corporate governance Kenya Investment Principal, Aureos Capital contributes toward improving the investment climate. Private equity funds, as a key compo- A n improved investment climate is nent of a diversified financial environment, viewed as a key component of foste- also play a vital role. As providers of capital to ring economic growth and reducing businesses in emerging markets, private equity poverty. Studies have demonstrated the posi- funds play an active role. They work towards tive correlation between good governance improving governance standards to optimise and economic growth. “Accelerating growth the management of and return on investments and poverty reduction requires governments made, which, in turn, fosters greater invest- to reduce policy risks, costs, and the bar- ment flows to the economies concerned. riers to competition facing firms of all types – from farmers and micro-entrepreneurs to The Reform Dividend local manufacturing companies and multi- in Challenging Environments nationals” (World Bank, 2005). While redu- As seen in Table 1, from the 2011 World Bank cing public sector governance risk in deve- Doing Business Survey, sub-Saharan Africa loping countries is important, private sector pose challenging operating environments. governance cannot be underplayed. The des- However, this snap shot hides the true picture tabilising effect of deficiencies in corporate of the trend on the continent. After imple- governance is counterproductive to econo- menting structural adjustment programs in mic development. The decisions, conduct the 90s, governments today acknowledge and operations of private sector entities have that while a stable macroeconomic environ- serious implications, as observed in the 2009 ment is necessary to accelerate growth, it is global financial crisis. not sufficient. Governments recognise the The private sector’s role is increasingly viewed role played by the private sector and have, as a as a critical component of the development of consequence, become more receptive to crea- ting business-friendly environments. Evi- DAVINDER SIKAND ET KIRIGA KUNYIHA dence can be seen in countries like Rwanda, a global leader in business regulatory reforms Davinder Sikand is Aureos Kiriga Kunyiha is an Capital Deputy CEO and Regional Investment Principal as recorded by Doing Business in 2008/09, Managing Partner for Africa. based in Nairobi. He joined which attracted around USD 1.1  billion in He has been with Aureos since Aureos in 2003 and has over investment, 41% more than in the previous its inception, 2001, having eight years private equity year, in the midst of the global economic cri- 25 years of private equity and experience, focusing on deal sis (World Bank, 2011). Despite such impro- investment banking experience. origination, structuring, Previously, Mr. Sikand worked execution, monitoring and vements, substantial progress still needs to at Drexel Burnham Lambert, exit facilitation in East be made to transform the continent into a Financial Security Assurance and Africa. He holds a BSc. in preferred investment destination. PricewaterhouseCoopers. He holds a Economics from Queen While funds may be limited as catalysts Masters in Business Administration Mary and Westfield College, for influencing change in public gover- (MBA) from the Kellogg Graduate University of London. School of Management, nance, they are beneficiaries of the chan- Northwestern University (USA). ging environments, as evidenced by new and renewed investor interest in
  • 11. 11TABLE 1: REGIONAL AVERAGES IN PROTECTING INVESTORS INDICATORSStrenght of investor protection index (0-10) Ease of shareholder suits index (0-10) OECD hight income 5.9 6.0 Eastern Europe & Central Asia 6.1 6.2 Eastern Europe & Central Asia 4.7 5.5 Middle East & North Africa 3.3 3.4 Middle East & North Africa 4.5 4.8 OECD hight income 6.9 6.8 East Asia & Pacific 5.2 5.3 East Asia & Pacific 6.0 6.3 Sub-Saharan Africa 4.2 4.4 Sub-Saharan Africa 4.9 5.0 South Asia 5.0 5.0 South Asia 6.3 6.3 Latin America & Caribbean 4.9 5.1 Latin America & Caribbean 6.0 6.0 5.1 5.7Extent of disclosure index (0-10) Extent of director liability index (0-10) Eastern Europe & Central Asia 4.9 6.3 Eastern Europe & Central Asia 3.1 4.0 Middle East & North Africa 5.7 6.3 Middle East & North Africa 4.4 4.6 OECD hight income 5.7 6.0 OECD hight income 5.2 5.2 East Asia & Pacific 5.1 5.2 East Asia & Pacific 4.4 4.5 DB 2006 DB 2011 Sub-Saharan Africa 4.7 4.8 Sub-Saharan Africa 3.1 3.4 South Asia 4.4 4.4 South Asia 4.4 4.4 Latin America & Caribbean 4.0 4.1 Latin America & Caribbean 4.8 5.3 2010 global 5.3 4.4 averageNote: The data sample for DB 2006 (2005) includes 174 economies. The sample for DB 2011 (2010) also includes The Bahamas, Bahrain, Brunei Darussalam, Cyprus,Kosovo, Liberia, Luxembourg, Montenegro and Catar for a total of 183 economiesSource: World Bank – Doing Business, 2011dedicated to the region. According to the ber of concerned sector participants, lobbiedEmerging Markets Private Equity Asso- authorities to change the selling method. Inciation (EMPEA), between 2006 and 2008 2009, the Kenya Bureau of Standards gazettedsub-Saharan private equity funds raised the new standard of selling by weight.USD 6.2 billion and invested USD 7.7 billion,which was substantially higher than at any Private Sector Governance Leading the Waypoint in history, showing further evidence of “The governance of companies is morethe reform dividend (EMPEA, 2010). important for world economic growth thanFurther, private equity funds can significantly the government of countries”. These wordsimpact the investment landscape within an of James Wolfensohn, president of the Worldeconomy through their activities. This can hap- Bank 1995-2005, emphasise the importancepen either directly through consultation with of the governance of corporate entities instakeholders, through portfolio companies or today’s world. Over and above, the macroeco-indirectly as members of private sector groups, nomic consequences of failures such as Leh-like the African Venture Capital Association. man Brothers,2 the private sector plays a lar-The Acacia Fund1 experience illustrates impro- ger role in our economies than ever before.ved local regulations through consultations Globalisation and deregulation have openedwith stakeholders. It formalised private equity up growth opportunities for companies butin Kenya by obtaining government recogni- also increased complexity and risks. Thesetion for private equity as a distinct financial opportunities and risks are not limited byinstrument. This formed the basis of new size or geography. African businesses areregulations for venture capital, introduced by also subject to the same reward/risk issues,the Kenyan Capital Markets Authority. with small- and medium-sized enter-Moreover, as mentioned, private equity fundmanagers can also improve quality standards 1 Established in early 1997, with a total committed capital of USD 19.6 million, the Acacia Fund made equity and quasi-equity investments in well-managedthrough lobbying via a portfolio company as Kenyan SMEs which demonstrated strong potential for growth. By the end ofexperienced in Kenya, where legislation gover- January 2003, the fund had invested USD 15.6 million in 18 companies. The fund has taken minority stakes in businesses across a diverse range of sectors.ning building codes and standards was positively 2 Before declaring bankruptcy during the financial crisis, in September 2008, Leh-influenced and changed. An area where safety man Brothers Holdings Inc. was the fourth-largest investment bank in the USA.standards had not been adequately addressedwas the sale of structural steel for buildings. Prior FOCuSto 2009, the sale of structural steel was done “bypiece” and not “by weight”. Without a defined Aureos Capital is a private equity fund management companysafety standard policy, the weight consistency specialising in expansion and buy-out capital for small to mediumwould vary, and some manufacturers would deli- size enterprises in Asia, Africa and Latin America. Since 2001, Aureos has increased its funds under management toberately undersize, compromising the structu- USD 1.3 billion, managed by over 90 investment professionals inral integrity of the steel. Athi River Steel Plant, its 28 offices worldwide. Investors include financial institutions,a steel recycling company that is part of Aureos development finance institutions, pension funds, sovereign wealthEast Africa Fund’s portfolio, along with a num- funds, fund of funds, family offices, and high-net-worth individuals. Private Sector & Development
  • 12. 12 PE Funds Improving Corporate Governance and Investor Climate Can private prises from Kenya to Senegal yearning manage each risk factor. A general services equity boost African to expand from a single-country presence business does not face the same level of risk, so development? to regional/pan-regional operations. As a it would not require the same level of oversight. result, management of these operations has Striking the balance between practicality and become even more complex and can no lon- effectiveness is the key. Having worked with ger be the preserve of a principal/owner. numerous businesses across various sectors, The key feature of sound governance is that it fund managers are well positioned to know what produces better resource allocation outcomes works given the business and market condi- as a result of better management of resources. tions. So as companies commence their journey This reduces corporate risks, increasing access to of scaling up, fund managers can match inter- finance, and attracts larger investments into these nal controls and governance structures with the companies. Many research projects have shown complexity of the business. Good governance is that sound governance practices are essential to about going beyond the basic measures requi- establishing an attractive investment climate. red to sustain success. It is about paying real attention to building the organisation’s culture The Leadership Role of PE Fund Managers and capability. It is about ensuring that the lea- Fund managers play a vital role in the gover- dership has all the modern managerial disci- nance culture of investee companies, as they plines in place, and that a clear, concise strategy are an important aspect of the value creation has been developed and agreed by the board, process. While most fund managers unders- and is implemented by management. Progress tand the importance of strong governance, must be monitored and measured against a set this should not be taken for granted. Empirical of well-defined and agreed matrices. evidence from emerging markets has shown that investors place a high premium on well- Technical Resources for Staying on Track governed companies, resulting in better exit Improvement is nothing if it cannot be mea- values. Fund managers are especially interes- sured on an ongoing basis. In addition, per- ted in governance because it promotes value formance indicators also have to capture more creation, which otherwise could not occur. than just financial indicators. To steer a com- The other point to note is governance, only forms pany in the right direction, the board needs to the “G” in Environmental, Social and Gover- ensure that there are processes in place ena- nance strategy. There also has to be a strong bling relevant disclosure on matters such as emphasis on environmental and social practices adequacy of internal controls or assessing the in order to build great businesses, lower risks level of risk a company is taking. and reduce potential liabilities throughout the The increasing complexity of managing busi- life of the investment, right through to exit. nesses means that a larger amount of informa- tion is required to ensure correct and timely dis- Good Governance, Beyond the Words closures. This has serious implications for how “No process of box ticking will overcome the fun- data is gathered and processed. To remain rele- damental dysfunctionality of a board of directors vant, companies have to look at enhancing their flowing from inadequate expertise on the part of management information/reporting systems directors, an over-compliant board, or an excessi- and align them with the performance and sus- vely dominant chairman or CEO. The functiona- tainability objectives of the business. The cost lity of a board cannot be achieved solely through implications and skill requirements may be out prescriptive rules, but requires the right mixture of the reach of typical medium-sized firms in of personalities, expertise, commitment and lea- Africa, which is why fund managers utilise dedi- dership” (Robins, 2006). Being on a Board of cated technical resources to fill the gaps that Directors of the investee or establishing a sub- may exist in portfolio companies. This gives committee in itself does not constitute improve- portfolio companies’ access to cost-effective and ment. Well-known governance failures at World- appropriate solutions. Com,3 Enron4 and Lehman Brothers all occurred with company boards in place. 3 On July 21, 2002, telecommunications giant WorldCom filed for bankruptcy protection in one of the largest bankruptcies in United States history, after Executives Sound governance involves more than com- perpetrated accounting fraud. The WorldCom scandal is regarded as one of the pliance with a set of rules. It is about taking worst corporate crimes in history, and several former executives involved in the fraud faced criminal charges for their involvement. Most notably, company founder and steps to ensure that the organisation enhances former CEO Bernard Ebbers was sentenced to 25 years in prison. efficiencies. To illustrate, given the nature of 4 At the end of 2001, it was revealed that Enron Corporation, an American energy, commodities, and services company based in Houston, reported a financial risk facing a bank, numerous specialist board condition that was sustained substantially by institutionalized, systematic, and sub-committees are required to assess and creatively planned accounting fraud, known as the "Enron scandal".References / EMPEA, 2010. Private Equity in sub-Saharan Africa, Insight Special Edition, November. // Robins, F., 2006. Corporate Governance after Sarbanes-Oxley: An Australian perspective, CorporateGovernance, Vol. 6, n° 1, 34-38. // World Bank, 2005. A Better Investment Climate for Everyone, World Development Report, 2005. // World Bank, 2011. Making a difference for entrepreneurs, Doing Business 2011. //World Bank, 2011. Making a Difference for Entrepreneurs, East African Community, Doing Business
  • 13. 13 Living with an investment fund – the company perspective From the decision to open up its equity capital to the withdrawal of the private equity fund four years later, step by step SOMDIAA reveals the four stages of this marriage of two worlds, and shows how a family business operating in Africa for more than 40 years changed its culture and adopted a more professional approach at the instigation of a financial investor. A report by the company’s chairman. Alexandre Vilgrain ning of 2003. This experience, which proved Chairman, SOMDIAA to be an enriching one, but also traumatic for the company and its managers, can be bro- A t the beginning of the 21st century, ken down into four phases: the due diligence SOMDIAA decided that it wanted to process, the decision to invest, day-to-day open up its capital to external inves- life with the fund and, finally, the exit. tors. SOMDIAA is a French company that has been established in sub-Saharan Africa Phase 1: Due diligence checks provide a jolt for over 40 years and holds majority inter- The first stage is the most important. In the ests in sugar-production complexes and course of due diligence checks, the poten- wheat flour mills. An unusual feature of tial investors – in this case the private equity the company at the time was that it was fund – strip the company to its bones, ques- owned by just one family. tion its managers, and visit the industrial The challenge for this key player in Africa’s sites with the management team. During agribusiness sector – in particular in the this period, the company’s entire strategy CEMAC region1 and in UEMOA2 – was to bol- and organisation are called into question. ster its own resources and build the capac- Looking back, this phase was by far the most ity to develop the busi- crucial for restructuring. ness further. In addition, Effectively, the workforces and managers see the company needed to the company anew from a different angle, improve its operations and and modify and improve certain practices, consider new working prac- approaches and working methods. Moreo- tices. Because of its history ver, for a group like SOMDIAA, “The due diligence (based in Africa, family- which was 97% owned by a single phase was by far run, etc.), the company had family, the due diligence phase the most crucial for ALEXANDRE VILGRAIN trouble breaking moulds marked the start of a real change restructuring.”Alexandre Vilgrain began and old habits. It has a of mindset. Because of its history,taking on responsibilities large number of long-term the company was finding it hard to enter thewithin the subsidiaries of the employees who have been modern age. It was chugging along, miredfamily’s agribusiness group in working in Africa for dec- in old habits. Some longstanding employ-France, Africa and the Indian ades. Although not openly ees were resistant to change. The main topicOcean in 1979. In Asia he setup a network of French-style opposed to change, they of conversation within the company becamecafé bakeries called Delifrance nevertheless proved some- ‘why change?’ The fund’s teams were quick toAsia, which was then listed what resistant. One of the supply the answer.on the stock exchange. reasons for involving finan- The fund’s impact was a salutary shock.In 1995 he succeeded his cial partners is to remove Private equity funds are staffed byfather as Chairman ofSOMDIAA. He also holds constraints and break young people who speak English andvarious positions within other down barriers. move in another world – the world ofcompanies, including that The initial idea was to list 1 The Central African Economic and Monetary Community (CEMAC) is anof observer on the Proparco the company on the stock international organisation covering Cameroon, the Central African Republic,board of directors. He was Chad, Equatorial Guinea, Gabon and the Republic of Congo. exchange, but in the end 2 The West African Economic and Monetary Union (UEMOA) is an organisationappointed Chairman of theFrench Council of Investors in SOMDIAA decided to open working to achieve economic integration of its member states (Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo) byAfrica (CIAN) in 2009. up its capital to a private strengthening economic competitiveness through open, competitive markets and equity fund at the begin- the rationalization and harmonization of the legal environment. Private Sector & Development
  • 14. 14 Living with an investment fund – the company perspective Can private international finance. This means develop a consistent quality procedure based equity boost African that they look at the company through on ISO  9001. It aims to find the optimum development? fresh eyes, unimpeded by the company’s quality level for every product: products for history, traditions and genes. They dissect industrial customers, for skilled tradesmen, the company professionally and impas- for traders and for end customers. sively, and shake up its routines – reaching All these changes were made possible by the right into the heart of Africa. Their finan- presence of an external financial partner who cial approach proved extremely valuable. was able to get messages across by opening the company up to the outside world and to Discussions, debates the modern age. and – most of all – changes This approach led to the professionalisation of Phase 2: The decision to invest a large number of practices, which have now Once the due diligence phase was over, it was become firmly established, including regu- time for the final negotiations on the value lar reporting from every subsidiary. SOM- of the company. For the company chairman, DIAA struggled to publish its monthly results this stage was the most stressful and the and half-yearly accounts quickly. By visiting most intense. The honesty and transparency the subsidiaries with representatives from with which he responded during the audit the investment fund during the due diligence phase now seemed to backfire on him. phase, it was possible to have peo- A private equity fund is not just another “The presence of a ple from outside the group explain shareholder. These young people, with their fund is one way of that these procedures were com- fresh (and above all, financial) perspective, professionalising monplace in many other compa- are not entrepreneurs. Neither are they African businesses.” nies. This challenge to employees’ familiar with the environment of the com- pride meant the practices were implemented. pany which they are reducing to figures. The And they are still in place today, with monthly fund has a clear objective: to get a ‘good deal figures available no later than the 10th of when it invests in the company, with the the following month, and consolidated half- investors convinced that the ‘good deal’ will yearly; similarly annual accounts are produced be when the fund pulls out. and audited within a very short time frame. Having come this far, the management team In the same way, the investment fund, which does not really want to call into question all the had social and environmental responsibil- work that has been done, or start the whole due ity commitments to its investors, asked the diligence process again with another fund. And, company’s board of directors about this issue. of course, there is money at stake! This was another area in which the fund’s The fund’s involvement in the group’s capital teams introduced changes and profession- was linked to an exclusivity agreement with alism during the due diligence phase. Since the SOMDIAA Group for business opportu- then, the SOMDIAA Group’s corporate val- nities in the sugar and flour sectors on the ues have been promoted through a network African continent. The group hoped that the of foundations.3 In every country where the deal would enable it to use the fund’s net- group operates, the foundation’s mission is work to access other development opportu- to optimise the social and charitable activi- nities, as well as providing a cash injection. ties that the group has been running for dec- Finally, the arrival of an external shareholder ades, and to manage the financing of devel- was a good thing for SOMDIAA’s image and opment projects. The first foundation was reputation in the business world. A number set up in Chad at the beginning of March of banks did not think that the group would 2010. Today there are eight foundations in be able to raise funds. This too created a sense six countries (Cameroon, the Central Afri- of pride within the workforce. can Republic, Chad, Congo, Côte d’Ivoire and Gabon). There is also a Health and Safety at Phase 3: Day-to-day Work Committee on each of the group’s sites. life with an investment fund On the environment front, the SOMDIAA For the fund, the most important moment in Group has introduced a proper policy based the life of a company is the that of the budget on ISO 14001 to improve the way it man- and results. The fund’s aim is to check that ages its impacts on the air, soil and water, its investment is profitable. Represented on to reduce its resource consumption (energy 3 Each foundation in the SOMDIAA Group is financed by a subsidiary, which and water) and to establish a plan for the delegates to it all activities that are not linked to the group’s industrial and treatment of waste from the various subsid- agricultural operations. 4 Compagnie sucrière du Tchad (CST), Société sucrière du Cameroun (SOSU- iaries. In a similar approach, since 2002, the CAM), Société agricole de raffinage industriel du sucre (SARIS Congo), SUCAF group’s sugar factories4 have been striving to Côte d’Ivoire, SUCAF Gabon and SUCAF
  • 15. 15 the board of directors, the fund also keeps of vision first of all. The board (the entrepre- an eye on the group’s global strategy. Oth- neur) realises that the fund is there only to erwise, it generally behaves like a financial make a profit – the best profit possible – and shareholder, leaving the management team not to help the company do well. The fund to do its work, which is a very comfortable achieved its goal: it pulled out after four years arrangement for the company chairman. This having doubled its investment. This psycho- marriage between the worlds of business and logical aspect is very important, but is often finance did not cause any friction or gener- ignored. It is a kind of trauma and it shocked ate any particular problems. On the workforces at all the group sites. Over“For the company’s the other hand, this attitude is time, the fund and its representatives had managers, the still quite disappointing, when become part of the group, part of the fam-fund’s exit felt like a compared with the due diligence ily… and then they broke off all contact over- divorce.” phase. For its part, SOMDIAA night! It was as if the adventure (because the put in place during this period everything experience was indeed an adventure) was no that had been decided during the due dili- longer of interest to them. gence audits: the social and environmental Did the withdrawal of the fund mean that policy, reporting systems, etc. the group’s strategic choices changed? It However, life with a private equity fund does is clear that from the moment a company not only boil down to this. It also sends a requests help from a private equity fund, very strong message both to the workforce its very nature is changed, especially in the and to the outside world and introduces a case of a family owned business. Of course new negotiating partner, who acts as a shield in theory, when a fund pulls out, a com- for the board of directors as they improve pany is no longer the same size, which was the company’s working methods. This is vital the case with SOMDIAA. And it no longer in the regions where SOMDIAA operates. In operates in the same way, which was also sub-Saharan Africa the group generally has the case with SOMDIAA. This means that two negotiating partners: its employees and the life of the company changes dramati- national governments. Having a ‘financial’ cally and its future strategic choices will partner sent a strong message to the group’s naturally be different as well. African partners (generally governments), Although the fund’s withdrawal was trau- facilitating and improving the company’s matic, a year later the business was back relations with them and, above all, providing on its feet. For a family firm operating them with a structure. The presence of a fund in a somewhat complicated geographi- is one way of professionalising African busi- cal region, life with a private equity fund nesses and bringing them into the modern is something to be experienced – provided age. Everything that was put in place while one invests as little emotion and as much the fund was involved is still there today. professionalism as possible. A marriage of these two worlds is possible, Phase 4: The exit as long as those involved remember that they For an entrepreneur, the withdrawal of an are poles apart. The fund is aiming to make investment fund never comes at the right time. a healthy profit, while the business is using It is always either too early or too late. Above all the money invested by the fund to leverage though, once the decision has been taken, there its development. If this is kept in mind, both is no going back. Once the fund has confirmed sides will benefit from the arrangement. its intention to pull out, it will do everything possible to extricate itself. And the decision is a quick one. The exit arrangements are not written down and the exit date is not known in advance. Everything that was said about long- term strategy during the due diligence phase and in board meetings no longer exists. Only one thing matters: getting out. The fund’s exit FOCuS proved difficult and very stressful for SOM- DIAA, quite apart from the fact that the fund SOMDIAA (Société d’organisation de management des industries did not do the company any favours. After the alimentaires et agricoles) is a holding company that has been fund pulled out (at the end of 2007), the com- providing services to the agrifood industry in Africa for over 40 years. It has a turnover of EUR 400 million and employs 20,000 people. As pany no longer existed for the fund. That phase a major economic player in Africa (Cameroon, the Central African was over and they had no regrets. Republic, Chad, Congo, Côte d’Ivoire and Gabon), SOMDIAA focuses More generally, for the company’s managers, primarily on developing activities in the sugar, wheat, animal feed the fund’s exit felt like a divorce. A divorce and poultry farming sectors. Private Sector & Development
  • 16. 16 Can private equity boost Although private equity has expanded at a rapid pace in sub-Saharan Africa in recent African development? years, it still remains relatively modest in scale here compared with other emerging markets. Investments tend to be too concentrated in a few countries and in the traditionally more dynamic sectors: diversification would help to meet the needs of African growth and the financing requirements of SMEs.Private equity fundraisingin emerging markets, 2006 – 2010 Eastern Europe & CIS USD 26 billions China USD 37 billions MENA USD 17 billions India USD 22 billions Asia 1 658 USD 59 billions Sub-Saharan Africa USD 9 billions 205 Emerging markets World USD billions Latin America & Caribbean USD 19 billionsNote: CIS: Commonwealth of Independent States; Asia: excluding Japan, Australia and New ZealandSource: EMPEA/ PROPARCO-Private Sector &Development, 2011Private equity funds raised and invested Private equity investments as a percentagein sub-Saharan Africa of GDP, 2008 - 20103.5 in million dollars 0.5 in % 3.43.0 0.45 3.0 0.42.5 0.38 0.32.0 2.2 2.2 2.0 1.5 0.2 1.5 1.3 1.3 0.17 0.17 1.0 0.16 0.16 0.9 0.1 0.12 0.10 0.100.5 0.60.0 0.0 2006 2007 2008 2009 2010 ing n l n ia ica a ia rld ina ts ca er k hA t fric Afr a i AmLati ort Eas ah az ss Ind re ar eri Wo Ch ma g Ru Br Em d N le -S an dd Funds raised Capital invested S ub MiSource: EMPEA, 2011 Source: EMPEA,
  • 17. 17Breakdown by size of funds raised between Funds stage by geographical area, 20072006 and 2010 % total number of funds Leveraged buy out Growth capital Venture capital100 3% 8% in % of total invested Total invested: 2.7 million dollars 100 13.5% 9%80 13.5% 16% 8060 60 27% 28%40 40 > 1 billion dollars 500 - 999 million dollars 2020 43% 39% 250 - 499 million dollars 100 - 249 million dollars 0 0 < 100 million dollars ca ri ca fri g fi th a, ica e , a ia a ca n a f ou fric ric ric ea er Afr lA nA hA fri r Oc Af Nig gS A nA Sub-Saharan Africa All emerging markets Ni er ding e din ern rn ian st lu tra en So er ut Number of funds: 37 Number of funds: 543 Ind st clu th th W xc Ea e a ex Sou r C No eSource: EMPEA, 2011 Source: Geiss R., Hajdenberg J., Renchon M. L’Afrique, terre d’investissement: le private equity en Afrique, réussites et nouveaux défis. CAPafrique, 2008.Breakdown by sector of private equity Geographical breakdown of private equityinvestments in sub-Saharan Africa, 2009-2010 investments in sub-Saharan Africa, 2008-2010 Infrastructure 389 (5) Banking & Financial Services 264 (11) 13% Others Industrials & Manufacturing Services 152 (6) 194 (15) 7% Ghana 57% South Africa Energy 137 (8) 8% & Natural Ressources Media & Telecom 129 (5) Kenya Agribusiness 65 (5) Total: 1.5 billion of dollars (Number of Investments: 74) Other 0 50 100 126 (19) 150 200 250 300 350 400 15% Nigeria Total invested: 4.9 billion dollars Number of deals: 135 in millions dollarsSource: EMPEA, 2010 Source: EMPEA, 2011Size of PROPARCOs portfolio private equity Ticket size of PROPARCOs portfolio privatefunds investees, 2004-2010 equity funds investments, 2004-2010 22% Medium entreprises 100 90 % of total number of deals 7% 11% 18% (50-200 employees) 80 Small entreprises 70 16% (10-49 employees) 60 9% > 30 million euros 50 15 - 30 million euros 6% Micro entreprises (< 10 employees) 40 33% 10 - 15 million euros 5 - 10 million euros 30 54% Large entreprises Number of funds: 17 20 10 24% 1 - 5 million euros < 1 million euros Number of funds: 17 (> 200 employees) Number of entreprises : 82 Number of deals: 82 0Source: PROPARCO -Private Sector & Development, 2011 Source: PROPARCO -Private Sector & Development, 2011 Private Sector & Development
  • 18. 18 The transparency Can private equity boost African development? challenge facing private equity When hedge funds are set up in offshore centers, they benefit from favorable conditions when investing in Africa. Their investments may spur economies, but short-term profit targets, the lack of transparency and tax evasion do not contribute to the development of the continent. Enhanced tax controls, transparency and traceability of funds will help private equity investment become a full-fledged player in Africa’s development. François d’Aubert Tax and legal arrangements General Delegate of the fight against tax havens adopted by private equity investors Private equity investment features prom- P rivate investment (direct and portfolio) inently in a new political-economic model has been gaining impetus in Africa since that is coming into being in developing the early 2000s, in line with the “Wash- countries. What attracts it to Africa are ington Consensus”.1 In 2010, it had a stock of both the positive prospects for economic some USD 150 billion of assets and is grad- growth and the high returns on invest- ually taking over from international finance ments, which are above those in other institutions. The capital is mainly American, world regions, with the exception of Asia French and British, but Chinese and Indian and emerging countries. The range of investments, those from Gulf countries and funds, investors and operators interested inter-African investments (South Africa, in the continent is expanding and diver- Libya) are growing at a rapid rate. sifying and is helping certain countries Multinational investments in oil and mining such as Egypt, Kenya and Nigeria reach the countries continue to take the lion’s share. “status” of “emerging countries”, which is However, there is a certain degree of diversifi- already the case for South Africa. cation which does serve the interests of non- Investors exercise a high level of selectiv- mining sub-Saharan African ity: political and government instability, countries and benefit cer- the low level of security, wars in certain tain local small- and medium- regions or the lack of transport infra- sized enterprises (SMEs). The structure can be discriminat- sectors include telecommuni- ing factors which penalize “Fund strategies cations, transport infrastruc- countries with rich mining are often based ture, the textile industry, potential. This is, for exam- on extremely high agriculture, tourism and the ple, the case for the Demo- profit targets against FRANÇOIS D’AUBERT hotel industry and, last but cratic Republic of Congo and a risk that is not François d’Aubert is a not least, financial services. a handful of other countries. always controlled.” magistrate at the French Experts forecast that invest- Other negative factors such as corruption Audit Office, a former ment flows in Africa will be in are often deplored, but very rarely put off deputy and Minister of the region of USD 150 billion potential investors. The different private Budget and Research, a by 2015. The bulk of these equity-friendly tax incentives and exemp- former mayor of Laval (Mayenne, France) and investments (80%) will con- tions implemented by numerous Afri- President of the Cité des tinue to focus on the mining, can governments under the International sciences et de l’industrie. metal, oil and gas industries, Monetary Fund and World Bank Tax Con- Since September 2009, he as well as natural resources sensus are viewed positively by opera- has been General Delegate exploration, driven by China’s tors. However, the lack of transparency of the fight against tax havens and President of high level of demand for raw the Peer Review Group materials. The tourism and 1 The “Washington Consensus” presents a set of standard measures applied of the Global Forum hotel industry are expected to economies facing difficulties as a result of their debt. It was designed by the World Bank and International Monetary Fund (both based in Washing- on Transparency and to receive 15%, while major ton) and is named after an article by the economist John Williamson, who Exchange of Information sectors such as infrastructure in 1989 defined ten recommendations closely modeled on the ideology of for Tax Purposes in the Chicago School. Its recommendations include financial liberalization, cooperation with the OECD. and industry may each only trade liberalization, market deregulation and the privatization of State- obtain 4%. owned
  • 19. 19in the terms under which they are gen- capital raisings worth several hundred mil-erally granted is an obstacle to establish- lion dollars) shows that the target of highing a climate of confidence. They do, how- short-term returns has a strong influenceever, make it easier for fund managers to on the tax and financial strategies of inves-keep their promises of ambitious returns tors and fund managers. Private equityon investment – often over 25% – and to funds can consequently be tempted to takeinterest funds with alternative strategies, control of a local business merely to makeeven hedge funds. a quick profit. This is made easier by a taxThese funds very often operate via legal system which facilitates equity distribu-entities registered in Mauritius, the tions and reductions during the first years.Caiman Islands, the British Virgin Islands And yet local businesses generally requireand Bermuda, or from the offshore 2 access to long-term equity and need to befinancial centers where they are estab- able to rely on a stable shareholding struc-lished (Delaware in the United States, ture. Africa has often attracted financialLuxembourg, Singapore, Switzerland and speculation, particularly in the miningthe United Kingdom). The different tax industry; it is hoped that the arrival of pri-exemptions, particularly on capital gains vate equity in other sectors does not leadand valuation gains, make this situation to a similar result.highly advantageous for them. In addi- The lack of transparency in unregulatedtion, these jurisdictions offer the pos- private equity investment poses anothersibility of maintaining funds’ resources problem with its financial and tax arrange-in convertible hard currencies. While ments in which funds are active players.most sub-Saharan African countries have It is based on the extensive use of off-non-convertible currencies and legis- shore jurisdictions and finan- “Africa has oftenlations that do not authorize offshore cial centers where the funds, attracted financialcompanies, they also make it possible to in addition to the tax facilities speculation,enhance risk coverage on currencies and they benefit from or organ- particularly in thedeals and, in principle, to keep in check ize, are largely outside finan- mining industry; it isthe real value of financial assets. cial regulation and pruden- hoped that the arrival tial standards. They are major of private equityShort-term returns, players in shadow banking3 for investment in otherlack of transparency and tax evasion which tax havens are most typ- sectors does not leadIt may be a win-win situation for inves- ically used. Funds registered in to a similar result.”tors, but this is unlikely to be quite the case tax havens have practically nofor countries. Admittedly, private equity transparency and information obligationsinvestment does play a positive role by vis-à-vis the market or regulatory author-supporting job creation and the emergence ity in terms of the identity of their ownersof new projects; it provides existing busi- or debtors, changes in their share capitalnesses with capital for their development, distribution, their accounts or their levelhelps stimulate emerging financial mar- of debt, their strategies or their results.kets and create and modernize infrastruc- This lack of transparency also concernsture. However, operating conditions in cer- the offshore debt of new entities, whichtain mines or agricultural sectors in which are encouraged by the possibility of beingfunds invest are also criticized for not com- able to deduct interest and are not sub-plying with basic social imperatives and mitted to any external control. It can beminimum environmental standards. practical for investors and operators seek-Although the increasingly active involve- ing discretion for political reasons toment of private equity funds generates a make use of the lack of legal and finan-growth process which can create jobs and cial transparency of certain non-coopera-wealth in the African countries they target, tive jurisdictions – whether they are fromit also raises three types of problem. First sovereign funds or the instruments usedof all, their strategies are often based on to take over raw materials reserves. Butextremely high profitability targets against they can also be screens for the interestsa risk that is not always controlled; the of Mafia figures or fraudsters seeking toconsequences can prove disastrous for the geographically and sectorally diversifyhost country: projects permanently halted,bankruptcy, disappearance of debtors, cost 2 The term offshore is used to describe the creation of a legal entity in aoverruns, fraud, etc. The recent participa- country other than the one in which the activity is conducted in order to optimize taxation (tax haven) or financial capital management.tion of hedge funds and speculative funds 3 Shadow banking is a banking activity conducted by entities that do notin pan-African investment vehicles (with receive deposits and, as such, are not regulated as banks. Private Sector & Development
  • 20. 20 The transparency challenge facing private equity Can private their investments and take advantage countries. They often stem from endemic equity boost of host countries’ needs for fresh capital African corruption, circumvented exchange controls development? in order to launder dirty money. and fraudulent remittances of interest and The third type of criticism concerns tax dividends (linked in particular to private evasion, which is at the core of the system, equity investments) towards tax havens. with tax optimization arrangements that The arrival of private equity investment are often aggressive and combine exemp- must not mask the need for a more equal tions in host countries with those offered sharing of revenues between investors and by third-party non-cooperative jurisdic- States, within a balanced legislative and tions. Transfer pricing manipulations on tax framework, that is investor-friendly exports (particularly raw materials), which and preserves the interests of local com- involve one or several tax havens between munities and States. The latter must, as the exporting country and the certain emerging countries do, at the min- “It is a priority to fight actual importer, are one of the imum provide for transactions concerning against tax evasion, main reasons for local tax base movable and immovable property in an the main victims of erosion. This tax evasion is investment operation (acquisitions, sales which are the public also fostered by loan interest and capital gains) to be taxed where they finances of most deduction mechanisms, which are located and not where the platformdeveloping countries in have long benefited multina- company is domiciled. More generally, it sub-Saharan Africa.” tionals in the mining and trad- involves fighting against aggressive opti- ing sectors. They have even more strate- mization schemes aiming to artificially gic advantages for companies financed by reduce local tax bases and reduce charges private equity with strong leverage.4 All of in order to locate the highest possible this naturally undermines host countries’ amount of profits in tax havens where tax bases, weakens the local impacts of they are tax exempt. investments and encourages local author- Tax transparency must also be made man- ities to “make up the difference” with par- datory, notably to avoid abusive transfer allel revenue systems. In the end, several pricing; sums paid by mining companies, tens of billions of dollars leave developing revenues received by governments and countries. This represents more than the expenditures made must all be disclosed. amount of international aid. In addition, the fiscal relationship between the host country of the investment and the Enhancing the impact offshore center must be based on equita- of foreign investment flows ble rules and conventions on the exchange The crisis has revealed a pressing need for of tax-related information in compli- financial and prudential regulation from ance with the OECD standard. This must which financial “ecosystems” linked to also be the case for the relationship estab- Africa must not be exempt. By reducing lished between the offshore center and the scope of unregulated areas and finan- the investor’s country. It is advisable for cial products and dependence on offshore the network of tax conventions, which has banking,5 the virtual detour that invest- expanded significantly over the past two ment funds make via tax havens would years with offshore centers, to be strength- become less attractive. It would also limit ened with new conventions. They must the negative impacts of excessive leverage provide for the exchange of tax-related and investments in derivative products. information to the OECD standard and International finance institutions should must be signed between the offshore cent- also undertake not to provide their exper- ers and the African countries receiving the tise or support to private equity fund foreign investments. Today, only five Afri- projects that transit through non-coopera- tive jurisdictions.6 They may do so by refer- 4 Leveraging involves borrowing liquidities in order to increase the actual size of the portfolio (initially only made up of funds provided by investors). ring to the criteria, recommendations or 5 Offshore banking rapidly developed in the mid-1960s, thanks to the growth standards of the Organization for Economic and liquidity of global financial markets. The range of services offered by offshore banks includes all deposits, transfers, credit facilities and investment Co-operation and Development (OECD), management. They handle administrative procedures and provide all these the Financial Action Task Force7 (FATF) and services on a confidential basis. 6 Non-cooperative jurisdictions are areas which do not apply internationally the Financial Stability Board8 (FSB). adopted standards for transparency and the exchange of tax and financial It is a priority to fight against tax evasion, information. 7 The Financial Action Task Force is an inter-governmental body with a mission the main victims of which are the pub- to develop and promote national and international policies to fight against lic finances of most developing countries money laundering and the financing of terrorism. 8 The Financial Stability Board is an informal economic group set up during in sub-Saharan Africa. This requires fight- the G20 meeting in London in April 2009. Its objectives relate to cooperation ing against illicit capital outflows from host in the field of supervising and monitoring financial
  • 21. 21 can States (Botswana, Ghana, Mauritius, Increasing international involvement aims Seychelles and South Africa) are members to foster good governance practices, such of the OECD’s Global Forum on Transpar- as the Extractive Industries Transparency ency and Exchange of Information for Tax Initiative (EITI),10 the main tool used in Purposes.9 Moreover, a number of offshore recent years to promote better governance centers that serve as a hub for investments of revenues from natural resource exploi- in Africa (British Virgin Islands or Hong tation in producing countries. In order to Kong for example) do not always have rel- promote the sustainable economic, social evant bilateral conventions which would and environmental development of the allow an effective exchange of information sector, Africa must establish good govern- with sub-Saharan African States. ance practices at the national, regional and Host countries of investments must build international levels. sound tax bases. This is essential for numer- ous African States. States must introduce tax base, collection and control systems for both corporate tax and capital gains tax on the businesses in which funds invest, and better regulate the different tax exemp- tions concluded between the authorities and operators. This also requires acquiring expertise in tax matters. The need for transparency and traceability Funds’ use of investments based in off- shore centers to invest in projects and busi- nesses in Africa contributes to the lack of transparency which affects global financial circuits. Introducing greater transparency is essential in terms of ethics and good governance. But it is also the key condition for foreign capital flows towards Africa to truly support the development of coun- tries targeted by investors, without, how- ever, causing operators to lose interest. This transparency requirement concerns all public stakeholders in investment: both the States that receive the investments and the offshore financial centers that often carry them. The international community expects them – particularly those affected by drug trafficking – to rapidly “Only five African comply with FATF recommen- States (…) are today dations for the fight against members of the money laundering in order toOECD’s Global Forum avoid any pollution of private on Transparency equity investment. Transpar- and Exchange of ency is also needed from opera- Information for tors, investors and direct bene- Tax Purposes.” ficiaries – the identity of which must be known by tax authorities (under countries’ adherence to the OECD stand- ard) and by bodies dedicated to the fight against money laundering. 9 Since 2000, the Global Forum on Transparency and Exchange of Information Initiatives for greater transparency are also for Tax Purposes has been the multilateral forum within which over 90 expected in the mining and oil industry, jurisdictions work. It is in charge of the in-depth monitoring and peer reviews of the implementation of standards for transparency and of the exchange of with businesses undertaking to disclose information for tax purposes. their country-by-country results, the tax 10 The EITI is a coalition of States, businesses, civil society groups, investors and international organizations. It establishes an international transparency they pay locally (notably corporate income standard for the oil, gas and mining sectors. This standard is based on the tax) and the dividends paid by a subsidiary. publication of both amounts paid and collected by businesses and States. Private Sector & Development
  • 22. 22 Private equity and SMEs: Can private equity boost African development? an instrument for growth Stabilising growth in Africa – growth which is real but fragile – depends partly on the dynamism of SMEs, which receive little in the way of private equity support. Funds’ profitability can be enhanced, in particular by developing local teams. The levels of funding invested need to be scaled up and the full spectrum of technical support resources should be utilised. Finally there needs to be considerable emphasis on additional investments targeting social objectives. Jean-Michel Severino An ecosystem of responsible SMEs Chairman of Investisseur & Partenaire pour le Développement for sustainable growth Achieving sustainable growth in Africa partly W e’re hearing it everywhere: Africa depends on developing responsible small and is back on track; its time has come. medium-sized African enterprises (SMEs). Growth rates prove it, and the Expansion in this sector – in terms of the impressive forecasts are stacking up. A boom- number and size of the companies involved ing population combined with GDP increases – is in itself a driver of growth. A dynamic look set to propel the continent to the equiv- SME sector has a balancing effect “Achieving alent of China’s current position, measured in on society through the “middle sustainable growth in terms of absolute economic value, by 2050. And class effect” it brings about; it Africa partly depends you can almost hear what comes next: devel- creates jobs, spreads wealth, and on developing small opment has happened, aid can be scaled back, anchors economic activity locally. and medium-sized case closed – Africa must now become private- Of course it is also necessary that enterprises.” sector terrain. A good deal of this description is these SMEs genuinely promote indeed accurate – the recovery sustainable growth – environmental issues in African growth rates is rais- are especially crucial here: SMEs are less able ing hopes of a renaissance. A to bear the costs involved in managing envi- middle class is emerging. Civil ronmental impacts and their social practices society is transforming, and can prove to be less beneficial than those of exhibiting increasingly demo- large corporations. cratic values. Nonetheless the role of SMEs is widely cel- Yet this growth is both frag- ebrated and growing this sector features JEAN-MICHEL SEVERINO ile and unevenly distributed. among the official objectives of all the Fragile, because the Afri- bilateral and multilateral cooperation pro- Jean-Michel Severino is chairman of the can economies are still small, grammes. Many development banks have set private finance company vulnerable to external tur- up ad-hoc programmes and European finan- Investisseur & Partenaire bulence, confronted with cial development institutions have been pour le Développement immense environmental chal- intervening in this area on a regular basis (I&P). From 2001 to 2010 lenges. Their public finances for many years. Even so the support systems he was CEO of France’s international development are exceedingly constrained, as in place for SMEs have remained unam- agency, AFD. Jean-Michel evidenced by the recent return bitious in number and limited to a hand- Severino is General to state indebtedness. Une- ful of instruments: comprising on the one Inspector of Finances venly distributed, because not hand public technical support (or “upgrad- at the French Finance all of the continent’s regions ing”) programmes, on the other refinanc- Ministry and served as Director in charge of are reaping the fruits of this ing or guarantee instruments offered to the international development growth to the same extent; primary banks. These instruments are use- at the French Ministry nor do the different social cat- ful and important and should be reinforced. of Cooperation. He has egories have fair access to the Yet however impressive they sound, they do also worked at the World same opportunities. Africa not provide a means of tackling the endemic Bank, firstly as Director for Central Europe and then will struggle to contend with problem of capital financing for SMEs. as Vice President for Asia. these constraints and chal- This problem has been so well known for so lenges on its own. long that most countries in the
  • 23. 23for Economic Cooperation and Development This has an automatic knock-on effect on(OECD) have set up dedicated state support net profitability for investors. Moreover,schemes benefiting their own SMEs in order when the investment objectives are innova-to address it. In the vast majority of cases tive profitability may be limited – resultingthese SMEs find themselves in a tight situa- in extended investment periods or highertion in terms of their equity capital: they can losses compared with the portfolio suffocated by their own growth, limited by Which explains investors’ relative disinteresttheir owners’ financial capabilities or effec- in this target category – and, in consequence,tively barred from accessing the long-term the low number of management teams dedi-external financing typically provided by the cated to this sector.private equity industry. In France for exam- The profitability of equity or quasi equityple, there are schemes to support innovation investments in African SMEs could improve(FIPs1), and local SMEs (FCPIs2) – all sup- given two scenarios: more local teams oper-ported by fiscal expenditure. Then there are ating with lower charges within a localOSÉO’s3 interventions in the form of quasi market; or the development of teams of aequity and debt, backed by the substantial significant size capable of indus- “Building Africanfunding available to this financial institution trialising the process and spread- teams focused onand facilitated by the triple-A rating it owes ing their structural costs over a small businessesto its public status. substantial portfolio. The former is an objective inAfrica’s private equity boom has not bene- scenario is realistic and is already its own right.”fited the continent’s SMEs. International starting to happen. Yet the proc-and continental funds have focused mainly ess is very slow, because of the low levels ofon the telecommunications sector and major human resources available (which are there-infrastructures (primarily energy), and have fore expensive) and the scarcity of local cap-concentrated on the more highly developed ital – which means that these teams need tonations to the north of the continent and find international backers, who are difficulton South Africa. This trend is even more to identify and persuade.pronounced for small SMEs (with fewer The second scenario is also possible, takingthan 100 employees). And the situation is as a basis the international teams alreadyeven worse for start-ups – companies estab- in place or some national teams – like thoselished within the last five years, which play currently emerging in South Africa or northa key role in driving economic dynamism. of the Sahara, for example. Yet here too theIt is these newly formed, small-scale SMEs process will take time; the market’s naturalthat constitute the core of future develop- processes will not of themselves offer anyment: they will be the engine driving Afri- shortcuts. Developing a strong SME sec-can growth in the future, its central ignition tor certainly involves the provision of moresystem. And yet they are entirely neglected, long-term financing, among other things; yetabsent from collective concerns – and from it also requires a dedicated programme of ini-the interventions of private equity. tiatives. This needs to be one of the general interest objectives of development policies ifImproving investment profitability we wish to accelerate the growth process in aLow levels of savings, the inadequacies of meaningful way.the banking system and the limitations ofthe entrepreneurs themselves make the Promoting the growth of private equitychallenges of accessing private equity famil- As was the case for microfinance, acceler-iar to SMEs in other parts of the world even ating the growth of private equity to bene-more acute in Africa. The same is true with fit African SMEs involves deploying a rangeregard to accessing private equity funds. We of complementary strategies. First of all themight assume that investment funds’ lack funds made available to private equity teamsof interest in small companies derives from targeting SMEs need to be increased. Tootheir lower profitability compared with that many public finance institutions supportingof large corporations. However, neither the private sector continue to have exces-claims levels nor profitability differentiatethe potential performance levels of instru- 1 FIPs (Fonds d’Investissement de Proximité – local investment funds) were created by the Dutreil Law in 2003, supplementing the SME supportments dedicated to large corporations or to system already provided by FCPIs (Fonds Communs de Placements dansSMEs. What makes the difference is manage- l’Innovation – innovation investment funds). 2 FCPIs (Fonds Communs de Placements dans l’Innovation – innovationment costs. In Africa, front-end and manage- investment funds) were created by the 1997 Finance Law to support thement costs are exceptionally high compared growth of high-potential innovative companies. 3 OSÉO is a French state-owned company whose primary objective is towith the unit values of the transactions, in help SMEs and medium-sized businesses secure funding, supporting theiran industry where fixed costs are the rule. ability to drive innovation and growth. Private Sector & Development
  • 24. 24 Private equity and SMEs: an instrument for growth Can private sive financial requirements with regard help the fund management teams them- equity boost African to this category. Like FISEA, the Investment selves progress: often young and facing sig- development? and Support Fund for Businesses in Africa nificant professional challenges, almost all set up by the Agence Française de Développe- of them need strengthening, particularly ment (AFD), it is important that bilateral or in relation to the quality of environmen- multilateral private-sector finance institu- tal and social management. Building Afri- tions establish “patient investment” catego- can teams focused on small businesses is an ries which can benefit social business4 in gen- objective in its own right, involving a com- eral and SMEs in particular. Some bilateral mitment to developing this profession and co-operations could take on the role of subsi- taking the risk of supporting emerging, rel- dising the instruments with the most socially atively inexperienced teams. There must be beneficial objectives. a willingness to accept potential losses – rel- Private individuals also represent significant atively easy here because the sums involved potential contributors. They could be further are limited – and to support training in uni- encouraged, in France, by extending the fis- versities and higher education institutions. cal measures relating to income tax and the solidarity tax on wealth (“impôt de solidarité Greater environmental awareness sur la fortune” or ISF) which benefit the FPI Supporting African SMEs, it must be empha- and FCPI schemes – and by equivalent meas- sised, involves more than just developing a ures in other countries. These tax schemes’ private equity industry adapted to the con- yield in development terms could prove sig- text. The legal and fiscal business environ- nificantly higher than that of traditional tax- ment, the quality and cost of infrastruc- funded development aid. Admittedly these tures and essential services, the availability of tax schemes are not very popular in France, human resources, openness and the interna- but these investors could be given additional tional commercial context, the performance or alternative encouragement by insuring of public services, etc. are all factors which can their investment risk using a mechanism like boost – or impede – the dynamism of SMEs. the ARIZ scheme5 or by setting up schemes to Nonetheless the development of impact cover initial losses. The fact that such mech- investment – using financial instruments anisms incorporate an element of indirect which combine social objectives with tar- subsidy should not be a deterrent, if the aims geting a financial return – will play a cru- and outcomes of these funds do serve the cial role in the major battle to stabilise Afri- general interest and if the returns achieved can growth which has been under way for a by investors are clearly below market expec- decade or so, following the long and depress- tations: what is happening here, effectively, ing period of structural adjustment. In order is the co-financing of public policy. The same to ensure that this era is firmly consigned to arguments can apply to the final category of the past it is vital that sufficient energy and potential investors: industrial and financial resources are devoted to this objective, espe- businesses implementing a social and envi- cially by public organisations and private ronmental responsibility strategy involving development institutions. the creation of investment funds designed to have an impact. The second category of resources need- ing rapid deployment is technical support. Small and very small businesses have only very recently started to gain access to this resource. Private equity funds can use this instrument efficiently to benefit the compa- 4 This new kind of business was defined by Nobel prizewinner Muhammad nies in which they are investing. The larger Yunus: an enterprise which devotes its profits to reducing costs and producing the intervention the greater the tangible social benefits, returning no more than the initial investment to investors. 5 ARIZ is a guarantee scheme created by the Agence Française de Dévelop- impact it can have: alongside ad-hoc tech- pement to make it easier for private SMEs and microfinance institutions to nical expertise it is also possible to finance access financing. medium-term management positions dur- ing the start-up phase, to provide train- FOCuS ing and to facilitate evaluations. This final point is very important: capitalisation, for- Investisseur & Partenaire pour le Développement (I&P) is a private finance company established in 2002. It provides financial and malisation and feedback are crucial to drive managerial support for microfinance institutions and medium- progress in a sector which is feeling its way sized companies in Africa – organisations which cannot access bank forward, laying down new pathways for financing and for whom microcredit is insufficient. Its interventions development policy. It is also important to take the form of equity investments and, in some cases,
  • 25. 25 Pioneer role of DFIs in sub-Saharan Africa Growth in emerging markets is currently leading the financial development institutions (FDIs) to re-focus their efforts on low-income countries – bringing sub-Saharan Africa to the fore once again. FDIs can play a driving role here by facilitating access to the private equity market, particularly as private operators are turning away from SMEs – assessing them as too risky. How to turn theory into practice. Yvonne Bakkum and Jeroen Horsten The impressive economic growth of many Director Private Equity, FMO emerging markets has put pressure on the Evaluation Officer, FMO role of DFIs in terms of their additional- ity to commercial investors, which lies at S tarting in the early 90s, Development the core of the missions of DFIs. Conse- Finance Institutions (DFIs) played a quently, DFIs have exited certain countries. catalytic first-mover role in making Dutch development bank FMO, “Barriers to investment emerging markets more accessible to hesi- for example, decided to discon- include a lack of tant commercial investors. They have been tinue new investments in Bra- institutional quality pivotal in developing the proper infrastruc- zil, Russia, Mexico and Kaza- fund management ture for the private equity industry, by pro- khstan due to their investment teams, limited access moting domestic and pan-regional private grade and upper-middle income to market information, equity associations and educating govern- country status,3 and is striving and poor corporate ments on the barriers imposed by legal and to increase its exposure in lower- governance.” regulatory frameworks. income countries. Recently, CDC, Over the period 2005 to 2009, the percentage of the United Kingdom’s DFI, announced in a emerging market private equity deals has more radical new business plan that it will exclu- than doubled to 30% of deals worldwide (Liech- sively focus its activities on the low and tenstein and Meerkatt, 2010). At present, most lower-middle income countries4 in sub-Saha- of the capital is geared towards the BRIC-coun- ran Africa and South Asia, where 70% of the tries.1 According to the Emerging Markets Pri- world’s poor live (CDC, 2011). vate Equity Association’s (EMPEA2) latest Annual Fundraising and Investment Review, DFIs, gateway to SME funds dedicated to BRIC accounted for 51% funding in sub-Saharan Africa of total capital raised – USD 23.5 billion – in The sub-Saharan African region is now a focal emerging markets in 2010 (EMPEA, 2011). area for most DFIs, mainly due to the pres- ence of many low-income countries (accord- ing to the 2011 World Bank list of economies, YVONNE BAKKUM AND JEROEN HORSTEN 26 out of the 47 sub-Saharan Africa coun- tries currently have a low-income status). InYvonne Bakkum is Director and project finance in emerging spite of sub-Saharan Africa’s gross domes-Private Equity at FMO (the markets. She has a mastersDutch Development Bank) since in business economics from tic product (GDP) having grown consistently2007. She joined FMO in 2001 as Erasmus University, Rotterdam. over the last decade, with output growthSenior Investment Officer and expected to accelerate to more than 5% overManager Business Development Jeroen Horsten is an economist the next five years (IMF, 2011), interest fromLatin America, responsible for who graduated from Tilburg commercial private equity investors instructured finance transactions University in The the Andean and Mercosur After graduating, he heldcountries. In 2005, she became various positions at TNT Post, 1 BRIC refers to the group of Brazil, Russia, India and China, which were all deemed to be at a similar stage of newly advanced economic development.Manager Credit Analysis and before starting at the Dutch 2 See the article by Jennifer Choi, p. 2, in this issue of Private Sector &Deputy Chairman of FMO’s Development Bank FMO in Development.Investment Committee. She 2007. As an Evaluation Officer, 3 Upper-middle income countries defined by the World Bank as countriesstarted her career with ABN he is currently responsible with a gross national annual income per capita of USD 3,976-USD 12,275. 4 Low-income countries are defined by the World Bank as countries withAMRO Bank in 1992, holding for evaluating FMO’s a gross national annual income per capita of USD 1,005 or less; lower-various positions in corporate private equity strategy. middle-income countries, with a national annual income per capita of USD 1,006-USD 3,975. Private Sector & Development
  • 26. 26 Pioneer role of DFIs in sub-Saharan Africa Can private sub-Saharan Africa is still low.5 Barri- sometimes exceeded the returns achieved by equity boost ers to investment include a lack of institu- African experienced fund managers: for the period tional quality fund management teams, lim- development? from 2000 through 2006, 46.2% of the top- ited access to market information, and poor quartile of performers in the IFC’s data set corporate governance. Consequently, invest- were first-time funds (Liechtenstein and ment flows into sub-Saharan Africa end up Meerkatt, 2010). mainly in the larger and more established With its private equity experience, South- companies in the main economies. Small and Africa could be an important investor hub medium enterprises (SMEs) still find it hard on the continent. Yet, the number of South- to access capital. African fund managers that have invested in According to the 2007 Finance for All report countries north of their borders is fairly lim- from the World Bank, increasing access to ited. This is because of unfamiliarity with finance for SMEs can accelerate economic local conditions – creating uncertain price- growth and reduce poverty (World Bank, risk trade-offs – and the abundance of attrac- 2007). However, World Bank tive deals in their home market. An excep- “With its private surveys have revealed that tion is global asset manager Investec, which equity experience, these firms, especially in lower started building a pan-African investment South-Africa could be income countries, still con- team in 1997 with the opening of its officesan important investor sider lack of access to finance in Botswana and Namibia. In 2004, theyhub on the continent.” a major obstacle to their devel- started investing in public equity markets opment. Many are considered too risky by across Africa. Their strong track record in local banks, and they are seen as too small this new environment laid the groundwork to justify extensive due diligences studies. for the launching in 2008 of Investec’s first They may also need investor guidance and pan-African private equity fund, the Investec experience to develop further. Africa Frontier Fund. DFIs target this gap among SMEs – which Despite Investec’s good reputation and local banks are in many cases not equipped attractive market conditions at the time, to address – by using local private equity there was still limited appetite among other funds as intermediaries. Also, DFIs pro- investors to invest in private equity in Africa. vide local banks with dedicated funding FMO was the first investor to deliver a final to grow their SME lending programs. In commitment, matching the USD 25 million some cases, DFIs have created separate investment of Investec. Ultimately, the fund programs, often supported or initiated by managed to raise USD 155 million, includ- their own national governments, to make ing investments from several South-African sure that funds are reserved for this higher pension funds and a fund of funds. In Zimba- risk segment. Examples are the FISEA6 bwe, Investec sourced an interesting oppor- (Fonds dinvestissement et de soutien aux tunity in the retail sector. To properly assess entreprises en Afrique), investment fund the potential of the opportunity, Investec funded by Agence Française de Développe- was looking for external expertise. Through ment (AFD) and managed by PROPARCO, their extensive network, FMO introduced International Finance Corporation (IFC) Investec to the ex-CEO of two leading mul- SME Ventures, and FMO’s Massif program. tinational food retailers. He was able to pro- Private equity investing requires fund man- vide Investec with the knowledge and exper- agers who have the ability to identify, grow tise that they needed and now functions as a and exit firms. This ability is developed with non-executive director on the investee com- experience, and to this end, DFIs – with pany’s board. their knowledge of the dynamics of private Another example of the roles DFIs play in business and the barriers to entrepreneur- sub-Saharan Africa is the Africinvest Finan- ial development – actively support first-time cial Sector Fund (AFS). FMO and long-time managers in sub-Saharan Africa. They offer strategic partner Africinvest joined forces in these managers much needed help: to seed 2007 to start this fund, which focuses on early the fund, find the right legal structure and stage and small financial institutions, espe- optimise their investment strategy, among others, and they provide them with access to 5 According to EMPEA’s latest Annual Fundraising and Investment their global networks. Review (2011), sub-Saharan Africa accounted for only 6% of total funds The concerns of commercial investors about raised for emerging markets in 2010. 6 FISEA is an investment fund that makes equity investments in the returns of first-time funds are often not businesses, banks, microfinance institutions and investment funds justified. The IFC showed in a recent analysis operating in sub-Saharan Africa. It is a public limited company set up in Paris on 20 April 2009, held by the Agence Française de Développement of its fund portfolio performance that first- (AFD). PROPARCO, AFD’s private sector arm, is in charge of appraising time funds in emerging markets matched and and managing FISEA
  • 27. 27 cially those located in post-conflict and less- ria of potential limited partners,7 such as developed countries. The fund is managed by pension funds and insurance companies, in Africinvest Capital Partners (ACP), who have selecting private equity funds. A study by a dedicated investment team and are able to Groh and Liechtenstein found that histor- use resources from a network of local part- ically track record is prioritised “DFIs are able to allay ners, located in countries like Ghana, Togo (Groh and Liechtenstein, 2011). investor concerns and Cameroon. To prevent a time-consum- Unfortunately, little data are and assist funds and ing fundraising exercise causing delays with publically available on returns companies to meet a highly uncertain outcome, FMO decided to achieved in the sub-Saharan their criteria through take a 100% share in the first closing of the Africa private equity market. For playing linking and fund (EUR 20 million). In early 2010, the sec- example, Africa does not feature partnering roles.” ond and final close took place, resulting in a in Cambridge Associates Private total fund size of EUR 31 million, due to com- Equity & Venture Capital Index and Bench- mitments from AFD/PROPARCO, through mark Statistics Report, which provides (his- FISEA and a private investor. To enhance cor- torical) return data. DFIs and fund manag- porate governance, FMO not only appointed ers could fill this role by jointly providing two members to both the advisory commit- data, consequently lowering the threshold tee and the investment committee, but also for commercial investors. has a position on the board of directors. Hence, the role of DFIs is essential in the sub-Saharan African private equity mar- Walking alongside locals ket. With their continued support, a grow- When FMO started to make equity invest- ing number of sub-Saharan African private ments in the 90s, this involved mostly direct equity fund managers have been able to investments in a wide range of sectors and successfully raise a second or third follow- countries. Soon it was realised that an in- up fund. This is a positive development, depth sector knowledge and local presence as growth in the industry requires success were essential to apply hands-on manage- stories or demonstrated effects. ment and create added value. In the early Ultimately, this generates a cycle entailing 2000s, FMO adopted a co-investment strat- resources moving into private equity invest- egy: besides investing in funds, where ing, critical mass being attained faster and required, it co-invested alongside these more entrepreneurs being willing to take funds. This provides the fund manager with risks. DFIs will continue to lead the cycle, a flexible source of funding for closing deals. making the sub-Saharan African private FMO limits its direct investments without equity markets more accessible. local partners to the financial institution, energy and housing sectors. The Bank of Africa (BOA) provides a good example of the role a DFI can play in a direct deal. When it was still a small group with only two subsidiaries, FMO became a share- holder by converting technical assistance (TA) funds into equity. In addition to their financial support, FMO, PROPARCO and other DFI’s also participated in the capital of several subsidiary banks. In most cases, the DFIs were founding shareholders and partic- ipated in several rounds of capital increases. Through board seats and by providing fur- ther TA, they helped BOA improve its corpo- rate governance and company structure. DFIs are able to allay investor concerns and assist funds and companies to meet their criteria through playing linking and part- nering roles. To attract a broader array of (commercial) investors to the sub-Saharan 7 Limited Partner is one of the co-owners of a business organized as limited African region, one has to know the crite- partnership who does not participate in the management of the firm.References / EMPEA, 2011. EM PE Annual Fundraising and Investment Review. // CDC, 2011. CDC high-level business plan 2011-2015, Presentation, May. // Groh, A. P., Liechtenstein, H., 2011. The first Step ofthe Capital Flow from Institutions to Entrepreneurs: the Criteria for Sorting Venture Capital Funds, European Financial Management, Volume 17, Issue 3, June, 532-559. // IMF, 2011. World Economic Outlook, Tensionsfrom the Two-Speed Recovery: Unemployment, Commodities, and Capital Flows, Report, April. // Liechtenstein, H., Meerkatt, H., 2010. New Markets, New Rules, Will Emerging Markets Reshape Private Equity?, TheBoston Consulting Group, IESE Business School, November. // World Bank, 2007. Finance for All? Policies and Pitfalls in Expanding Access, A world Bank Policy Research Report, November 13. Private Sector & Development
  • 28. 28 Lessons in this issue BY BENJAMIN NEUMANN EDITOR IN CHIEF Sub-Saharan Africa, long perceived as terra incognita, a favourable climate for investments: all key factors is now recognised as fertile territory for private equity. in promoting economic growth and reducing poverty. A few figures illustrate this trend: fund-raising between Investment funds’ profitability – frequently decried – 2006 and 2008 totalled USD 6 billion, compared with should on the contrary be seen as signalling this sector’s USD 2 billion between 2000 and 2005. Although Africa growth prospects in sub-Saharan Africa: it is this remains, nonetheless, a relatively minor market in this profitability that encourages more, and more diverse, respect – accounting for less than 4% of funds leveraged players into the market. across all emerging markets between 2006 and 2008 This form of financing is indeed often reduced to – the continent now constitutes a “new frontier” for the pursuit of short-term profit for investors, at the private equity. expense of business stability; it is also accused of Sub-Saharan Africa is now attracting increasingly participating in tax evasion, with what can be aggressive diverse investors – private investors, local investors – tax optimisation schemes combining exemptions in a sector supported to date mainly by the financial in the host country with the exemptions offered by development institutions. Highly concentrated in offshore jurisdictions. While investors may benefit from geographic terms (South Africa, Nigeria, Kenya) and fiscal transparency and legal security, this is too often focused on particular sectors (mining and energy, accompanied by opacity and lack of supervision on the banks), private equity is gradually expanding its private equity side. sphere of operation. In 2010, 21% of transactions were Private equity needs to answer these challenges, in conducted in South Africa, as compared with 56% in order to make a greater contribution to the continent’s 2008, while more than half of the transactions were in development. Multilateral organisations have a key sectors like food and beverages, healthcare and media/ role to play in supervising this sector, in order to telecommunications. achieve greater transparency. Financial development Nonetheless several factors are impeding the growth institutions, meanwhile, need to continue their of private equity in sub-Saharan Africa: political risk, pioneering role in Africa by intervening in the areas a lack of experienced fund managers, the small scale and sectors neglected by private investors, and by of the investment opportunities available, high entry providing more support for the SMEs which are crucial valuations, challenging exit conditions, an unfavourable to achieving sustainable growth in Africa. — legal and regulatory environment, challenging operating conditions, etc. However – and contrary to popular belief – private equity funds can play a key role in Africa’s development. Firstly they are an important source of capital, assisting with start-ups and the growth of existing businesses. As a shareholder, a high-quality management team can instil good management practices, good governance, a more effective organisation, more transparent reporting, and improved efficiency in human resources terms. It can also support the company in improving its environmental and social standards, particularly through technical assistance programmes. In our next issue Finally, the funds have a strong impact on employment What are the growth prospects for the and economic activity – and therefore in terms of fiscal private agro-industrial sector in sub- revenue for governments – quite apart from creating Saharan Africa? Private sector & DeveloPment is published by PROPARCO, Agence Française de Développement Group, share capital of € 420,048,000, 151 rue Saint-Honoré, 75001 Paris – France, Tel.: (33) 1 53 44 31 07 – E-mail: – Website: • Publications Director Étienne Viard • Founder Julien Lefilleur • Editor in chief Benjamin Neumann • Deputy Editor in Chief Denis Sireyjol • Editorial Assistant Santiago Piza-Cossio • Editorial committee Laurent Demey, Charlotte Durand, Alan Follmar, Adeline Lemaire, Marie-Hélène Loison, Élodie Parent, Véronique Pescatori, Denis Sireyjol, Aglaé Touchard, Nathalie Yannic • Issue coordinated by Laureen-Astrid Kouassi, Marie- Hélène Loison, Olivia Réveilliez and Aglaé Touchard (PROPARCO) • Contributors to this issue Yvonne Bakkum (FMO), Jennifer Choi (EMPEA), François d’Aubert (French Ministry of Finance), Jeanne Hénin (PROPARCO), Jeroen Horsten (FMO), Kiriga Kunyiha (Aureos Capital), Jean-Michel Severino (I&P), Davinder Sikand (Aureos Capital), PRoPARCo IS A DEVELoPMEnt FInAnCE Aglaé Touchard (PROPARCO), Alexandre Vilgrain (SOMDIAA) • Graphic design and creation 28 rue du Faubourg Poissonnière, 75010 Paris – France, Tel.: (33) 1 40InStItutIon WItH A MAnDAtE to PRoMotE PRIVAtE InVEStMEntS In EMERGInG AnD 34 67 09, / Publishing: Lionel Bluteau, Jeanne-Sophie Camuset / Design: Thibault Moullin • Traduction Christine Mercier, Ros Schwartz Translation LTD • DEVELoPInG CountRIES. 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