Private equity in the shadow of giants

Private Equity
In the Shadow of Giants
INNOVATIVE APPROACHES ALONG
THE INVESTMENT VALUE CHAIN IN SUB-SAHARAN AFRICA

About the Study
This paper draws primarily on 43 formal interviews and more infor-
mal conversations with a wide range of stakeholders in the African
private equity ecosystem including general partners (GPs) and
limited partners (LPs) (both prospective and currently engaged
in the region), research companies, solicitors, fundraising agents,
recruitment consultants, and development finance institutions (DFIs).
We also consulted a range of press articles, internet sources, reports
and studies of the private equity sector, most of which are listed in
the endnotes.
This opinion piece does not aim to be a fully quantified primary
research report classifying countries or players by future attractiveness or
past investment returns. Rather, we have sought to collate the opinions of
stakeholders in the industry to create an overview of the sector and facili-
tate a better understanding of the challenges they face and the innovative
approaches to the business model they have made.
We have, however, included an appendix containing the list of firms
interviewed with a brief classification to give readers a sense of the
industry landscape and an overview of the sectors and countries most
attractive to those firms.
Private Equity in the Shadow of Giants is aimed primarily at new-to-Africa
actors interested in sub-Saharan Africa rather than the larger scale,
established classic leveraged buyout (LBO) market in South Africa and
elsewhere around the globe, hence the title.
Christoph Andrykowsky, Victoria Barbary and Olivia Toye conducted
this research through interviews from August to October 2011 using
Monitor Group’s and the South African Venture Capital Association’s
(SAVCA’s) extensive network.
© MONITOR COMPANY GROUP, L.P. 2011© MONITOR COMPANY GROUP, L.P. 2011

Table of Contents
Executive Summary....................................................................1
Introduction.................................................................................6
Africa’s Challenges...................................................................10
PERCEPTIONS........................................................................... 11
COST TO SERVE........................................................................ 12
Private Equity’s Challenges.................................................... 14
FUNDRAISING.......................................................................... 15
DEAL FLOW ............................................................................ 20
TALENT...................................................................................23
Innovative Approaches Along the
Private Equity Value Chain.....................................................26
1. FUND STRATEGY.................................................................... 28
2. FUNDRAISING...................................................................... 29
3. DEAL SOURCING....................................................................32
4. DEAL EXECUTION...................................................................34
5. POST-DEAL HOLDING..............................................................35
6. EXITS................................................................................. 40
7. COST BASE............................................................................ 41
Where Does This Leave Us?.................................................. 44
ENDNOTES ..............................................................................47
Appendix.................................................................................. 49
Acknowledgements.................................................................52
About the Authors.................................................................... 53
© MONITOR COMPANY GROUP, L.P. 2011

Executive Summary
MONITOR HAS BEEN SERVING THE AFRICAN FINANCIAL
investor community for almost a decade and felt that given the recent real and
perceived increased interest in the continent, the timing was appropriate to capture,
aggregate and elevate the financial investment actors’ views and opinions on how
to best benefit from this positive trend in sub-Saharan Africa, home to the globe’s
last large-scale frontier markets.
As numerous recent reports have attested, including our own, Africa from the
Bottom Up, Africa comprises 55 rapidly urbanising, true frontier markets that have
moved beyond pure commodity extraction to a real consumer-led growth play. For
years, sub-Saharan Africa has had a terrible image abroad, with more attention
being paid to the bad news emanating from the continent – civil war, famine, pi-
racy – than the good. But perceptions are now improving and catching up with the
realities that many investors find on the ground: almost under the radar, established
players, even outside the South African market, have made good and consistent
returns. However, the bubble-like interest, despite the hype, has not yet resulted in
a commensurate inflow of capital.
African markets are still challenging to operate in. The cost to serve, execute deals
and deploy capital is still high due to a fragmented, largely unsophisticated market
with a huge infrastructure and talent backlogs, which impedes economies of scale
ELDERS GATHER TO MAKE A DECISION IN CÔTE D’IVOIRE:
In sub-Saharan Africa, the deal-making process is localised and often
family orientated making deal flow challenging.
1PRIVATE EQUITY IN THE SHADOW OF GIANTS

Executive Summary
and ease of doing business. For private equity players, this manifests itself in three
core activities:
• Fundraising: Prior to the global financial crisis, private equity
investment in sub-Saharan Africa was largely the preserve of
development finance institutions. However, more true frontier
investors are exploring the region, seeking alternative African
investment exposure that outperforms the small public markets
through innovative funding structures. This has improved the
fundraising opportunities for those GPs with differentiated
business models. Consequently, the bar has been raised by
institutional investors and teams have to demonstrate more value
creation through true operational improvement, rather than just
market growth or financial engineering.
• Deal flow: Across the region, competition for deals has increased
with the number of financial investors and renewed interest
from (African and global) trade buyers, foreseeably turning the
region into a vendors’ market. However, with the exception of
the giants – South Africa and Nigeria – deal flow is likely to
remain in the small- to mid-cap range. In this space, GPs supply
growth capital to founder-led firms that aim to expand regionally,
require corporatisation and upgraded governance processes and
management systems, as they are rarely “investment ready” by
Western standards. This is exacerbated by the nascent character
of the industry in much of the region. Consequently, there
PRIVATE EQUITY IN THE SHADOW OF GIANTS
2

Executive Summary
is an underdeveloped deal intermediary and service provider
ecosystem. Entrepreneurs rarely seek out private equity as a
way of growing their business as they are often unaware of
it, partly because there is an almost complete absence of a
venture capital industry in the region, which would typically
feed the deal pipeline from the bottom.
• Talent: This remains one of the biggest challenges, both
at GP and asset level. However, strides can be made by
employing a complementary blend of skills of returning
expats with best in class global training and local talent with
local networks, experience and potential.
To address these challenges private equity players have innovated along the private
equity value chain.
• Fund Strategy: Players are increasingly specialising and focusing
on niches, pointing at a much more sophisticated market
than the assets under management and market penetration
would suggest.
• Fundraising: New sources of patient capital, beyond development
finance institutions and traditional institutional investors, are
entering the scene. Frontier investors, family offices and funds
from other emerging markets are seeking alternative structures in
the region to deploy capital.
• Deal Sourcing: Just bringing in money is no longer good enough
for a GP to secure a controlling (but not always a majority)
stake. In return, vendors are seeking partners with networks and

Executive Summary
capabilities to unlock value. Creating concepts or platforms for
regionalisation is a theme that many players are using to create
value in their portfolio companies.
• Post-Deal Holding: Although many actors understand the need to
be actively engaged with their assets after the cheque is written,
few of them have cracked the post-deal value-add nut. The
implementation of value-enhancing changes in founder-led firms
is still one of the key challenges, for private equity investors in
Africa, but dedicated full-time (non-deal) operations executives
are still the exception. Consequently, teams rarely implement
proper dashboards, balanced scorecards or other cross-portfolio,
value-based monitoring and post-deal value driving tools.
• Exits: There is a wide range of potential exits, but a strong
preference to extract premiums from strategic sales to
multinationals seeking African growth platforms. Some GPs
are also beginning to implement sophisticated third-party exit
grooming, signifying increasing market sophistication.
• Cost Base: Execution and post-deal engagement costs in Africa
are still relatively high. While many investors choose to locate
in London and partner with African companies, this model
is unlikely to attract funding in future. The need to find a
cost-effective way of keeping “boots on the ground” through
leveraging flexible operating models and local networks is
becoming more vital than ever.
4

Executive Summary
Overall, our study uncovered an attractive industry in flux, with increased competi-
tiveness, but sufficient uncharted territory to grow from its still small base. Many
questions need to be answered about the sustainability of many of the innovative
approaches that have been proposed, or whether they are too far ahead of the
curve in terms of investor and investee perceptions and expectations. It will be
interesting to observe which ones will get to scale in their chosen niches.
On balance, the easy deals have been done. GPs now have to be on the ground,
have an operational value-add track record and have a local network to position
themselves as the preferred provider of capital. Financial skills are table stakes; be-
yond that, GPs will require specialised commercial skills to extract value. However,
few GPs include individuals with such experience on their payroll or embed this
expertise in the philosophy of the GP franchise.
In the end, private equity in sub-Saharan Africa is a people business, and whoever
institutes value-driving change the quickest by being closest to the assets is most
likely to win.

Executive Summary
Introduction

Introduction
THE LAST TWO YEARS HAVE SEEN A LARGE NUMBER OF
reports in which consulting firms and research houses are proclaiming “now’s the
time for Africa” (lead by Monitor’s Africa from the Bottom Up in 2009). This follows
a wave of growth, development and increasing political stability, albeit from a very
low base, that has engulfed sub-Saharan Africa over the past decade. Since 2000, the
region’s GDP has increased at a compound annual growth rate of 5%. Although it
halved during the global financial crisis, this level was almost restored in 2010.
Assuming no further significant downward spiral in the global economy, the region
is expected to grow by 4.8% this year (5.8% excluding South Africa) and exceed this
rate in 2012 and 2013 (with some sources quoting up to 10% in some sub-regions).1
Much of this growth is driven by private investment as investors wake up to the
increased publicity of finding significant alpha in Africa.2
Foreign direct investment
(FDI) is the most important source of private capital flows to the subcontinent.
Although in 2010 FDI inflows to sub-Saharan Africa as a whole had fallen by a fifth
($10 billion) since their 2008 peak of $48.1 billion, this is still an increase of 150%
in the past half decade. It also hides a significant uptick in certain economies and
regions where there are specific opportunities: the discovery of oil in Ghana saw
FDI inflows increased by 1.5 times, while the expansion of mobile telecoms in the
Democratic Republic of the Congo has seen FDI inflows increase four times to
$2.9 billion.3
It is often argued that Africa’s rapid growth has been driven by the continent’s rush
to exploit the region’s abundant natural resources, such as oil, bauxite, precious
and “rare-earth” metals, diamonds, and 630 million hectares of cultivatable agricul-
AFRICAN BUSHVELD
The untouched beauty and wildlife in large parts of Africa creates ample
tourism and eco-tourism investment opportunities.
7

Introduction
tural land. While commodities have attracted foreign attention, most notably from
China, and account for around 40% of FDI, sub-Saharan Africa’s growth is not just
being driven by primary goods. Natural resources directly accounted for only 24%
of the continent’s GDP growth between 2000 and 2008.4
The vast majority of growth is derived from manufacturing and service industries
including construction, retail, banking and telecoms, which have grown two to three
times faster than those in OECD countries. This has been driven by urbanisation
and the African consumer’s rising levels of discretionary income. Although sub-
Saharan Africa remains the globe’s least urban region, its cities have grown at 3.3%
annually over the past decade: by 2032, over half the African population will live in
urban areas.5
With cities driving growth and development,6
Africans are becoming
more affluent. The number of Africans with discretionary spending power, exclud-
ing the wealthy elite, more than doubled from 151 million to 313 million between
1990 and 2010, and is now of comparable size to the same class in India or China.7
And yet, despite all the hype, private equity investment in sub-Saharan Africa
remains at modest levels. One of our LP interlocutors commented that “the nature
of our industry is that there is a lot of looking, but not a lot of dipping into one’s
pocket. There has been an almost bubble-like interest in Africa, but it hasn’t been
demonstrated by any huge uptick in investment.” This is underlined by Emerging
Markets Private Equity Association (EMPEA) data, which shows that fundrais-
ing for the region lags behind other emerging markets. In 2010, $1.5 billion was
raised for private equity funds in sub-Saharan Africa (6% of the total for emerging
markets); that year, China-focused funds raised $7.5 billion and Indian funds $3.3
billion. Despite the attention sub-Saharan Africa has received recently, in the first
half of 2011 the region’s funds raised $1.1 billion, largely comprised of Helios
Investment Partners’ $900 million fund, the largest pan-African fund to date. This
is dwarfed by the $10.3 billion China-dedicated funds raised during the same period.
8

Introduction
Private equity penetration in sub-Saharan Africa is also amongst the lowest in the
world; in 2009 it was only 0.16% of GDP, before falling to 0.06% in 2010 (see
Figure 1).
Figure 1: Emerging market private equity investment as percentage of GDP, 2009 – 2010
PEInvestment/GDP(%)
United
Kingdom
United
States
Israel India Brazil China Russia Poland SSA South
Korea
Japan MENA Mexico South
Africa*
Turkey
Source: Emerging Markets Private Equity Association.
*Note: the South African ﬁgures are likely to include government and captive player data less likely to be included in the other country ﬁgures.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0.34
1.13
0.43
0.90
0.57
0.63
0.32
0.44
0.06
0.23
0.13
0.16
0.02
0.10
0.01
0.08
0.16
0.06
0.21
0.06 0.06
0.04
0.11
0.04
0.01 0.01
0.26
0.01
0.08
0.01
2009
2010
Source: Emerging Markets Private Equity Association
*The South African figures are likely to include government and captive player data less likely to be included in the other country figures
The relatively low penetration points at an early-stage market, with the exception
of South Africa. Returns have, however, been consistent and above average; all
of our GP interviewees expected returns of over 20% in markets outside South
Africa, with established players reporting in excess of this figure. Indeed, one of
our interlocutors told us “if you can’t make 20% in Africa, then you shouldn’t be in
the private equity business”. The longer-established players have consistently out-
performed the local public markets and other emerging regions. As the perception
with reality is catching up, more new entrants are now seeking this alpha.
9

Africa’s Challenges
INVESTING IN SUB-SAHARAN AFRICA IS CHALLENGING.
Despite the growth story, African opportunities are often harder to exploit than
that in many other high-growth emerging markets like in Asia and Latin America.
The challenges GPs face broadly fall into two categories: investor perceptions of
the region and the high cost to serve.
Perceptions
Despite the hype around sub-Saharan Africa as an investment destination, it has a
terrible image abroad.8
Coverage of the region and of its prospects has been relent-
lessly negative, even from acknowledged friends and advocates. The “CNN Effect”
has meant that the stories that grab headlines around the world – the civil war in
Côte d’Ivoire, Somali piracy, the HIV/AIDS plague across the subcontinent, and
the recent humanitarian crisis in East Africa – tend to crowd out good news
stories – the region’s growing political stability represented by transparent elections
in Ghana and the recent peaceful change of ruling party in Zambia. Much like the
media itself, investors tend to take more notice of the three minutes they see on the
television news rather than getting into the region and looking and understanding
the market dynamics from the ground up.
Conversely, the opposite is also increasingly true. As Western markets grow only
sluggishly in the wake of the global financial crisis, and European governments
struggle to persuade the markets that they can repay their debts, many investors
are reassessing risk and looking to new markets to find alpha. Such reassessments
make sub-Saharan Africa’s many markets look increasingly attractive on a risk-
POWER LINES IN NAMIBIA:
A large infrastructure shortfall is a major cost to doing business
in Africa.
11

return basis. However, this may lead to misperceptions about the relative size of
the opportunity in some of the sub-Saharan African countries, and about the levels
of risk.
Cost to Serve
Due to is physical size, geopolitical fragmentation and lacking infrastructure, sub-
Saharan Africa is also a hugely expensive place to do business, both in terms of
time and money. Largely, this is the result of the major infrastructure shortfall and
the lack of supporting ecosystems (legal, financial, intermediaries, etc.) across the
region. On just about every measure of infrastructure coverage, African coun-
tries lag behind their peers in the developing world, with the differences being
particularly large for paved roads, flight connections, phone/data main lines and
power generation,9
which makes doing business challenging, both for “fly-in” and
“boots on the ground” private equity business models.
Another factor that adds to the cost of doing business is the diversity and
atomised nature of the region. Sub-Saharan Africa comprises 49 of the continent’s
55 states, many of which have populations of fewer than 20 million and economies
smaller than $10 billion. These countries are characterised by cultural heterogeneity
from the Islamic cultures of the Sahel, through the French colonial legacy of West
Africa to the commercial sophistication of South Africa. Such diversity creates a
complex web of legal and business cultures, which are not easily navigated and can
limit businesses ability to spread across the continent.
This diversity is made more challenging to navigate because the investment eco-
system is underdeveloped or absent. Particularly at the smaller end of the market,
there are few value-adding intermediaries and other (legal, accounting, banking,
consulting) service providers. The major effect of the lack of a professional eco-
12

system is the high cost of due diligence. This is a “huge expenditure” and creates a
higher risk and abort costs for investors, particularly at the small- and mid-cap level,
for a number of reasons:
• Outside South Africa, due diligence firms are not generally
considered to be particularly high quality, and thus global
accounting, strategy or risk-consulting firms were often engaged
to satisfy both GP and LP requirements, at a higher cost than
the local equivalent.
• There is little reliable market and consumer data available in
Africa, as there is a large informal or cash economy, and standard
information about companies frequently isn’t available.
• As in other emerging markets, smaller companies often have
two or three sets of financial records, to which GPs needed full
access before investing. Traditional legal, commercial and
accounting due diligence is considered insufficient in Africa; GPs
and LPs need local knowledge about the immediate network and
political position of investees, for example.
• Both UK and US foreign corrupt practice legislation now require
compliance both going into the asset and in ongoing monitoring
throughout the investment period.10
Even when this had been navigated and locked down contractually, many
interviewees spoke of the necessity of staying out of court. In many African
countries the courts system can be mercurial, and while the legal contracts are
necessary, they are insufficient to ensure that an agreement is enforced even after
an expensive legal process.
13

Private Equity’s Challenges

PRIVATE EQUITY COMPETES SIMULTANEOUSLY IN THREE
distinct but dynamically linked markets: the markets for funds, deals and talent. A
superior team and track record create a virtuous cycle that enables smarter execu-
tion and value extraction from the deal flow and thus attracts funding more easily.
In each of these markets, the sub-Saharan-African environment presents specific
challenges to GPs and they have, therefore, had to adapt their models. As such,
we have cut into the topics and trends in Africa using these three markets as the
lenses through which we, and the other actors, perceive the applicable differences
in Africa.
Fundraising
Sources of Funding
One of the distinctive features of private equity in sub-Saharan Africa is the
heavy development finance institution (DFI) footprint both as LPs and direct
investors. DFIs have long been important investors in African private equity,
catalysing commercial investors’ interests and moving the investment agenda
from aid to commercial capital, helping stimulate the local private sector
through for-profit investments. Preqin documents that there are 51 DFIs
actively investing in Africa-focused funds, representing 9% of LPs investing in
the region,11
but our interlocutors suggested that this underplays their influ-
ence, with several suggesting that DFIs provide well over half the value of
LP investment in sub-Saharan Africa.
Finding the right talent is one of the greatest challenges for
GPs operating in sub-Saharan Africa
15

GPs working in sub-Saharan Africa also have access to impact investors, who
actively promote the growth and expansion of enterprises that have a development
impact, while returning at least nominal principal, and have provided hundreds of
millions of dollars to private businesses in the region.12
Another increasingly im-
portant source of new capital for GPs is the African diaspora, whose remittances
play such an important role in capital flows to the region. New vehicles are being
established that aggregate the economic power of African ex-pats to invest profit-
ably on the subcontinent.
Additionally, in South Africa, Namibia, and soon Botswana, changes to public pen-
sion fund legislation have allowed local pension funds to quadruple their allocation
to private equity to 10%, which brings their allocation in line with more experienced
public pension funds in North America. The raising of the private equity allocation
in these institutions, our interlocutors hoped, would increase their awareness of the
asset class and open new pools of funds to be deployed in this sector.
Many GPs are, however, beginning to look elsewhere for funding. Many of those
we interviewed were approaching family offices and high-net-worth individuals,
particularly in other emerging markets, as more adventurous, nimbler investors with
fewer conditions attached to funding. Endowments and foundations, particularly
those from the US, and sovereign wealth funds also favour the region as they seem
to have more risk appetite than traditional institutional investors,13
such as pension
funds, funds of funds and asset managers. For example, we have seen a sovereign
wealth fund and a specialised family office investment team execute focused
sector roll-up strategies in consumer packaged goods and fast-moving consumer
goods across the continent. By contrast, only a few traditional investors have dived
in to Africa, amid concerns about risk and the maturity of the market.14
16

Challenges of Fundraising
Since mid-2008, GPs raising funds for sub-Saharan Africa have faced many of the
same difficulties as their peers around the world. Both private and public institu-
tional investors have become more risk averse and have invested less in private
equity.15
A number of interviewees also identified a “certain dissatisfaction with
the private equity model in general” and a requirement for more transparency and
accountability from the fund managers. Even DFIs and government development
agencies, operating in cash-constrained environments, are more aware that they
need to have an impact for every dollar they spend. To attract investors, therefore,
African GPs need to “demonstrate to an investor sitting on the east coast of the US
that, on a risk adjusted basis, they can make equivalent dollar returns by investing
in Africa as against investing in the US or Europe or Asia” by genuinely improving
the strategy and operations of investee companies.
Consequently, investors have raised the bar in terms of strategic sophistica-
tion requirements for GPs, to mitigate risk and maximise returns. Many LPs now
have more stringent track record requirements than they did in 2007. To convince
investors that they are “good, not lucky”, fund managers must demonstrate expe-
rience and consistency in portfolio returns. This can adversely position first-time
fund managers, particularly those without African track records. That said, LPs
do scrutinise individual personnel, requiring a team with all the complementary
skills that good parenting of a portfolio company requires. DFIs and institutional
investors are also looking more closely at GPs’ strategies and business models and
require “carefully articulated strategies that take account of the realities of markets
that have been well researched”.
17

All these trends affect fund managers equally in other markets, but in sub-Saharan
Africa, this has been amplified by the macro stereotypes about political risk and
corruption, and the nascent state of the industry outside of South Africa. The risks,
many stakeholders in the region believe, are “overhyped”; while there are some
examples of potentially harmful legislation, such as Black Economic Empower-
ment in South Africa and Indigenisation in Zimbabwe, nearly all our respondents
argued that risk isn’t necessarily that much higher in Africa than anywhere else and
some have the track record to prove it: one of our interlocutors’ firms is stated to
never have lost or written off an entire asset in Africa due to country risk since the
firm’s inception in 1948.16
Fundraising is particularly challenging for South African GPs at present. DFIs are
less willing to invest in South Africa, because it is now considered a mid-income
country. Moreover, given the current political situation there is a greater risk premi-
um placed on South Africa by investors in London and New York, yet the returns
and GDP growth rate are lower. However, given South Africa’s dominance over the
region’s GDP, its market depth and the comparative sophistication of its private
equity industry, it is “difficult to deploy $200 million in Africa while ignoring South
African investment opportunities entirely”.
On balance, fundraising constraints in sub-Saharan Africa may be easing; globally,
Preqin’s most recent LP survey found that investors are “not investing at the same
pace as in the years before the downturn, [but] the number of investors looking to
make commitments is steadily improving”. Moreover, Preqin’s survey suggests that
LPs are looking for returns of 200 basis points over the market; as African equities
have performed poorly this year (see Figure 2), several GPs we interviewed
suggested that private equity was an attractive option to those seeking African
exposure (and to harness African growth) but with substantially higher returns.
18

Figure 2: Performance of African stock markets January–August 2011
INDEX PRICE 1D Av. YTD USD YTD
North Africa
EGYPT EGX 30 4728.55 0.28% -33.79% -35.51%
MOROCCO CFG 25 24018.47 0.16% -8.30% -5.17%
TUNISIA TUNINDEX 4513.03 -0.91% -11.73% -9.25%
West Africa
BRVM COMPOSITE 143.11 -2.36% -10.05% -6.30%
GHANA ALL SHARE 1128.26 -0.30% 12.93% 9.37%
NIGERIA ALL SHARE 21298.07 -1.11% -14.02% -16.09%
East Africa
KENYA ALL SHARE 73.60 -0.59% -24.76% -35.41%
TANZANIA ALL SHARE 1279.83 0.02% 9.96% 0.41%
UGANDA ALL SHARE 964.90 -0.26% -18.78% -33.37%
Southern Africa
BOTSWANA DCI 7287.30 -0.06% 13.63% 8.10%
MALAWI ALL SHARE 4905.96 0.56% -0.95% -9.30%
MAURITIUS SEMDEX 1929.58 -0.89% -1.92% 7.55%
NAMIBIA OVERALL 749.38 -1.68% -13.59% -20.33%
SOUTH AFRICA ALL SHARE 29525.83 -1.21% -8.07% -15.24%
ZAMBIA ALL SHARE 3799.56 0.26% 15.00% 11.02%
ZIMBABWE INDUSTRIAL 160.58 -0.16% 6.15% 6.15%
ZIMBABWE MINING 160.64 1.11% -19.84% -19.84%
Global Markets
MSCI EMERGING 988.05 -0.16% -14.19% -14.19%
S&P 500 1165.24 -0.74% -7.35% -7.35%
EUROSTOXX 50 2080.10 -1.29% -25.52% -22.17%
NIKKEI 225 8590.57 -2.21% -16.02% -12.15%
Source: FM Capital Partners
19

Deal Flow
Deal flow has changed. The easy days of post-Apartheid unbundling of conglomer-
ates in South Africa are long gone. On the whole, so too are the leveraged buy-outs
relying on financial engineering and letting underlying growth recoup the debt. The
tide is no longer raising all ships, even in this part of the world. Good deals are
harder to find and there is greater competition. Investments no longer just create
value by themselves; more sophistication is required to source and identify value in
them, thus investment theses often demand more attention and skills by the GP to
turn into real returns.
In 2008 deal flow slowed, almost “constipating” the industry, resulting from
the financial crisis. Due to limited debt, exits to financial buyers in that period
had slowed and deals delayed waiting for movements in multiples, as unrealistic
expectations created mismatches between buyers and sellers. Another challenge
peculiar to South Africa was that “the listed markets continued to tick over and the
changes to the Companies’ Act have made it more difficult and complex to execute
transactions and increased the cost of failure”. This is borne out in EMPEA’s data:
in 2008, South Africa was responsible for 28 deals, valued at $2 billion; in 2010,
the deal volume had decreased by two thirds (to only 10 closes), worth only $47
million. This trend started reversing in 2011, with transactions like Savcio, Tracker
and Universal indicating a return of high-value deals to the market. Conversely,
however, the other giant market of sub-Saharan Africa, Nigeria, seems to have been
less affected. In 2010, it accounted for $188 million (30% of the total value) in only
six deals.
20

Another factor that stymies deal flow is that private equity is in its infancy in
the region, with the exception of South Africa; consequently, capital-seeking
businessmen have had little exposure to the asset class, and are often unaware of
it. They do not, therefore, seek it out as a potential exit or as a natural source
of growth capital. The GPs in the region thus have to promote, demystify and
educate vendors about private equity, which can be a lengthy process, termed by
one GP “the education overhead”. This is exacerbated by the fact that there is
an almost complete absence of a proper venture capital industry in the region,
even in South Africa, which means that entrepreneurs are not familiar with the
role of outside investors.
GPs investing in mid-market and early-stage companies across the region seemed
content that there was sufficient deal flow, but many of those looking at larger
companies were struggling to find assets to take large tranches of financing. One
of our interviewees noted that this is partly because big players are seeking only
“belt and braces deals” and limiting their focus for large ticket deals to South
Africa. Consequently, particularly in Africa’s largest market, there is increasing
competition as more international GPs enter sub-Saharan Africa. That said, those
GPs playing in this space, but who took a more entrepreneurial approach, and
broader geographical focus to deal sourcing told us that they had seen “limited
competition, and our current pipeline reflects this fact”. But, in the conventional
private equity space, there are relatively few companies by comparison to China and
India that can take large ticket sizes. Many businesses are still young, founder-run
and have small capitalisations, as until recently, political instability has constrained
companies’ regional and cross-boarder growth. Several GPs who specialised in
21

small deals noted that many funds that had started out in small sub-$5 million
deals were “edging upwards to... $10 million, $25 million deals”, so “it’s more and
more congested higher up the food chain you go”, a trend exacerbated by larger,
international GPs looking to sub-Saharan markets.
There is also new competition from investment banks and some highly astute trade
players. Russian investment bank Renaissance Capital, which operates in six African
markets, completed 27 transactions in 14 African countries from mid-2010 to mid-
2011.17
Local trade players also compete with private equity as they have industry
relationships, access to customers and more trade expertise to pick and choose
assets. What is more, South African corporations with already established sub-
Saharan activities have become targets for multinationals eager to gain a foothold
in the region. A case in point is Wal-Mart’s $2.3 billion bid for South African retailer
Massmart, which has a growing presence in 14 markets across the region.
The slowdown in capital deployment is supported by EMPEA data, which shows
that for the first time since 2006 capital invested was lower than funds raised in
2010, and that it had hit a five-year low at only $631 million (see Figure 3) – a drop
of over 50% on 2009. Moreover, the data provides evidence for deal flow drying up
at the top end of the market. In 2008, 50 private equity deals were closed in sub-
Saharan Africa, with a total reported value of $2.9 billion. In 2010, there were 48
(only two less), but in value they represented only 20% of the 2008 level, suggesting
the average deal size shrunk down to a fifth.
22

Figure 3: Sub-Saharan Africa Fundraising & Investment, 2006 – 2010 (US$B)
$0
$1
$2
$3
$4
2.1
1.3
2.0
3.4
2.2
2.9
1.0
1.4
1.5
0.6
Funds Raised
Capital Invested
US$ Billions
2006 2007 2008 2009 2010
As such, with the exception of the giants – South Africa, where the public market
and private equity is much more developed, and Nigeria, given its growth dynam-
ics and size – deal flow is likely to remain in the small- to mid-cap space. These
deals are not about financial engineering, as is the case in LBOs; rather GPs need
to supply growth capital to founder-led assets that aim to expand regionally, require
corporatisation, and improved governance processes and management systems as
they are rarely at first sight “investment ready” by western standards. As such, they
require intensive post-deal engagement to realise the value.
Talent
Talent, both at GP and portfolio company level, is the major constraint for private
equity in Africa, almost unanimously confirmed by all players interviewed. Recruit-
ers confirmed that not all skills – Western education, financial acumen, management
experience, African background and operational track record – can be found in one
23

individual for each position. Rather, recruiters have to construct teams mixing team
members with some of these attributes and then invest in developing local talent to
achieve the required blend.
One investor told us that they were struggling to find an African to head their
Johannesburg office as suitable individuals were unwilling to leave lucrative jobs in
international financial centres or managing large international private equity funds
to manage a smaller fund on their home continent for a necessarily lower salary.
This, he believed was partly due to the fact that the “true egalitarian private-sector
boom in Africa is relatively new and... this is the first chance many people have had
to make real personal wealth”.
Despite this constraint, talent is to be found amongst the returning diaspora or
“re-pats”, who some LPs felt were ideal for the business due to their combination
of developed world experience and sensitivity to local nuances. But while the finan-
cial crisis might have encouraged some re-pats home, “the infrastructure does not
yet exist to entice the bulk of the African diaspora back”, thus repatriation has yet
to reach the levels seen in Asia. Also the banking crisis driven re-pats need to be
complemented by more operational focused “heavy-hitting” operationally experi-
enced re-pats, paired up with strong local team members to support them.
Several LPs we interviewed believed there to be “a severe shortage of good GPs in
Africa”. This echoes the findings of the 2011 Coller Capital EMPEA LP survey, in
which nearly half of respondents said that the limited number of established GPs
was likely to be the single biggest factor to deter them from beginning to invest in
sub-Saharan Africa over the next two years.18
As one potential LP told us, “we have
one set of investment guidelines and investment criteria irrespective of geography.
They mustn’t expect that just because a manager is in a higher-growth economy like
24

Africa that we’re going to give them any benefit of the doubt that they’re going to
perform as well as any other manager”. This explains the current quasi-absence of
large global institutional investors that still prefer to place their funds in Asia first;
many are interested and observing from the sidelines, until the volume of credible
players is sufficient to spread their bets.
Several of our interviewees pointed out that “there is a huge difference between
those who can do private equity and those ex-investment bankers who think they
can”. The distinguishing factor tended to be those teams that understood
that investing in the growth capital space requires a wide range of operational and
change management skills, beyond just financial structuring and deal execution.
25

Innovative Approaches along the Private Equity Value Chain
Innovative Approaches Along
the Private Equity Value Chain
PHOTO BY PIETERJAN GROBLER

DURING OUR INTERVIEWS WE HAVE ENCOUNTERED SUCH
a wide range of GPs that it would have done little justice to the innovations,
diversity and richness of their business models to force these into a simple indus-
try classification (see Appendix). Instead, we have looked to where the particular
challenges of sub-Saharan Africa have led GPs to innovate along the private equity
value chain, and to illustrate how these innovations have worked at each stage.
Figure 4: African GPs’ Innovations throughout the value chain
RENEWABLES ARE GAINING MOMENTUM:
Private equity firms operating in sub-Saharan Africa are finding
niches to exploit. One of the most popular among our interviewees
was green energy.
7. Cost
Base
1. Fund Strategy
• Regional funds
• Sector-specific funds
• Value-add funds
• Developing
platforms
• SMEs and mid-cap
• Following South
African companies
north
2. Fundraising
• Pledge funds
• Listed company
• Deal-by-deal
• Partnership
• Holding company
• Open fund
• Captive
• Merchant bank
• Higher fees
• Management &
oversight fees
3. Deal Sourcing
• On-the-ground
networks
• LP & partner
networks
• Proprietary deal
flow
• Limited
intermediary-
generated deal flow
4. Deal Execution
• Convertibles
• Preference shares
• Tranche investments
• Non-cumulative
dividends
• Liquidation
preference
• Debt financing
5. Post-Deal Holding
• Active, hands-on
engagement
• Capacity building
• Insert experts
• Regional expansion
• Technical assistance
6. Exiting
• Trade/Strategic
Sales
• IPO
• Group sale
• Secondary sale
• Sell back to
management or
founder
Investment ExecutionInvestment Strategy
Recruiting and Human Resources
Regional Office Infrastructure
Travel
Support services: legal services, due diligence, finance (accounting & reporting), IT etc.
27

1. Fund Strategy
As fundraising conditions have tightened over the past three years, competition for
funding has intensified. Consequently, new-to-market small, sub-Saharan African
players are developing sophisticated, differentiated strategies. The most common
of these amongst our interviewees were sector plays: financial services, health, agri-
business, and renewable energy. We also observed focused geographical strategies,
both regional and thematic (e.g. post-conflict economies) which has resulted in
investments being spread over a wider range of countries. EMPEA data shows a
marked uptick in investments in Kenya and sub-Saharan African
markets outside of South Africa, Nigeria, Ghana and Uganda.
These accounted for half the total value of private equity invest-
ment on the subcontinent in 2010, and represents an increase
of almost three times on both 2008 and 2009. We also noted a
number of strategies segmented by market sector, such as ven-
ture capital and SME investments, and value-add approaches – for example using
South African networks to link businesses in neighbouring countries to Africa’s big-
gest market, and backing South African entrepreneurs founding companies north
of the border. LPs believed this to be an encouraging trend as it showed that “more
thought was going into” the GP business models and strategies.
Most of our GPs were seeking to harness the growth of the “slow but steady
moving machine” of the emerging middle class; therefore, one of the most
popular strategies was that of developing consumer products or agribusiness
companies by buying platforms to expand into neighbouring markets, organically
or through roll-ups. One GP told us “we don’t take technical risk”, rather they
seek to take proven models to new geographies, either with one portfolio com-
pany, or by sharing the knowledge across their portfolio. This strategy primarily
involved mid-cap companies, with GPs taking a controlling minority stake of
Most of our GPs had
strategies focused on
harnessing the growth of
the African middle class.
PRIVATE EQUITY IN THE SHADOW OF GIANTS28

around $20 million. These are likely to benefit from changes like the creation
of the East African Customs Union, which makes international expansion easier
and less costly.
We also saw GPs working with venture or early-stage companies using this strategy,
but they preferred a majority stake, usually for under $5 million. The key to making
this model work was either finding an underdeveloped sector, such as healthcare,
or finding a company that had a particularly innovative business model that could
leapfrog existing technologies or products in the market.
All these contrast with the classic model of the long-established, multiple
vintage, larger-scale South African players who think about their capital allocation
north of their borders more in the sense of backing their South African portfolio
companies in their quest to double their non-South African revenue lines, rather
than seeking standalone assets in remote markets.
Regardless of the approach, many of our interviewees believed that while oppor-
tunism had worked in the past, in the current climate it was more important to stay
“consistently on-strategy”, and only buy assets where they had a detailed under-
standing of the economic and political environment in which they were investing so
that they could efficiently unlock the sources of value over the investment period.
2. Fundraising
One of our interlocutors told us that it is “increasingly difficult to justify run-
ning a fund model unless you get to scale” and given the current challenges of
fundraising he thought it would be very difficult to raise another fund. Indeed,
it appears that for many of our interviewees, the traditional closed-fund model
29

was distinctly under threat. This, it was argued, was “a natural evolution for the
business” and the development of alternative structures was an “important mile-
stone for the industry”.
We saw a number of alternative investment structures that actors had developed,
either through necessity, or through intent:
• Listed investment company using public market funding
• Privately held holding company or conglomerate (on-balance-sheet lender)
• Deal-by-deal fundraising or flexible capital model
• Pledge funds
• Open fund with no close
• Captive funds with a dominant investor
• Merchant or investment bank or principle investment arm
• Wealth managers
• Impact investors
There were a number of reasons why actors had innovated around the funding
model. Partly this was a result of the liquidity-constrained environment. With LPs
reluctant to tie up their capital and expose themselves to the high perceived risks
of Africa, having a model that provided investors with “liquidity and a real price
point”, was advantageous because it reduced the risk, but still gave private equity
exposure. Another benefit that actors saw in these structures was that they gave

investors “exposure to growing markets that they would otherwise be unable to
access”, thus providing them with added diversification benefits.
There is a clear preference for attracting more patient
capital, hence the emergence of more transparent, open
funding models that were more flexible about ticket
size, stake size, sectors and holding period. As one
interlocutor argued “the dirty secret of private equity
is the seven-year lifespan. You have to sell a perfectly
good asset at a predetermined point – from an investor
standpoint that’s crazy”. As a reflection of the dynamic
nature of the African market, players viewed flexibility as particularly important:
they needed to be nimble, quickly taking advantage of the opportunities that they
found. They also wanted flexibility on holding period. Those actors investing in
infrastructure and property would hold for the longest period, but otherwise there
was a disparity across all other variables, with some players seeking to exit a com-
pany within three years, even an early-stage one, and others feeling that to maximise
the value they needed to hold it for longer.19
Indeed, they wanted to be able to sell
the asset at the best market opportunity, not when dictated by a fund lifespan.
Those GPs who are planning on continuing the classic GP/LP closed fund
model often asked to increase management fees. This is obviously unpopular
with LPs, particularly DFIs, as one told us “if a GP can’t survive on two and
twenty, it shows he doesn’t know the landscape well enough”. That said, some
DFIs are willing to pay higher fees if the fund was below $50 million, if they
are engaging with SMEs, or in post-conflict countries, which they understand
had a greater economic impact and are more resource intensive. That said, all the
LPs we spoke to were concerned that higher fees might represent a flaw in the
sustainability of the GP’s underlying financial model.
Sub-Saharan African
GPs are innovating around
the fund model to
attract a wider range of
investors, reduce risk and
provide liquidity.
31

An alternative route is to charge investees a “management and oversight fee” baked
into the shareholder agreement, which enables GPs to engage intensively with their
portfolio companies without burdening the investors with the additional cost. The
principle behind such a fee is that the companies should pay for the value-add that
the GPs bring. However, as both the GPs that follow this model pointed out, it
only really works if you can make a cast-iron case up-front for that value-add to the
management of the investee company. Smaller, founder-led companies are gener-
ally less open to this.
3. Deal Sourcing
As in other markets, private equity is “very much a people’s business in Africa”, it
is “very difficult to address without feet on the ground or partners that you’re truly
aligned with and truly trust”. Our interlocutors thus emphasised the need to
spend considerable time in creating and developing “soft relationships” learning
the local cultural context and getting to know local entrepreneurs. This network
is vital as “the deals get put together and you get invited; you don’t propose the
deal if you’re a private equity player. Often the deals get done at a political or
industry leadership level”.
Those GPs considered to be successful by their peers were thus those that “really
know their way around” their chosen region. This allows GPs to get to know the
“potential investee companies, the market gossip and where the company sits
within the business ecosystem”. It also enables firms to identify any potentially
problematic (or advantageous) political affiliations that the entrepreneur might
have. Good relationships with vendors also prevent GPs from being persuaded to
“overpay for growth”, which can improve the investment’s performance as “if you
overpay, it’s difficult to generate the kind of returns investors are looking for”.

The importance of networks was underlined by the position of South African
managers who were seeking to expand north of the border. Most understand the
need to tap the growth and have a tranche of their fund carved out for ex-South
Africa investments, but many struggle to source deals – “how deals get done in
those countries is a mystery” due to the “complexity of the relationships” – and
evaluate risk. South African managers understood that expanding into the rest of
sub-Saharan Africa “requires our senior people to be committed and go to some
of these places”, and that this required “spending money and putting offices and
infrastructure in place”. Rather than make this commitment, many South African
GPs seek to gain this exposure indirectly by encouraging their portfolio companies
to expand regionally. This, as one interviewee pointed out, is “self-serving, but it’s
also valid”. However, “it underestimates inter-country differences, and in that sort
of play, management is an issue”.
Proprietary Deal Flow
Several established players noted that competition for deals has increased notice-
ably in recent years with one telling us “we have faced more competition on deals
in the last six months than in the last six years combined”. In this environment,
the ability of a GP to secure propriety deal flow was considered by many stake-
holders to be a litmus test of quality. Our interviewees believed that creating deals
and “build[ing] your reputation so people come to you” improved performance by
reducing initial asset prices, and demonstrated your skill at finding a good invest-
ment in unusual spaces. There was a certain amount of scorn for managers that
had bought assets that had “been around the block”, or had “wait[ed] for the
opportunity to come their way when shareholder activity unlocks an asset” rather
than going out and creating opportunities. There was also disdain for GPs that
relied on intermediated deal flow. Most of our interviewees believe that these deals
are the preserve of global players (Actis, Bain Capital, Carlyle) or established large
33

local firms with larger funds because “you need to be the highest bidder”, and most
GPs, particularly those with smaller funds, are unable to pay over the odds.
GPs’ views of investment opportunities are coloured by how they are plugged into
the ecosystem. The most marked example of this comes in the form of attitudes
towards the Asian family businesses of East Africa. Those GPs who understand
these businesses and have good contacts there see them as an opportunity to create
deal flow by building relationships and working with them to develop new busi-
nesses. Others see them as competitors because they are “shrewd on-the-ground
operators and they are well-connected with strong relationships with government...
particularly in resources”.
4. Deal Execution
Like private equity practitioners across the world, our GPs rarely take a plain-
vanilla equity stake in their investee companies. They seek to protect their down-
side by using convertible notes, preference shares, or investing in tranches,
particularly in smaller companies. They may also have non-cumulative dividends,
some form of liquidation preference in-line with other preferred stockholders,
and standard conversion and dilution provisions.
Bank financing in Africa is expensive; for example Barclays in Kenya currently
offers business loans at 14.9% over a five-year period20
– double the equiva-
lent in the UK – so some GPs investing in SMEs or early-stage companies also
look to provide investees with some form of debt financing. This sometimes takes
the form of a shareholder loan for start-ups, mezzanine financing, particularly in
manufacturing industries that have an expanding customer base, and sometimes
long-term debt “comparable to a bank”.

5. Post-Deal Holding
The vast majority of GPs we interviewed emphasised the need to be very hands-on
with their portfolio companies; few of the GPs we interviewed had more than two
investments per partner, and all took the customary seats on the board. This was
also reflected in the composition of GPs’ teams; several noted that they required
a mix of skills that ranged from accounting, legal, and financial to operational
knowledge in engineering and logistics. This would either be present within the
partnership, or they would call in the right skill sets as
the investee business changed, through networks of ex-
executives or consultants.
But outside the venture/early-stage space, GPs prefer
not to get too close to the running of portfolio compa-
nies themselves, instead helping the existing management to corporatise and grow
the business. Nearly all the GPs we spoke to stressed that when making their
investment decision they back good management ; for one GP “it’s the only thing
we do”. However, in some particularly challenging post-conflict economies or at
the venture capital level, some GPs had taken on managing director roles; one even
had to undertake the stock-take for an early-stage logistics business.
On the whole, however, GPs look to help the existing management to improve and
grow the business. The emphasis here is very much on capacity building within
portfolio companies, particularly in smaller or family-owned businesses where most
of the skill and energy resides in the founder. GPs discovered that in many cases
the “talent is there, but there is not enough”. This often manifests itself in a big gap
between the talent of the entrepreneur (or C-level executives) and the middle man-
agers, who do not lack in “raw talent or integrity” but have less experience. They
“usually require a little bit of deliberate study and understanding” because it’s the
middle managers that are going to implement the changes that need to take place
when turning a company around and looking to become more commercial.
Capacity building within
portfolio companies is
a vital part of turning a
company around.
35

Innovative Approaches along the Private Equity Value ChainInnovative Approaches along the Private Equity Value Chain
HELIOS INVESTMENT PARTNERS: BEST-IN-CLASS EXAMPLE OF DEDICATED POST-DEAL
VALUE-ADD CAPABILITIES IN SUB-SAHARAN AFRICA
One player in sub-Saharan Africa, Helios
Investment Partners, has adopted the
philosophy of integrating commercial
skills into the GP from their first vintage,
despite being technically “sub-scale” at
the time, with economics perceived to
be too small to carry this capability. The
team has a clear division of labour
between deal execution and post-deal
parenting. Although the post-deal or op-
erating executives do form part of the
deal selection and due-diligence process,
their primary role kicks in once the GP
“holds the keys to the business”.
Operating executives are located on the
ground, close to the assets they nurture
and they intervene far deeper than the
board. As in the more sophisticated
private equity markets in Europe and
North America, they have a different
background, education and experience
than fund managers, mostly being drawn
from the top-tier strategy firms or with
operational improvement experience, as
opposed to investment banking or ac-
counting. They end up part of the asset’s
management team, coaching and advising
all the way to the middle management
layer, often “peeling off” into the asset,
manning a project management office
(PMO) that actively implements the in-
vestment thesis and growth initiatives.
Ultimately, however, they are still part
of the GP with similar incentives to the
GP’s deal executives. This is the critical
difference to the more prevalent model
of the portfolio company hiring retired
CEOs as sector-experienced operat-
ing executives only into the respective
specific portfolio companies. Aligning
post-deal executives’ incentives with
the GP encourages the sharing of best
practice across assets, which can
improve asset performance throughout
the portfolio and thus increase post-deal
executives’ compensation. Moreover, it
enables these practices to be passed to
the GP franchise and thus transfer the
learning to the next deal or vintage.
This model also facilitates innovation
across the portfolio. Executives
employed by the portfolio company tend
to adhere to the principles and busi-

ness models that have worked for them
in their past careers, which offer
good downside protection for the
assets. But more progressive players
supplement this with analytics, change
management and multi-sector experi-
enced ex-consultants from the top tier
strategy houses, to ensure that some
of the more innovative and cutting
edge approaches to value creation
get implemented. This is what global
institutional investors are now increas-
ingly looking for and insisting on.
The Helios model works as it does not
create a “second-class citizen” dynamic
between deal executives and operating
executives: they are part of the same
team and in the same boat when it
comes to shared economics and incen-
tives. However, if GPs try and add this
principle half way through a vintage
or the GP’s history, it can cause con-
siderable internal friction. Generally by
then, the GP has been blessed by past
successes that did not rely on such ca-
pability, and the team’s economics have
been spent amongst the existing deal
partners that than need to make “space”
(in terms of carry points and incentives)
for the new operating executive. This
invariably puts them on the back foot.
They will have to work hard to justify
their presence and the cost they create,
in addition to being forced to hire ad-
ditional leverage to “move the needle”
in the portfolio. Further, they have to
sell themselves to the existing portfolio
CEOs, who will naturally feel threatened
by more “share-holder interference” that
they hadn’t signed up for.
One closing comment on the topic of
controlling stakes: there is a percep-
tion that the GP needs control to affect
value driving change. Often GPs con-
fuse effective board control (or majority
shareholding) with the ability to affect
change. By way of a global example:
one of the single biggest post-deal or
portfolio teams is part of a Special Situ-
ations Fund (owned by a bank) that only
ever takes minority positions, but is still
highly effective at instituting value driv-
ing changes quickly through influencing
and credibly convincing, rather than
controlling the management teams.
37

Some GPs did, however, bring in heavy-hitting outside expertise, with relevant
experience. For example, one GP that invested in a bank in Equatorial Guinea,
brought in an executive that had run a major international bank’s operations in
Afghanistan. Others sought to source expertise from within Africa – particularly
South Africa and Zimbabwe – and bring it to other African markets. Indeed, one of
our interlocutors felt that the flexibility and willingness to move to other countries
was one of the great strengths of the African talent pool.
Sometimes, however, this was challenging. The ecosystem of executive search is
undeveloped in Africa and expensive; GPs thus had to source individuals through
their own networks: as one interlocutor told us “you can’t suggest hiring a CFO and
then not have someone in mind”. Moreover, it could be difficult to persuade the
management that additional people or skills are needed to help grow the business,
particularly in founder-led firms.
GPs operating in both the mid-market and larger spaces, sought to help their
portfolio companies expand their operations regionally. This might be by simply
leveraging their own network of public and private sector international contacts
to help the investee enter new markets. In other cases, GPs used synergies
between the companies in their portfolio to either share best practice or serve as
clients. In financial services, providing technical assistance and growth capital to
expand into neighbouring countries often proved enough to grow the acquired
banks quickly.
On balance, however, we found the post-deal efforts of African GPs more aspira-
tional than real compared to their developed-market or even Indian counterparts.
Few players have adopted a genuine separation of labour between the hunting
and farming of value, or have real, dedicated (non-deal) operating partners with
the right mix of operational, change management and analytical skills to institute
early value driving changes into the acquired targets. Starting with cross-portfolio

dashboards and monitoring – measuring market externalities as much as financial
performance data – to cross-portfolio learning initiatives between executives, and
more innovative portfolio-wide commercial initiatives than just improved working
capital management and the obvious low-hanging fruit in the supply chain. Very
few of the GPs use a value-based management approach where growth initiatives
and board proposals are constantly evaluated against the initial valuation models
built during the deal due diligence.21
Part of the reason is the skill mix of the ex-
ecutives founding the GPs. In Africa often they have more of an accounting and
banking background where in India one finds more ex-CEOs being part of starting
the private equity franchises.
Moreover, sub-Saharan African players have not made as much effective use of
long-term consulting arrangements for that purpose. The KKR-Capstone model
of retaining consulting capacity and “best-in-class thinking on tap” for both port-
folio work and deal execution, has not been followed in the region. Players still
favour the classic fee-based expert, which not only incurs scoping, selection and
contracting costs and delays, but also impedes the institutionalisation of knowl-
edge across the engagements, and certainly does not align long-term incentives
between all three parties (GP/investor, portfolio company and consultant). In par-
ticular, when it comes to seeing through the implementation of slightly longer-term
change programmes, the use of consultants experienced in private equity can lead
to earlier value extraction.
That said, credit must be given to those GPs that are trying, starting with either
part-time operational partners (half deal hunter, half value farmer) on the pay-
roll, or other hybrid models. We found that the effective parenting of founder-led
entrepreneurial assets in Africa, given their scale, stage of development, degree
of corporatisation and openness to use external help, is probably (after fundrais-
ing) the most difficult and least developed activity in the private equity value
chain in Africa.
39

6. Exits
As the private equity market outside South Africa is very new, there have been rela-
tively few exits, but as one of our interlocutors noted, “exits are hard to achieve in
Africa”. GPs thus have to be “very creative” due to a lack of liquid public markets,
no secondary market and a lack of bank financing for M&A. However, several GPs
believed it to be advantageous to have the exit strategy planned early as ultimately
this is the most important part of the investment: GPs need successful realisations
to build up a track record and thus obtain follow-on funding.
There was a wide range of opinions on potential exit strategies, with trade or stra-
tegic sales being at the top of many lists, particularly for companies that created
industry platforms where some GPs saw them as a target for multinationals to buy
their way into new markets.
The most divergent opinions came on using IPOs. For GPs investing at the top end
of the market, a listing was the obvious exit, either on a local or foreign exchange.
But views were divided for those investing in mid- and small-cap companies. One
South African GP told us: “I’m not a fan of IPOs [as an exit], it doesn’t suit the
African private equity model... it’s not a market for small caps, and is an unattract-
ive exist mechanism”. Another working with start-ups and early-stage companies
in post-conflict markets disagreed: “we are quite keen on looking at local listings
for some of our companies... African stockmarkets have had a very good run and
they’re looking to some extent overpriced. There’s a lot of money looking to get
into Africa at the moment and there are very few IPOs... there is an opportunity for
us to target that over the next few years”.
In the small-cap universe, another potential exit strategy was aggregating parts of
their portfolio and selling some of the businesses as a group, or listing to “generate

an incremental exit”. This strategy gave those GPs access to markets and investors
that would usually be beyond their reach, and gave a diversification benefit to po-
tential buyers.
More recently we have seen a higher degree of sophistication by the larger South
African players when it comes to value extraction on exit. These players have
engaged external parties in a vendor due diligence fashion up to a year ahead of
envisaged exits to reassess the asset and its remaining runway for value creation.
These “exit grooming” or “corporate readiness assessments” more than pay for
their own cost, as they allow for informed pre-exit choices. In other words, they
identify those pockets of value to be extracted, by when, and which parts of the
future value creation can be credibly marketed and “sold” to the new owner.
7. Cost Base
Practising private equity in sub-Saharan Africa is expensive: deal sourcing, diligence,
communications, and being on the ground is challenging and time consuming. Fre-
quently, GPs struggle to cover costs on standard 2% management fees, particularly
for funds under $100 million: “bigger is beautiful because it helps make ends meet.”
GPs have thus developed several approaches to fund operations.
Flexible Operating Infrastructure
Everyone we spoke to agreed on the necessity of having an extensive local network
and knowledge of the business environment. But many GPs did not think that
this necessitated a permanent in-country presence. Several of the GPs we spoke to
were based in London; as a global financial hub it gives access to a wide range of
potential deals, investors and staff. Moreover, several GPs commented that it was
actually easier to travel to parts of Africa from London than within the region, and
41

this made interacting with investee companies easier. For many, a base in London
mitigated talent constraints as they could recruit internationally and reduce costs
on expatriate living allowances that are often needed to attract people to live
in-country. However, those GPs are quick to explain that this is not a “fly-in”, “suit-
case investor” model as they still dedicate considerable time to engaging their assets,
even without a permanent in-country presence.
Where GPs felt they needed an on-the-ground presence, they sought to minimise
costs. To provide a low-cost permanent presence, one GP embedded staff in their
assets, using the portfolio company’s office space and back-office services. In a
reverse model, one venture capitalist brought his investee companies to him,
incubator-style, so they were all within a ten minute drive of each other.
Partnering
Another model prevailing with “new-to-Africa” London-based players was
by partnering or coinvesting with a local entity and operational expertise in the
business of the investee company, rather than providing this themselves. Part-
ners could be a local private equity firm, a high-net-worth individual or a
financial institution, sometimes even a blue-chip trade or strategic player. Some
GPs chose to partner with DFIs as “they have the expertise, the legal frame-
work is less of a concern, and the political risk is mitigated as they have good
relationshipswiththegovernment”.Oftenthesepartnerswouldalsotakeequityinthe
investeetoensurethattheirinterestswerealigned.Somenew-to-AfricaGPsusedthis
approach as a stepping stone into the region, allowing them to gain experience
rather than immediately seeking controlling stakes from a distance in the more
heavilycompetedgeographies.

This alternative was adopted either by international GPs with little in-country pres-
ence or by those who were purely (passive) financial investors. Both understood the
need to have operational experience and to engage their investee companies, but
admitted that “we don’t have the local or expertise to get down in the weeds and
actually run the company”. Instead, they engaged with the company through moni-
toring. However, the scope for this model to succeed seems relatively limited, and
was only found amongst captives or government-funded investment initiatives; as
one interviewee told us “why would investors be paying fees for this? Why wouldn’t
you just pay the local guys?”.
43

Where Does This Leave Us?
PHOTO BY MARK VANCE

DUE TO THE CONFLUENCE OF CHALLENGING INVESTMENT
environments in sub-Saharan Africa, and the more selective deployment of LP capital
for private equity funds, actors operating in the region have had to be creative, along
the value chain to create compelling business models to attract capital that allows them
to be flexible. This has required GPs to try to “leapfrog” their business model up the
private equity trajectory, adopting more sophisticated strategies than just generalist LBO
or growth funders. However, this may well be too much too soon on several levels.
The sub-Saharan private equity market is still very small with penetration still lagging
markets that have successfully carried such market specialisation. Further, many of
the GPs we spoke to operating outside South Africa are still on their first vintage,
and they have yet to prove that they have cracked the post-deal, active-engagement
nut. The cost to serve in sub-Saharan Africa is high, and with small funds, unproven
funding models, and pressure to keep standard management fees, the jury is still out as
to whether this will be profitable, particularly as returns in sub-Saharan Africa still lag
those of China and India. Conversely, capital seekers are going to have an interesting
time with investors flocking in, but they need to be aware of the true value-add (as
against the aspirational) beyond the face value of money that potential investors bring.
There is also a sense that these models may be too sophisticated for the market. A
dearth of obviously attractive investees and increasing competition for investments in
the region have made conventional deal flow away from the venture or early-stage end
of the market difficult to secure, and both the quantitative and qualitative data suggest
that it is still not easing. Thus penetration of the market is low, and while that leaves
a huge opportunity for private equity deployment, the GPs are not yet, on the whole,
realising it. However there are opportunities if GPs adopt a more entrepreneurial
approach as evidenced by deals such as Helios Towers and Helios’s investment in
Shell’s downstream oil business.
Finding cost-effective and successful methods to nurture growing
companies after the investment is one area on which GPs need to work.
45

Finally, GPs seem to feel that the private equity fund structure is insufficient to
meet the speed and complexity of financial innovation and evolving asset require-
ments in sub-Saharan Africa. They were thus seeking out new avenues of funding
than previous fund vintages. DFIs still account for 60-75% of all LP investment in
sub-Saharan Africa, but those we spoke to were cautious about investing in financ-
ing structures other than the GP/LP fund, because that was how their strategic
asset allocation was set up. Several GPs we spoke to, whilst acknowledging the
important role DFIs had played in the development of the industry, were frustrated
by the apparently leisurely pace of DFI decision making, and sought to leapfrog
up the LP ladder. However, private institutional investors were wary of first-time
fundraisers because they were looking for international “institutional quality” GPs
with a strong track record. While there were those LPs who didn’t want to “miss
the boat” or “be late to the party”, more cautious investors thought this was a dan-
gerous dynamic. Their view is that given the potential of sub-Saharan Africa, the
window of opportunity is not going to close and currently they wanted to “let the
cowboys be cowboys” and wait until the market was more mature.
Overall, our study uncovered a very attractive industry in flux, with increased
competitiveness, but sufficient uncharted territory to grow from its still very
small base. Many questions need to be answered about the sustainability of
many of the innovative approaches that have been proposed, or whether they
are too far ahead of the curve in terms of investor and investee perceptions and
expectations. It will be interesting to observe which ones will get to scale in their
chosen niches.
On balance, the easy deals have been done. GPs now have to be on the ground,
have an operational value-add track record and have a local network to position
themselves as the preferred provider of capital. Financial skills are table stakes,
beyond that GPs will require more sophisticated skills to extract value. Few GPs
keep those on payroll and as part of their philosophy of embedding it in the value
of the GP franchise.
In the end, it is a people business, and whoever institutes value driving change the
quickest by being closest to the assets is most likely to win. ●
46

Endnotes
Endnotes
1 World Bank, Africa’s Pulse: An analysis of issues shaping Africa’s economic future, volume 4, September 2011, https://blogs.
worldbank.org/africacan/files/africacan/wb_africaspulse_sept2011_web2.pdf (accessed 23 September 2011).
2 Some interviewees that are long-established in the region would argue that “good returns have always been around –
but less talked about – in Africa”.
3 United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2011: Non-equity Modes of
International Production and Development, http://www.unctad.org/en/docs/wir2011_en.pdf (accessed 4 October 2011);
UNCTAD, World Investment Report 2010: Investing in a Low Carbon Economy, http://www.unctad.org/en/docs/wir2010_
en.pdf (accessed 4 October 2011).
4 Additionally, resources contributed indirectly to growth through government spending – approximately 8% of GDP
growth in the same period. Charles Roxburgh et. al., Lions on the Move: The Progress and Potential of African Economies,
(McKinsey Global Institute, June 2010).
5 UN HABITAT, The State of African Cities 2008: A Framework for Addressing Urban Challenges in Africa, (Nairobi: UN
HABITAT, 2008).
6 Monitor Group, Africa from the Bottom Up: Cities, Economic Growth and Prosperity in sub-Saharan Africa, (Monitor Group,
Cambridge MA: 2009).
7 This figure includes the “middle class”, which accounts for 13.4% of the population, but more importantly, the “float-
ing class” (just above the Bottom of the Pyramid) with per capita daily consumption levels of between $2 and $4, who
account for over 20% of the population, up from 11.6% in 1980. Mthuli Ncube, Charles Leyeka Lufumpa, Désiré
Vencatachellum, The Middle of the Pyramid: Dynamics of the Middle Class in Africa, African Development Bank Market
Brief, 20 April 2011; Vijay Mahajan, Africa Rising: How 900 Million African Consumers Offer More Than You Think, (Pearson
Education, 2009).
8 Monitor, Africa from the Bottom Up, p.19.
9 Vivien Foster and Cecilia Briceño-Garmendia (eds.), Africa’s Infrastructure: A Time for Transformation, Overview, (World
Bank, Washington D.C.: 2010), http://siteresources.worldbank.org/INTAFRICA/Resources/aicd_overview_eng-
lish_no-embargo.pdf (accessed 15 August 2011).
10 This is one of the drivers of demand for specialised intelligence firms, such as Monitor Quest, that offer bespoke ser-
vices to manage both propensity and opportunity to default in key individuals, increasing the cost to operate for GPs.
“We are in a new era of F.C.P.A. enforcement,” Lanny A. Breuer, the US assistant attorney general for the criminal
division, said last year, “and we are here to stay.” Peter J. Henning, “A Warning as Wall Street Moves into Emerging
Markets”, New York Times, 28 September 2011, http://dealbook.nytimes.com/2011/09/28/a-warning-as-wall-street-
moves-into-emerging-markets/?pagemode=print (accessed 3 October 2011).
11 This is for Africa as a whole; south of the Sahara, it is likely to be a greater proportion. Bogusia Glowacz, “Develop-
ment Finance Institutions investing in African private equity”, Preqin.com, 29 March 2011, http://www.preqin.com/
blog/101/3607/african-private-equity-dfi (accessed 4 October 2011).
12 See Michael Kubzansky, Ansulie Cooper and Victoria Barbary, Promise and Progress: Market-based solutions to poverty in
Africa, (Monitor Group, Boston MA: 2011), esp. pp. 182-193.
13 Nick Kochan, “The Final Frontier: Africa for Brave Investors”, Euromoney, September 2011, p 326.
14 Strongly borne out in our interviews, but also corroborated by Coller Capital, Emerging Markets Private Equity As-
sociation, Emerging Markets Private Equity Survey 2011, p. 10.
15 The Preqin Quarterly, Q2 2009.
16 Simon Harford, Partner and Co-head, Africa, Actis, South African Venture Capital Association Conference Cape
Town, February 2011.
17 Dominic O’Neill, “Investment banks eye the last frontier: Africa”, Euromoney, May 2011.
47

Endnotes
18 Coller Capital, Emerging Markets Private Equity Association, Emerging Markets Private Equity Survey 2011, p.9. It is
worth noting that this has dropped from 60% in the 2010 survey, suggesting that LPs are more aware of established
GPs in the region than they were 12 months ago, and that more established GPs are seeking to tackle the market. An-
other point suggesting that LPs are better educated about the African environment than they were in 2010 is that those
citing political risk as a deterrent to investment fell from 58% to 39%.
19 Recent research by INSEAD and PwC suggests that this is an approach favoured by LPs from the Middle East when
they invest in sub-Saharan Africa. Their MENA LP survey found that they “favoured investments with a short life-
line”. Pascale Balze, Stephen Mezias and Yousef Bazian, The Next Five Years: MENA PE, September 2011, p.24 http://
campuses.insead.edu/abu_dhabi/research/documents/INSEAD-MENA-PE-Report-2011.pdf (accessed 4 October
2011).
20 Barclays Kenya Website http://www.barclays.com/africa/kenya/consumer/ (accessed 10 October 2011).
21 See also the authors’ work for the South African Venture Capital Association’s Foundation Programme lecture at the
Gordon Institute for Business Sciences.
48

Appendix
Broadly speaking or without going into a scientific segmentation exercise
(by size, region, theme or strategy, funding structure, etc.), and with no
claim of completeness, we perceived seven categories of players:
• Global players with a presence on the continent: e.g. Actis, Aureos
Capital, Bain Capital (which has made one investment in South Africa),
Carlyle (which is starting out), Standard Chartered and few more
rumoured to be investigating opportunities;
• Global players transacting from abroad, without an on-the-ground
presence, but partnering with local actors or DFIs: e.g. HSBC Principal
Investments, Cordiant Capital;
• Niche players transacting from abroad, without a permanent presence
but partnering with locals: e.g. Silk Invest;
• Niche players with a (more or less) permanent local presence: e.g.
ManoCap, Maris Capital, TLG Capital;
• Pan-African players headquartered abroad, but with bases on
the continent: e.g. ECP, Kingdom Zephyr, Development Partners
International, Helios Investment Partners;
• Regional or local players, solely based on the ground: e.g. African Capital
Alliance, Catalyst Principal Investments, Salt Capital;
• South African players: e.g. Ethos Private Equity, Metier, Marlow Capital.
Appendix
African Private Equity landscape
49

Appendix
In this study we did not attempt to quantify and rank the “hot” countries and
sectors by returns or attractiveness. Qualitatively however, we identified a
number of trends for investment decisions:
GROWTH STORIES
Our interviews uncovered three growth stories that both private equity fund
managers and their investors were chasing.
• Consumer-led growth: Increasing consumer demand as disposable income
in sub-Saharan Africa increases and the middle class grows;
• Commodity-led growth: Classic energy and mineral extraction plays, and
more recently, food security driven agri-food processing;
• Infrastructure backlog: This is present in both physical infrastructure
(roads, ports, energy, telecoms, water and sanitation), as well as financial
services, education, and healthcare facilities.
The most favoured theme among our interlocutors appeared to be fast-
moving consumer goods or consumer packaged goods roll-ups to create
sizable regional players, which can then be sold to multi-national companies.
Many private equity investors felt that both commodities and infrastructure
required specialist knowledge and a range of skills within the team that they
often could not provide.
Favoured Countries and Growth Stories
50

Appendix
FAVOURED COUNTRIES
Drawing a conclusion on country selection beyond South Africa is harder. Our inter-
viewees saw opportunities all over the sub-Saharan African region:
• East Africa: Kenya, Uganda, Tanzania and Ethiopia were all seen as attractive
markets, particularly for those players in the small- to mid-cap space, who wanted
to expand regionally. The customs union, the new telecoms infrastructure in
Kenya, and good education standards created opportunities for many GPs.
• West Africa: Ghana was particularly favoured, even for many over Nigeria, as
an easier place to do business and had a stable and less complex political and
cultural environment. However, those GPs that knew the Nigerian landscape were
extracting considerable value from Africa’s most populous country.
• Post-conflict countries: South Sudan, Liberia, and Sierra Leone were all attractive
countries to GPs playing in the venture and early-stage spaces. The low base
from which many companies in these countries start provided these funds with
high growth opportunities and the potential of selling assets to strategic buyers
looking to expand regionally.
51

Acknowledgements
Acknowledgements
The authors would like to thank all the senior executives who were interviewed for the
project, without whom this report would have been impossible. Further we thank both the
South African Venture Capital Association (SAVCA) and Unquote for their contributions. We
would also like to thank Mark Fuller, the former Chairman of Monitor Group, for his support
in making resources available to us to undertake our research.
General Partners / Investors
Actis
Aureos Capital
African Capital Alliance
African Development Corporation
Catalyst Principal Investments
Cordiant Capital
Development Partners International
Ethos Private Equity
Helios Investment Partners
Horizon Equity Partners
HSBC Principal Investments
Kingdom Zephyr Africa Management
ManoCap
Maris Capital
Marlow Capital
Metier
Old Mutual Private Equity
Omidyar Network
RIT Capital Partners plc
Salt Capital
Sanlam Private Equity
Silk Invest
Sphere Holdings
Surya Capital
TLG Capital
Trium Investments (Trivest)
Limited Partners
Capital Dynamics
Citadel Wealth Management
Coller Capital
Hermes GPE
Homestrings
Pantheon
Partners Group
Development Finance Institutions
African Development Bank
Development Bank of Southern Africa
International Finance Corporation
Proparco
Solicitors
O’Melveny Myers
Norton Rose
Research Organisations
Malachite
Jason Mosely
Executive Search
Egon Zehnder
Fundraising Agents
Asante Capital
Trade Bodies
South African Venture Capital Association
52

About the Authors
About the Authors
Christoph Andrykowsky
Christoph is a Partner at Monitor and is primarily driving Monitor Capital‘s
efforts into Africa for both ‘fee for service’ and ‘upside /equity-sharing /
co-invest’ arrangements.
His work covers the full value chain of private equity from fund strategy
design for a semi-captive private equity player, advisory on private equity
deals, de-listings, strategic due diligences /sector studies, 100 day plans, post
deal value extraction, corporate readiness assessments and exit grooming across a wide variety
of sectors and businesses. He also manages Monitor’s relationship with Surya Capital in Africa.
Prior to working at Monitor he spent six years in industry, managing business and export devel-
opment projects for an international engineering group of companies covering Africa, Europe
and Asia.
Christoph completed a three year master degree in international business administration at
E.A.P. – European School of Management in Paris, Oxford and Berlin, now: ESCP-EAP and
holds a BSc in industrial engineering, economics and business administration; Hamburg Univer-
sity, Germany. He is a French and German national with permanent residence in South Africa.
He is also a commercial pilot.
Victoria Barbary
Until October 2011, Victoria was the Senior Analyst in the Office of the
Chairman at Monitor Group, where she headed the London research team.
Her work has covered a wide range of emerging-market issues including inclu-
sive business and impact investing in India and sub-Saharan Africa, economic
development in the Middle East and sub-Saharan Africa, as well as risk man-
agement and private equity investment strategies in emerging markets.
Victoria is a leading expert on the activities and structure of sovereign wealth funds, and has
written extensively on the topic, and regularly comments for the print and broadcast media.
Victoria is the founder and managing director of Dhana Advisory, a specialist advisory and re-
search firm concentrating on capital flows in emerging markets, with a focus on Africa and the
Middle East.
Victoria has a PhD in History from the University of Cambridge, UK, and Bachelors and
Masters degrees in Modern History and Politics from the University of Durham.
53

The Design Studio at Monitor is a graphic design
firm based in Cambridge, Massachusetts with a
speciality in information design. Since 1998, the
designers have worked closely with clients to under-
stand their message and content in order to provide
smart and creative visual solutions. Please visit
www.thestudio.monitor.com for more information
and project samples.

FOR MORE INFORMATION PLEASE CONTACT:
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Christoph_Andrykowsky@Monitor.com
tel +27-11-712-7517
www.monitor.com

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