Action in Africa

The G8 Summit was good news for Africa. UK prime minister Tony Blair’s success in persuading his colleagues – the heads of the eight richest countries in the world – to double aid to the continent was undoubtedly a significant achievement.

But more significant news this year came not from Gleneagles, but from Kuwait.  In April, the Kuwaiti Mobile Telecommunications Company (MTC) announced that it had paid $3.5 billion (€2.9 billion) to purchase Celtel, the pan-African mobile phone operator.  On a personal note, the sale was good news for CDC – as the first institutional investor that backed Celtel after the founder, Sudanese entrepreneur Mohamed Ibrahim, we made 4.3 times our money.

However, it is the broader implications for private equity in emerging markets that are most significant in the Celtel transaction.  The sale confirmed that private capital can be put to work in responsibly managed businesses in emerging markets and still provide excellent returns.

We have seen how the private equity industry has transformed the UK economy over the last 20 years.  We believe that it has the power to do the same for emerging markets over the next 20 years.

The fact that MTC, a strategic investor based outside Africa, was prepared to put a significant amount of money into the transaction lends further support to the thesis.  At CDC, while we look for top quartile returns in the markets where we invest, an important part of the mandate from our owner, the UK government, is to attract capital to markets where other investors fear to tread.  Our early commitment to Celtel had a halo effect – other investors such as UK fund manager, Blakeney Management, and Washington-based Emerging Markets Partnership (EMP) invested after us, having judged the investment potential of this region. 

So why is private equity so important for Africa?  Mainly because Africa, like anywhere else, needs long-term capital.  In particular, it needs private equity for its flexibility, discipline and patience. Furthermore, private equity allows capital to be applied across the economic spectrum from large corporations, to mid-caps and small and medium sized enterprises (SMEs).  We have seen how the private equity industry has transformed the UK economy over the last 20 years.  We believe that it has the power to do the same for emerging markets over the next 20 years. 

The private equity industry in emerging markets as a whole is still in its infancy, though it is making long strides in India, where investor interest is burgeoning.  There has also been progress in China, where successful managers including CDH have been able to raise sizeable funds in a short space of time.  But Africa, and to a lesser extent Latin America, are still frontier territories for the industry,

It is strategic private equity that will ultimately lead to long-term economic growth in Africa.

despite a number of interesting success stories.  The number of fund managers with credible track records in Africa is still small, though we expect it to grow in line with opportunities in particular sectors, such as mobile communications, where Africa offers the world’s fastest growing markets, with annualised increases in revenues of 65 percent over the past five years.

We look therefore for fund managers who can apply lessons learned in the first world to situations in the developing world.  Actis, which managed CDC’s investment in Celtel, is one; EMP, Aureos, which invests exclusively in SMEs, Ethos in South Africa, CAPE in Nigeria and African Lion, which focuses on early stage mining prospects, are others.

The opportunity is there and the need remains urgent. Sizeable African companies, such as Homegrown in Kenya, which supplies cut flowers and packed vegetables to major UK supermarkets and conglomerate United African Company (UAC) in Nigeria, have approached private equity firms because they have found it difficult to raise long-term expansion capital in the domestic equity or debt markets.  African industries of the future, such as the formal retail sector and low cost airlines, will be looking to the private equity industry to provide development capital.

Africa is a major market for CDC – as the continent’s largest equity investor we have recently made commitments of over $100 million to four different African funds in addition to existing investments in Africa of $750 million and a $250 million commitment to Actis Africa, to be invested over the next three and a half years.

The G8’s debt-relief plan and increased aid spending are real advances towards the goal of reducing poverty but few would deny that one of the thrusts Africa needs is investment – investment in companies and projects that offer a commercial rate of return.  As in China and India, the promotion of a vigorous and competitive private sector will drive economic growth.  There is a place for aid, but it is strategic private equity that will ultimately lead to long-term economic growth in Africa.

Richard Laing is CEO of CDC, the UK government-owned fund of funds business focusing on emerging markets with assets of $2.3 billion under management. It has committed capital to 35 funds in Africa, Asia and Central America.