The Africa attraction

A new crop of Africa-focused private equity funds provides clear evidence of the region’s increasing pull for investors. By Judy Kuan.

Last year’s success stories in African private equity, including the centerpiece $3.36 billion (€2.78 billion) exit of private equity-backed pan-African mobile phone business Celtel International, have left a strong impression on investors considering a move into the region.

Gibian: opportunities in Africa outweigh capital inflow 

If the creation of a slew of new private equity funds targeting the region is any indication, curiosity about the region’s return potential is clearly on the rise. A number of the most recently publicised new vehicles have set quite sizeable fundraising targets, including the $500 million EMP Africa Fund II being raised by Washington, DC-based EMP Africa Fund Management; the Swiss-based, Swicorp Emerge Invest targeting the Middle East and North Africa region; and Athens-based Vectis Capital’s newly launched €70 million ($84 million) Vectis West African Advancement Fund.

“In general, EMP Africa sees private equity in Africa as quite compelling, and we think it is attractive in several different areas,” says Thomas Gibian, CEO of EMP Africa. “The size of the opportunity in Africa really overwhelms the amount of fresh capital that’s giving Africa a look today. The advantage goes to the supplier of capital.”

Gibian points to key sources of investment opportunities in Africa as being businesses where Africa has traditionally had a competitive advantage (energy, natural resources, mining and extraction, agriculture), sectors where the combination of technology and management can create efficiencies (financial institutions and telecommunications), and industries that can take advantage of trends in globalisation (logistics and distribution).

The globalisation trend presents “growth opportunities for all kinds of infrastructure that is necessitated whenever there are changing markets and changing market demand,” says Gibian. “Among the sectors that we think will attract significant investment in Africa over the coming years, most are either infrastructure or infrastructure-related.”

According to Gibian, the financial performance of EMP Africa’s first fund rivals that of top-level private equity firms, including not only those active in Africa but in other regions as well. However, he admits that investing in Africa is not without its challenges, and miscalculations and mistiming can lead to disappointing deals. For instance, out of the fourteen portfolio companies – one of which was Celtel – in the $407 million AIG African Infrastructure Fund managed by EMP Africa, two write-offs were made for companies that Gibian views in retrospect as being “a bit early” for the market at the time of investment.

Historically, what has set Africa apart from other emerging markets, says Gibian, is not the absence of investment but rather that much of the investment in Africa was done privately and in a manner that did not result in the creation of financial instruments or securities accessible to emerging market investors. Gibian sees the most profound change occurring in Africa’s growing private sector as being the trend that, as African companies develop – often with the backing of private equity – corporate governance and transparency have also improved.

African growth companies with proper governance structures do exist, and, as Gibian says, they will likely represent the “most rewarding” opportunities for investors in the region.