THE ANNUAL REVIEW 2010 - PEI Media

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page 120 private equity annual review 2010 groups and their investment portfolios very hard indeed. With that in mind, it is not surprising that of those LPs we interviewed who have invested with some of the pioneering groups, not many were able or willing to issue a positive score card. Only a couple said performance to date had been “as expected”. Others said it was too early to tell what these early investments would be able to deliver. And one London-based investment advisor, commenting on the performance of MENA funds he has backed so far, said: “We are in hope rather than expectation. There are people who say they could achieve returns above 15 percent, but there are others who say the IRR will be lower.” creative destruction… Needless to say that for any MENA managers failing to engineer a satisfactory result from their existing portfolio it will be extraordinarily difficult to persuade existing investors to make fresh capital available for a new round of deal-making – let alone expand their investor base and find new limited partners going forward. Instead, the word doing the rounds in investor circles is that of consolidation and a significant manager shakeout. LPs, in other words, are expecting the make-up of the MENA GP community to change dramatically in the coming years. What is most interesting about investors’ opinions about this weeding out of unsuccessful managers is that it is widely seen as a much-needed and overwhelmingly positive development, one that will allow MENA private equity to start over and make a fresh attempt at creating an institutionally viable private equity industry in the region. According to many LPs in our sample, the resetting of MENA private equity is happening right now, affording the region an opportunity to emerge with a stronger, revitalised and ultimately more appealing GP community than before. Everything else being equal, and amid reduced competition for assets, this “We are starting to see managers that have the right characteristics” community should be expected to present an altogether more attractive investment opportunity to the institutional buy-side than the preceding generation. Josh Lerner, Jacob H Schiff Professor of investment banking at Harvard Business School and a regular visitor to the region, describes the positive significance of the moment thus: “There’s been a sort of cleansing effect from the latest financial crisis, where a lot of the groups that didn’t really know what they were doing were purged from the system, which means the groups that did survive – the successful groups – will have a lot less competition and presumably are in a position to do better as a result.” Many of the investment professionals we interviewed made similar comments. Here is how an international fund of funds manager put it: “One of the challenges we have faced has been trying to foot the rhetoric and the reality coming out of the region, speaking specifically perhaps about a number of the Dubai-based managers where there was a great deal of excitement and talk and I think perhaps unbridled optimism from a number of new managers established in the 2006- 2007 time frame. What the crisis has done is, it has allowed everybody to look with the light of day at what really has remained, which is a smaller group of well-established managers that are likely to continue to be the foundation of the development of the private equity industry here.” … and a new dawn Now that the debris has surfaced and is being swept away, limited partners with faith in the notion that MENA has the potential to add value to a diversified portfolio may soon have an opportunity to (re-) visit the survivors of the recent storm, and also to take an exploratory look at new fund managers. A Tokyo-based investor, who has no prior experience of investing in the region, said: “Now would be good timing to start investing because of the shakeout. We are still watching carefully with interest.“ And another fund of funds noted: “We are starting to see managers that have the right characteristics. The macroeconomic climate is also interesting, but for us, the managers are the most important. Whether we invest in MENA will come down to the credibility of the managers.” An important role in the rebuilding of the industry across the region will of course fall to those firms that have come through the past two years with their business models, reputations and investment teams intact. We asked limited partners to name the MENA private equity fund managers that they considered to be among the market leaders at the moment. Those who answered the question most frequently cited Abraaj Capital, Actera Group, The Carlyle Group, Citadel Capital, EFG Hermes, Foursan, Gulf Capital, Tuninvest and Turkven as among the groups they expected to remain active and relevant going forward. If the majority view of the investors we surveyed is correct and the post-crisis consolidation will pave the ground for a smaller but revitalised and ultimately more prosperous private equity industry to emerge, then the time for serious due diligence on existing and new managers to commence is not far away. n
private equity annual review 2010 pa g e 121 s u b - s a h a r a n a f r i c a Limitless opportunities A number of factors suggest the next 10 years could see African private equity come into its own. Toby Mitchenall reports There is a sense among Africa’s private equity professionals that the shake-out of the global financial crisis may have set the industry back in the short-term, but in the long-term it will provide the launch pad for the next stage of the industry’s development. That is not to downplay the effects of the crisis. Private equity investment in sub-Saharan Africa slowed dramatically; in 2009 private equity transactions across the region totalled around $1.4 billion: 52 percent lower than 2008 and down nearly 60 percent from its 2007 peak, according to data from the Emerging Markets Private Equity Association. While this may appear bad, however, it compares well with the relative slowdown in more developed private equity markets. The UK in 2009, for example, recorded a steep year-on-year decline in deal activity of 74 percent. Fundraising – as it did in markets throughout the world – suffered as many limited partners struggled to keep their portfolios in good health, became increasingly averse to illiquidity and in many cases lost their appetite for more “exotic” investments (a category into which Africa often falls). The $974 million raised by sub-Saharan private equity funds in 2009 was 57 percent lower than the previous year’s figure, which topped $2 billion. Yet again, however, the hit taken by the private equity market in Africa appears less severe than most other emerging markets, and certainly the developed markets. One salient reason for this could be the continued support of development finance institutions, which use private equity managers as a means to boost economic activity and, in turn, development. Since 1992, 117 Africa-focused private equity managers have attracted backing from mostly European DFIs. And fundraising conditions appear to be improving. In the first half of 2010, already more capital had been raised than 2009 in its entirety. Significant closes for two pan-African funds buoyed the industry: Kingdom Zephyr Africa Management raised $492 million for its second fund and Emerging Capital Partners rounded up $613 million for its third vehicle. Neither quite reached target, but both represented the largest funds each firm had raised to date. African private equity practitioners can once again start looking forward. “Investors have taken note of the significant progress made in Africa over the last decade and as they look for new frontiers with promising growth prospects and the potential for making significant returns, Africa probably presents the last frontier,” says Kofi Bucknor, managing partner of Kingdom Zephyr. bright future While it may not be able to keep pace with its emerging market counterparts in the BRIC acronym in terms of GDP growth, Africa is growing much faster than developed economies. According to analysis from the African
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