THE ANNUAL REVIEW 2010 - PEI Media

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page 122 private equity annual review 2010 Development Bank, real GDP growth across the continent was expected to reach 4.5 percent in 2010 and projected to hit 5.2 percent in 2011. Given the diversity the continent offers in terms of both regional growth rates and approaches to private equity investment, there is scope for managers to find market segments to generate outsized returns. In sub-Saharan Africa (excluding South Africa), investments typically take the form of development capital, focusing on financing fast-growth companies. South Africa itself boasts a well established, mature buyout market; while in the North African markets – which are also relatively well developed – investments focus more on smaller, family-run organisations. In conversations with GPs focused on Africa, it becomes clear that the opportunity set presented by the continent tends to hang on a number of recurring themes: some uniquely African, others more widely prevalent in emerging markets. “One of the reasons [investors] are interested [in Africa],” says Hurley Doddy, chief executive of Emerging Capital Partners, “is that the same type of growth in the consumerrelated businesses that we’ve seen in China, India and Eastern Europe is happening in Africa at a similar type of pace.” The emergence of a “middle class”, with discretionary money to spend and a desire for consumer-goods is proving a huge driving factor behind investment theses. “Private equity in Africa has traditionally been resource heavy,” adds Graham Thomas, managing director of principal investments at Standard Bank Group, “and while resources will continue to be important, we think there will be a shift in focus to consumer-driven businesses.” Building on the theme of a growing middle class, the proliferation of consumer financial services has been a long-time favourite of private equity firms targeting Africa. Despite the shocks felt by banks during the financial crisis, particularly those in Nigeria, the vastly under-banked population provides an attractive investment proposition. “There is such a low penetration of financial services across the continent and the middle class is growing so rapidly, that this will remain a key sector Chigwende: looking to the ‘next generation’ of entrepreneurs “Africa probably presents the last frontier” for private equity for some time to come,” says Sven Soderblom, portfolio director for Southern Africa and Latin America at CDC Group. Meanwhile, telecoms, media and technology, the sector that gave the continent its “poster child” private equity investment – the 2006 exit of mobile phone business Celtel International for $3.36 billion – continues to draw attention. Following the boom in mobile telephony, investors are now eyeing the opportunity presented by the rollout of high-speed broadband connections and the related infrastructure needs. “Key sectors of interest for us are financial institutions, telecoms and related services, infrastructure and retail,” says Marlon Chigwende, head of private equity for Africa at Standard Chartered Bank. “These industries play to the continent’s strength in natural resources and the general rise of the African consumer.” first mover advantage From an investor’s perspective, the continent benefits from a lack of competition – both in terms of private equity capital and well-established corporates. The scarcity of private equity capital means that businesses can be acquired at significantly lower multiples than in other – more heated – emerging markets. “Fewer competitors, means fewer auctions, which means a better return on investment,” says Peter Schmid, head of Africa for Actis. Furthermore, the fragmented nature of many African markets – and lack of dominant corporates – means that if a private equity firm acquires a market leader in any particular segment, it can rapidly take market share. Likewise it can be rolled out across borders into other markets across the region. There are still a number of challenges facing the industry, and areas which it needs to address. “In order for it to succeed, and attract long term sustainable capital inflows,” says Standard Bank’s Thomas, “the industry will need to professionalise, and exercise discipline to convince investors that investment performance is repeatable, and not just a few lucky deals.” Despite the widespread optimism among the region’s general partners and principal investors, the Africa story remains a challenging sell to the global institutional investor community. When Kingdom Zephyr hit the road to raise its latest fund, it came close to its $500 million target. At PEI Africa Forum in June, Kofi Bucknor summarised the general LP reaction as follows: “Interest is growing exponentially. Are people ready to commit? Not in a big way, but that could change very quickly.” That change will only come if the current generation of funds with capital to deploy can turn the compelling African private equity story into equally compelling results. n
private equity annual review 2010 pa g e 123 l p r a d a r : y e a r i n re v i e w Showing their strength Limited partners have been flexing their muscles and making demands, according to extracts from PEI’s ‘LP Radar’ column. By Christopher Witkosky c h r i s to p h e r w i t ko s k y The industry will continue to see institutions, especially those with the resources to build strong in-house teams, looking for more unique investment structures FEBRUARY US public pensions scale back their commitments “For the first time ever, the California Public Employees’ Retirement System recently committed less to a new Blackstone fund than to its predecessor: it committed $500 million compared to $750 million in 2006. While $500 million is still a huge amount, Blackstone has most likely received similar treatment from other long-standing LPs. The firm has accordingly lowered the target for its sixth fund from $20 billion when it first launched to $15 billion in early 2009. Media reports in the last month suggest that Blackstone will cap the fund at $9 billion. Blackstone’s experience may not spell the end of the ‘big ticket’, but it does suggest that in the new fundraising reality LP commitments will be smaller and harder to get.” MARCH The South American fundraising opportunity “Brazil has become increasingly friendly to private equity over the last decade. The country’s huge pension system is authorised to invest in private equity, but the pensions demand more control than many GPs are comfortable with, including having veto rights over deal decisions. This has kept foreign GPs from targeting Brazil for capital. GPs have expressed concerns that the major Brazilian pensions may end up suffering from backing under-qualified managers, the only managers willing to consent to LP controls.” APRIL OPERS wades in over Hugo Boss “The Ohio Public Employees’ Retirement System, which has about €110 million invested with London-based private equity heavyweight Permira, has threatened to re-think its relationship with the firm if its portfolio company Hugo Boss doesn’t reconsider closing a production plant in the city of Brooklyn, Ohio. This is a startling show of force on the part of the pension and, in an era when LPs are increasingly becoming more aggressive in their interactions with fund managers, should be of concern to GPs. Like many other businesses, private equity-backed companies have needed to cut costs through the downturn, but the Ohio situation shows the decision may not be an easy one when it involves killing jobs in the backyards of important LPs.” MAY The LPs’ desire for directs “GPs are structuring these accounts at just the right time, as more and more LPs are looking for opportunities to co-invest alongside trusted GPs. The industry will continue to see institutions, especially those with the resources to build strong in-house teams, looking for more unique investment structures where they can have more control over investment decisions and pay
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