Conduits of Capital

amined the impact that venture capitalists have on their
portfolio companies and found that geographic proximity
(more specifically, travel time) affects value creation. To do
so, the authors considered how the introduction of new airline
routes that reduced travel time between venture capitalists
and their portfolio companies affected portfolio companies
with respect to the quantity and quality of their innovations
and success (i.e., exits via IPO or acquisition). The authors
found that reductions in monitoring costs stemming from
these new airline routes indeed translated into better
portfolio company performance. The authors hypothesized
that such success could be attributed to more time spent by
the venture capitalists at the portfolio companies where they
could advise executives, provide access to key resources,
and aid the operation’s professionalization. 12 While this
study exclusively examined VC activity in the United States,
it offers a persuasive argument for the impact of proximity
in this context.
Further supporting the impact of location on company
oversight, Josh Lerner found that venture capitalists
typically served on the boards of geographically proximate
companies. In particular, Lerner found that more than half of
the biotechnology firms he examined had a venture director
with an office within 60 miles from their headquarters, and
the distance was within seven miles for a quarter of the
companies. In other words, the data suggested that the cost
of oversight is sensitive to the distance between the PE firm
and its portfolio companies. 13
Practitioner Perspectives
In frontier markets, and Africa specifically, a local presence
may be even more significant, given, for example, weak or
nonexistent internet connections and expensive travel. In
fact, a 2014 survey of 106 global limited partners by the
Emerging Market Private Equity Association (EMPEA)
found that 55% of respondents felt that a “limited number
of established fund managers” would likely deter SSA PE
investment within the next two years. 14
What is it specifically that gives an advantage to local firms?
We consider two such factors below, deal access and due
diligence. Particularly in emerging markets where PE firms
have not differentiated by brand, a local presence is critical
for both deal access and deal assessment.
• Deal access
David Wilton, then of the International Finance Corporation
(IFC), emphasised that access to deal flow, especially
proprietary deal flow, requires local contacts. 15 The United
Nations Economic Commission for Africa also noted that
deal flow is mainly generated by “personal networks of
fund managers,” and just one-third of deals are generated
through company / sector tracking. 16
• Due diligence and reputation checking
The British Private Equity & Venture Capital Association
(BVCA) has detailed a variety of challenges impeding
private equity due diligence in SSA. 17 These included the
need to understand the business and political connections
of company founders, and the difficulty of finding executive
talent, all in the face of limited public information. The stakes
are high: missteps can leave the PE firm (even if it has a
minority position) vulnerable to anti-corruption legislation.
In addition, regional and country-specific political risk also
complicates the already risky business of investing in SMEs.
Uncertain official economic information in frontier markets
also complicates the process of deal assessment. Without
reliable estimates of, for instance, economic sector activity,
market size numbers could be inaccurate and “sector
picking” strategies could be futile. 18 As a result, success in
frontier markets appears to dictate that a PE firm establish
at least a local office in a country of interest.
To dig a little deeper into the PE firm and portfolio
company benefits of “localised” private equity, we offer a
brief description of Blackstone’s minority investment in a
local Brazilian PE firm, Pátria Investimentos. Blackstone’s
investment in Pátria illustrates a broader trend of Western
fund managers becoming “local” through partnership with
established local players. 19
3.2. The Importance of a Local Presence
– Mini Case: Blackstone and Pátria
Investimentos
The value of subtle local knowledge for PE is clearly illustrated
in Blackstone Group’s partnership with Brazil-based Pátria
Investimentos. On October 1, 2010, the Blackstone Group
invested US$200 million for 40% equity in Pátria, a local
Brazil-focussed alternative asset manager founded in 1988
with one of the strongest records in Latin America. 20 The
Pátria investment was part of Blackstone’s broader emerging
Conduits of Capital – Onshore Financial Centres and Their Relevance to African Private Equity
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