Investing in Africa: Continent demands a different approach

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We all know that Africa is where it’s at for entrepreneurs. Many of the globe’s fastest growing economies are here and the range and scope of opportunity is truly spectacular. What is less clear is how to leverage that opportunity in a way that makes the most sense for the target companies, their countries and for the investors involved.

Private equity has done very well out of Africa. Data released in April by the African Private Equity and Venture Capital Association (AVCA) show that between 2007 and last year, there were 207 private equity exits. Other AVCA data showed that private equity funds in Africa posted an 11.2 percent annualised return over the 10 years to 2012, outperforming their peers in the developed world.

Despite the fact that it seems on the surface like a licence to print money, I believe that the way the private equity firms traditionally do things – taking a minority stake, taking a few board positions, loading the company with debt while leaving existing management to run the show – is the wrong one. It may be the most popular way of crowding private sector funding into businesses, but the investors I work with, and myself, believe that Africa demands a different approach.

I side with John Warrillow, the writer of the bestseller, Built to Sell, who wrote in a blog last year that the business owner “does the sloppy job of getting the business off the ground and puts in the first 10 or 20 years of hard labour”, grovels for money, lays people off and chases debtors.

By comparison, “the private equity guy”, who came along a lot later, “is slick”, and one of the “book smart MBAs who couldn’t sell ecstasy in Ibiza”. They chase short-term profits in the interest of their lucrative exits and this often comes at the expense of the business.

We try and avoid that and, we believe, we have more than book smarts. The way my partners and I do things is that we take a controlling stake in businesses, install a management team we trust, and crowd in global best practice technological, management and financial expertise.

I believe in running businesses and helping them fulfil their potential. It’s a harder path than traditional private equity but, especially when we are talking about the bigger deals, it is the right one to take.

Hype

Capital is necessary, but on its own it isn’t anywhere near enough. Because we run the show, we are able to get the right people where they need to be and, because we have the motivation to really make it work, we don’t hesitate to get properly stuck in.

There are two kinds of deals that are prominent in Africa – family-owned businesses and former state-owned enterprises. I far prefer the former and it is a source of constant amazement how successful some of these businesses have become, despite not having proper access to formal financial markets. They have often been built up from scratch by dedicated and imaginative entrepreneurs who have simply run out of runway and just need that extra boost to take the next step.

It is becoming glaringly apparent that asset prices are being driven up across the continent because of all the hype that surrounds it. Where assets in South Africa can be bought for multiples of three to six times earnings, those in other African countries are fetching between nine and 20 times. This means that it is getting tougher to do deals that make economic sense.

Even though much of the hype is warranted, there is a lot of capital looking for deals, but there are a limited number out there that actually meet investors’ criteria.

Another thing for investors to worry about are that many businesses are running two sets of books and unless you are entrepreneurial in spirit, unless you understand the environment and the country, it’s quite hard to make a deal. It’s a different mindset and approach to what traditional private equity is used to.

But there is still an abundance of wonderful opportunities out there for those willing to do the hard work.

Hard work for me is getting my hands dirty – spending time on the ground and walking the streets – it’s all about being there. These are things that you can’t do remotely. Those who aren’t up to it will, not to put too fine a point on it, fail. Their cheque books will simply not be enough.

* Andrew Robinson is an entrepreneur and investor. He is the chief executive of Siand.


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