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Private equity firm Abraaj on doing deals in a more volatile Africa

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Mustafa Abdel-Wadood speaking at the Thomson Reuters Africa Summit

“Generally speaking we look beyond the short term and I think that is extremely important.”

So says Mustafa Abdel-Wadood, partner at emerging market-focused private equity firm, The Abraaj Group. Active in Africa for almost two decades, the firm has made investments in 17 of the 54 countries on the continent, in sectors including consumer goods, financial services, healthcare and logistics.

Last week the company announced that it had acquired a stake in Indorama Fertilisers, which operates a urea manufacturing plant in Port Harcourt, Nigeria. The facility produces 1.4 million metric tonnes of fertiliser per annum.

The deal comes at a time when Nigeria is facing a number of economic challenges. The fall in global prices of oil (the country’s biggest source of foreign-exchange) has shrunk the country’s export revenue, resulting in currency volatility and a shortage of US dollars in the market. The naira has fallen near 40% to the dollar since the Central Bank of Nigeria decided to abandon its dollar-peg for a more market-driven exchange rate system in June.

Speaking at the Thomson Reuters Africa Summit in Cape Town, Abdel-Wadood said he is often asked about why Abraaj is investing in Nigeria during such a challenging time. Abdel-Wadood explained that while much of the hype around Africa’s investment potential has died down due to slower growth on the continent in general, Abraaj’s investment activity has not lost momentum.

“I think generally speaking it has been a volatile environment… Yes, there was a period about two years ago where everybody was saying this is the next investment destination. If you take a long-term view, this is the long-term investment destination – but some capital is flighty, and with the slightly more subdued growth and the currency challenges … I think it [turns] some people away.”

He said that Abraaj’s investment activity hadn’t slowed down, adding that while economic growth might have slowed across the continent, many markets are still experiencing higher growth than most Western countries.

“We are talking about risk in volatility of currencies and political risk, et cetera, but I think the biggest risk is the risk of slow economies. I mean if you look north, the growth is much slower than it is in the southern hemisphere and in the growth markets. So our take is a different type of risk – and I emphasise the word ‘different’ – by looking at the sub-challenges seen in Africa and elsewhere.”

According to Abdel-Wadood, Abraaj has executed more private equity transactions in Africa than any other emerging market region. However, the size of these transactions has been smaller – with African investments making up under US$3bn of Abraaj’s $10bn portfolio globally.

“When you look at the kind of companies that we are looking at in these markets, the mid-market companies tend to be slightly smaller. We are writing cheque sizes that are smaller than what you’d be [writing] for example in Mexico, Turkey or Indonesia, which are all trillion-dollar economies – and your mid-market company there is a larger company,” he said, adding that Abraaj’s “sweet spot” is the middle market, as it offers a stronger growth trajectory.

Abdel-Wadood noted that Abraaj has also managed to successfully exit about 50 of its 80 investments in Africa.

“Most of our exits have been trade sales as opposed to IPOs – the vast majority – and in Africa specifically, more than other markets. [This is] potentially because the capital markets aren’t as developed as elsewhere, but generally speaking it has been trade sales from people that want access to markets here.”

However, he added that he is seeing a growing number of trade sale exits to pan-African or regional companies.

“For example, we invested in an insurance company in Morocco which actually expanded to 22 sub-Saharan countries, and last year was sold to Sanlam in South Africa.”

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