Private equity firm Spear Capital recently paid US$6m to acquire a 27% stake in Zimbabwe’s Dendairy, a leading dairy producer. 

According to Muvirimi Kupara, head of the firm’s corporate communications, one motivation behind the investment is that the Zimbabwean dairy industry offers higher returns than in most other markets.

“And we anticipate the market size to grow by a multiple of 10 over the next 10 to 15 years, so there’s nothing but headroom at this stage.”

Zimbabwe is a net importer of milk products, noted Kupara, and the market holds growth opportunities for value-added dairy products such as fruit juice, ice-cream and flavoured milk.

“Local supply has grown significantly in the last 36 months, but is still significantly under-supplying the market… Probably anywhere between 40% to 50% of demand is being met by local suppliers.”

Navigating risk

The investment comprises a combined debt/equity transaction. Kupara explained the deal was constructed in this way to gauge the performance of the debt. If Spear can get the returns it hopes for, the company plans to convert that debt into additional equity in the business.

“To use a poker analogy, we don’t go all in… If for whatever reason [Dendairy] doesn’t perform, we still hold the option of pulling back some of our capital.”

He added Spear’s strategy is to invest in companies that already have competent management that can help the business grow.

Gauging opportunities

Spear is also eyeing other investment opportunities both in Zimbabwe and across sub-Saharan Africa as a whole. “Our priority focus remains Zimbabwe, Zambia and South Africa, but we are open to transacting anywhere in sub-Saharan Africa.”

According to Kupara, investors shouldn’t believe “everything they read” and he advises others to spend adequate time in African markets to properly assess the potential risks and rewards of investment opportunities for themselves.

“Especially as, in a lot of emerging markets, perception doesn’t equal reality. The operating model for Africa, particularly with private equity, is you must be ‘boots on the ground’. So don’t believe everything you read. It [requires] getting on a plane, getting on a bus, and going and personally visiting the market.

“All too often in the private equity spaces we sit behind computer screens and don’t actively experience the market in which we invest. And that doesn’t work in a lot of African emerging markets.”