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The real risks of private equity investing in Sub-Saharan Africa

The perception of risk continues to exert a strong hold over potential investors in Sub-Saharan Africa.

Peter Schmid

Peter Schmid

These perceptions tend to cluster around a few issues: will I be able to gain a controlling stake? Will the government interfere and hamper my ability to operate? Is there sufficient legal process and protection? Can I successfully exit the investment?

I would contest the persistence of these issues – there was once truth in each of them but the situation in Africa has improved and continues to do so. There are instead “real” risks that must be considered.

I would begin with the fundamental risk inherent in any deal, regardless of geography: are you partnering with the right people? There is no shortcut to this question. Very extensive due diligence and Know Your Customer referencing is required, and that is much easier if you have a local team on the ground.

A related “real” risk is the very shallow talent pool in Sub-Saharan Africa. There has been much anticipation about the highly skilled African Diaspora returning home. I would temper this excitement; the Diaspora is not returning in anything like the numbers required and a lack of senior management expertise is the most acute risk to private equity investing in Sub-Saharan Africa today. The only way to outpace this risk is to cultivate strong and extensive networks.

The final “real” risk is liquidity. Triggered by the global downturn, lending in Sub-Saharan Africa has dried up at both a regional and portfolio company level. This is a current, pressing problem across the continent, and one which has been widely underestimated. It is the reason we have not seen more pick-up during 2010 in countries such as South Africa and Nigeria.

Entry prices for Sub-Saharan African companies are significantly lower than in other emerging markets. There is limited competition yet, in certain sectors, we see GDP growth on a par with India and China. Sub-Saharan Africa is the world’s last investment frontier and despite the risks, we remain very optimistic about its future as an investment destination.

Peter Schmid is a partner at emerging markets focused private equity firm Actis. This article was first published in EMPEA’s Private Equity in Sub-Saharan Africa research report.

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