How we made it in Africa’s ‘Due Diligence’ series asks top players in Africa’s private equity industry about how they are mastering the art and science of profitable dealmaking and fundraising. Doing the due diligence on those who do due diligence for a living.
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Investec Asset Management’s Africa private equity strategy focuses on growth capital and buyout investments in established mid-market and larger companies, with the objective of supporting the creation of local or regional champions in their respective industries. Michael Avery sat down with Peter Baird, managing principal of Investec Asset Management’s Africa Private Equity unit.
1. Explain your investment philosophy.
Fundamentally, we are looking for control investments in well established, market-leading, cash-generative businesses in low-risk geographies. Preferably these are in sectors that are tied to underlying real GDP growth (or personal-consumption expenditure), serving the needs of the emerging middle class. We particularly like businesses that have the potential to become national or regional champions, or are taking advantage of leapfrogging combinations of technology.
2. What is the greatest investment lesson you’ve learnt?
The most important lesson is that there are only two kinds of businesses in the world: those that consistently generate cash, and those that don’t. Investing in the latter kind is inherently riskier than investing in the former: take your cash balance, divide by the daily burn rate, and that is the number of days you have to find additional capital. This is inherently stressful and leads to short-term thinking.
The second-most important lesson is that the macro environment (economic and political) is frequently more important than all other factors in the success or failure of an investment. My current favourite quote is: “Man plans, God laughs.”
The third significant lesson is that management matters more than nearly any other company-specific factor. To paraphrase Warren Buffett: a mediocre business with a great management team nearly always outperforms a great business with a mediocre management team.
It is extremely difficult to accrete capital value with a weak management team. If you have weak management, you have to make changes.
3. Identify an untapped opportunity for private equity investors in Africa.
The sector is out of favour at the moment, and a lot of risk capital has left the market, so there are many, many untapped opportunities.
Geographies that we particularly like include South Africa, Morocco, Egypt, Kenya, Uganda and Ghana. Sectors that we particularly like include education, transport and logistics, retail, FMCG, fintech, and business services. There are plenty of great investment opportunities at the intersections of these geographies and sectors.
4. What is the biggest misconception about your job?
The biggest misconception is that the job is primarily about deal-making. Buying good companies at good valuations and exiting well on the back end are important. Complicated structuring is wildly over-rated, and usually masks (temporarily) an entry valuation that is too high, or a fundamentally flawed or risky business plan. Real value is created through the hard work of muscular active ownership. Portfolio companies that consistently grow their cash flows will almost always be good investments.
5. Name the one deal you wish you invested in.
Vivo Energy, which was a joint investment between Helios and Vitol in a pan-African petroleum-products sales and marketing business. Basically, petrol stations. This was a great strategy into a vital but underdeveloped sector, brilliantly executed over the course of several years. By all accounts, it was an outstanding investment.
6. What are the skills you need to succeed as a private equity investor in Africa?
To drive gross IRR (internal rate of return), the most important skill is working with management teams to drive value creation over the course of several years. This is patient, non-glamorous, grinding work. There is no substitute. It also helps to be good at risk management and portfolio construction, and basic deal-making (entry and exits). For net IRR, the core skills are maximising asset velocity, using leverage thoughtfully, and returning capital to investors early and often.