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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Describe your investment philosophy.
The most important factor and key to success in a transaction is alignment with the management team and fellow shareholders. Corvest partners with management. We don’t try and run the business but rather back the incumbent management team.
Other important aspects that we look for in an investment opportunity include a solid track record in terms of performance/profitability; a niche player or strong market position vis-à-vis competitors; and reasonable growth prospects.
What is the greatest investment lesson you’ve learnt?
Management alignment and the opportunity for self-determination. Our model of backing management has proven very successful. It is rewarding to observe a management team who has either been part of a bigger organisation and therefore not masters of their own destiny, or who have not formerly been shareholders in the business, becoming equity partners and suddenly having the opportunity to drive the business forward and who then share in the fruits of that growth.
Identify an untapped opportunity for private equity investors in Africa.
Whilst we have been successful in South Africa, we have had limited exposure to private equity in Africa, preferring instead to follow a lower risk strategy of supporting our South African-based investee companies into other geographies. Servest, Davita Trading and Excellerate, to name a few, are prime examples of this strategy and all have been highly successful in partnering with local management and growing a footprint through organic growth and/or acquisitions in chosen territories.
What is the biggest misconception about your job?
That we are corporate raiders. The term ‘leveraged buyout’ became an accepted term around the time of the buyout and privatisation of the American firm RJR Nabisco in 1988 – a deal made famous by the book “Barbarians At The Gate”, written by Bryan Burrough and John Helyar. A bidding war for the business resulted in an inflated price, which was then funded by an unhealthy level of debt which severely damaged the company and destroyed jobs. As a result of this transaction, private equity practitioners developed a negative reputation for being corporate raiders who funded buyouts with significant amounts of debt, aggressively reduced costs in the business to fund the debt, often by cutting jobs, and then flipping the company for a profit with little thought for the business and its people.
This interpretation couldn’t be further from the truth and private equity has moved on significantly since the early days of leveraged buyouts. Debt levels are far more prudent in modern transactions and the main objectives (and certainly Corvest’s philosophy) are partnership, sustainability and growth.
Name the one deal you wish you invested in.
There isn’t one. There is little point in lamenting lost opportunities. There are many reasons why a deal might not happen and often it is for the best. In private equity we look forward, not back.
What are the skills you need to succeed as a private equity firm in Africa?
The key principles of private equity outlined above apply equally in any jurisdiction. However, successful deals in Africa are often characterised specifically by a focus on investing in local partnerships and developing these relationships; an emphasis on solid on-the-ground monitoring; and, of course, not overpaying for the investment up front.