Interview with Alexis Caude
MANAGING PARTNER, ADENIA PARTNERS

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Alexis Caude is the managing partner of Adenia Partners, an Africa-focused private equity firm. Adenia is currently raising its fifth fund and has recently surpassed its $400 million fundraising target, making it one of the largest Africa-only private equity funds ever raised. How we made it in Africa recently spoke with Caude about investment opportunities on the continent.

Highlights from the interview include:

– How an Adenia investment in South Africa’s renewable energy saw tenfold revenue growth;
– The allure of South Africa as an investment destination;
– Why Adenia invested in a rose farm in Kenya;
– The potential for growth in Kenya’s modern retail sector;
– Identifying opportunities amidst West Africa’s challenges; and
– The African markets where Caude sees the most promising investment prospects.

Capitalising on South Africa’s energy crisis

South Africa has grappled with electricity shortages for over a decade. In recent years, increased scheduled power outages, known locally as load shedding, have left some regions without power for up to 10 hours a day in severe instances. This situation has compelled many households and businesses to adopt solar power solutions for electricity generation. Between March and June 2023, rooftop solar capacity in South Africa expanded by 349% to 4.4 GW.

In 2021, Adenia invested in its first South African enterprise, Herholdt’s, which is a distributor of renewable energy products such as solar panels, batteries and inverters. According to Caude, the company’s revenue has surged tenfold since Adenia’s investment. Last year Adenia further invested in the sector through Enfin, a firm that finances solar solutions for businesses, farms, sectional titles, and schools looking to adopt solar power without bearing the full upfront costs.

Caude points out that generating solar power in South Africa is more economically viable than in markets like Europe and the US, where the solar industry often depends on government subsidies. “It’s actually cheaper to install your panels and produce your [own] electricity than buy it on the grid … In South Africa, given the amount of sun that you have every day, it’s actually an industry that is extremely cost efficient,” he says.

The investment appeal of South Africa

South Africa faces numerous economic challenges, including high unemployment, stagnant growth, a beleaguered power sector, and overburdened transport infrastructure.

Despite these hurdles, Caude notes that he was struck by the large number of investable companies in South Africa – those of sufficient size and with strong management teams. “It is very different from other places on the continent,” he says, adding that South African CEOs are generally on par with their counterparts in Europe and the US.

Furthermore, he points out that companies in South Africa typically have relatively low valuations and there is comparatively little competition from other private equity firms. “It makes the business case quite compelling if you’re able to grow faster than the depreciation of the rand … It’s a market where we see lots of opportunities.”

Investing in a luxury farming product

While Adenia generally avoids primary agriculture investments, in 2021, the firm backed a Kenyan farm producing a niche product that Caude equates to a luxury item. The enterprise, Red Lands Roses, specialises in growing spray roses, characterised by their multiple flowers per stem, setting them apart from the standard single-bud roses. Caude draws a parallel between the company’s flowers and luxury products, noting their sale price is two to three times higher than regular roses. These roses, primarily exported to Europe, are in high demand and challenging to cultivate. Furthermore, Red Lands Roses sells directly to distributors, bypassing the traditional flower auctions in the Netherlands, which results in substantially higher margins. “The profitability of this business is extremely high as compared to other businesses that we’ve looked in this industry,” Caude remarks.

Room for growth in Kenya’s modern retail sector

Even though modern retail is more widespread in Kenya compared to many other African nations, Caude sees substantial growth potential in the sector. Over 70% of goods are still purchased from informal, small stores rather than from air-conditioned supermarkets.

In 2019, Adenia invested in the Kenyan supermarket chain Quickmart and merged it with Tumaini Self Service, a retail operation it had acquired the previous year. Now with 60 outlets, Quickmart seeks to stand out by offering a wide range of fresh products as well as delis where customers can purchase food prepared on-site and consume it within the store.

While Caude describes Quickmart as a successful investment, he acknowledges a recent challenge: the depreciating Kenyan shilling, which adversely affects Adenia’s earnings in US dollars. Despite the shilling’s relative stability in the past, it has faced a steep decline recently, dropping to record lows of over 160 to the US dollar earlier this year.

Although French supermarket brand Carrefour has a presence in Kenya, Caude says he is surprised there aren’t more international supermarket groups operating in the country. “It’s a big market, it’s growing,” he notes.

Seeing opportunity amid West Africa’s headwinds

Recently, several West African countries have experienced heightened political and economic instability: Niger, Burkina Faso, Guinea, and Mali have all witnessed coups over the past three years; the Sahel region has been marred by violence perpetrated by various armed groups; and Senegalese President Macky Sall’s controversial decision to postpone the presidential election originally scheduled for 25 February to December has resulted in protests. Nigeria, the region’s largest economy, has also faced significant economic challenges, with its currency, the naira, reaching a new low of over 1,500 to the dollar earlier this month, and inflation surging to 28.92% in December, marking its highest point in 27 years.

Caude points out that the difficulties in West Africa have prompted some multinational companies to consider selling their subsidiaries in the region, creating opportunities for private equity firms like Adenia to acquire these businesses. “If you have a business in Mali, if you have a business in Burkina Faso, you tend to be a little bit more nervous now than you were in the past … we have a couple of interesting opportunities,” he notes.

However, he expects that within a few years, some of these multinationals may look to re-enter the African market, due to the continent’s attractive demographics among other factors. “All those big companies will need to look at Africa at some point if they want to continue growing,” he says.

Identifying Africa’s most promising economies

When asked which African countries he’s most bullish on, Caude explains that his interest hinges more on the presence of companies capable of absorbing the $30 million to $100 million investments that Adenia and its co-investors aim to deploy through its new fund. “It would be very difficult for me to do a deal of this size and magnitude in a very small country in Africa,” he says. For this reason, South Africa, Kenya, and Morocco stand out as some of the most promising markets in his view.

Caude is also closely monitoring Nigeria, which has undergone significant policy changes since President Bola Tinubu took office in May 2023. The Tinubu administration has eliminated a longstanding fuel subsidy and relaxed foreign currency controls, resulting in a significant depreciation of the naira. “It’s a challenging market … I think they’ve done a lot of good things on the macro side, but we need to see where it goes,” he says.