Investing in Africa’s basic needs: The case for private equity in food and affordable housing

PRESS OFFICE: PhatisaPhatisa logo_235x140

Currently at over one billion inhabitants, the African population is set to double by 2050. With such unprecedented growth, a number of existing challenges around food security and affordable housing will become acute if there are not adequate interventions from governments, NGOs and the private sector.

The International Monetary Fund estimates Africa’s GDP growth will be around 5.5% per annum on average over the medium term, which is far above that of the developed world. The continent is seeing marked urbanisation and increased consumer spending, and its young population has expectations that need to be met.

Food security and housing are now important areas for investment in Africa, and forward-thinking investors are focused on offering affordable products in these segments. But success in these two critical sectors is not only to be enjoyed by investors. Expanding food and housing markets also have a meaningful impact on employment, both unskilled and skilled, and create stable social environments in which other economic activities can prosper.

Sector development impact score outcomes for private equity

Sector development impact score outcomes for private equity

Source: CDC

Note: Geographies have been divided into four categories – low, medium, high and highest. The investment difficulty of countries was assessed with regard to: (i) market size; (ii) income level; (iii) ability to access finance, and; (iv) the ease of doing business.

So governments need to step in and establish positive economic and political settings, which are vital to attracting private sector capital – and especially private equity investment – that in turn helps create jobs and alleviates poverty.

Summary of development impact of different equity flows

Summary of development impact of different equity flows

Source: ODI, Sub-Saharan Africa and international equity, September 2015

Phatisa, an African private equity fund manager, has already begun its pioneering journey into these two critical components of any economy. Rising to the challenge of making a difference on the continent, its US$246m African Agricultural Fund (AAF) and $41.95m Pan African Housing Fund (PAHF) are invested in sectors, which tend to be ignored by conventional African private equity managers.

Our private and public investors include European, American and African DFIs and we all share two clear objectives – to achieve financial returns alongside sustainable and impactful developmental performance. This is what we call ‘development equity’. Phatisa hopes that the success of its development equity investments will in turn entice additional private sector capital into Africa, and particularly into the food and affordable housing sectors.

We are encouraged by the number of foreign PE firms entering the continent and their pipeline of fund raising is promising.

 Funds raised and available (2008 – June 2015)

Funds raised and available (2008 - June 2015)

Source: EMPEA

In sub-Saharan Africa, between 2008 and June 2015, $16.4bn has been raised by private equity funds for investment. In the half-year of June 2015, $2.7bn was raised – an annualised $5.4bn, well above 2014 full year levels of $4.1bn. (Source: ODI, Sub-Saharan Africa and international equity, September 2015)

The African PE market is unique and not for everyone. In developed markets, buy-out transactions are financed using significant leverage. In contrast, in Africa, venture and growth capital are the norm, and deal structures tend to accommodate a greater variety of exit routes. Positively, as African economies mature, the number of companies in later stages of their life cycle is increasing and hopefully the incidence of buy-outs and exits to other PE firms will rise.

As foreign PE funds are increasingly interested in the continent, I urge Africans themselves not to miss out on their own investment opportunities. Ideally, Africa’s potential should also be unlocked by local capital. Although off a low base, it is encouraging that some African pension funds are increasing their investment in private equity. This is a welcome development as it is important for pension funds to be exposed to the potential returns that PE can offer, while diversifying their asset classes even further.

The proportion of global PE that is targeted at Africa is small, albeit growing strongly. PE capital is much needed here, so that businesses do not have to depend solely on usual bank finance, and can source investment from a more relationship-focused model, such as private equity. And the proportion of global PE directed at food and housing is even smaller. But this can change in light of the continent’s increasing consumer population and strong economic growth.

The agricultural sector in Africa is coming into its prime, fuelled by people’s basic demands to be fed. Conditions in Africa are well suited to food production, but there is clearly a great need for equity capital investment in order to maintain food production and ensure food security. The ODI September 2015 report on Sub-Saharan Africa and international equity indicates that private equity is investing minority amounts in agriculture. It describes this sector as one where productivity increases are critical to poverty alleviation but where finance constraints are present. It reports that $0.6bn or 4% of funds have been invested in agricultural projects between 2008 and June 2015, including value-chain and export development.

Phatisa is one of the first African PE managers to recognise the investment potential of the underdeveloped food and agri-sector in Africa. However, we also recognise its challenges, and acknowledge that agriculture in Africa is smaller, more fragmented and far less automated than similar activities in Europe or America.

Our flagship agricultural investment is a palm oil business in Sierra Leone. It works with a significant number of small holders who supply our mill with fresh fruit that is processed into edible palm oil for the local and regional markets.

Feronia, the DRC’s leading palm oil company, is a further AAF investment, in partnership with CDC. Private equity capital is helping rebuild its three palm oil plantations. Affected by years of civil conflict, the DRC is one of the world’s poorest countries, and despite huge agricultural potential, it imports a substantial portion of its food requirements. Feronia intends to reduce this import dependence and strengthen the food security chain by increasing the availability of edible oil and cereal products.

As an investor in the African food sector, there is more to simply being part of the production and distribution processes, and maximising value on exit. For Phatisa, it is about adding meaning at all levels, enabling the value chain in food security to become more integrated, predictable and profitable. It is also about economic development that is inclusive of surrounding communities, while remaining cognisant of environmental and social issues.

Our second fund, the Pan African Housing Fund, is focused on affordable and middle-income housing. Africa’s substantial population growth, together with rapid urbanisation, translates into massive demand for accommodation, and governments cannot keep pace with this. And besides satisfying one of the most basic needs – being shelter – most economic activity starts by owning a house, as it is the primary asset that people pledge in order to access capital for their entrepreneurial activities. According to the East African Development Bank, African housing requires investment of $2.5bn per annum.

Deep and genuine investing in African agriculture and housing requires a unique perspective in order to harness skills and unlock value from investments. It is not only about private equity and corporate finance. It is about understanding that you need the talents of people who have previously managed similar businesses and who can provide ‘real knowledge’ on what farms, the food chain, or construction contractors might need. It is also about leaving a legacy of suitable first-world technical knowledge and skills with all partners, helping them to develop and de-risk their businesses while achieving acceptable returns.

Investment in Africa is challenging. Countries are not economically diversified, and can be vulnerable to commodity price declines with attendant depreciation in their currencies. African economies and politics are fluid and the environment can change over the life of the investment. So to attract investment, we need stable structures. A predictable regulatory and political landscape helps to secure exits from investments, and at better valuations.

By leading the way for investment in food and housing, Phatisa is contributing to Africa’s development, while securing sound returns for investors. At the same time we are showcasing Africa’s opportunity and rewards to interested investors watching the continent from offshore.

“The most positive form of equity flow for developing countries in the region is private equity. It provides incremental capital including for some countries where financing is difficult and for sectors which are developmentally important. Private equity, with its high-risk appetite, has used approximately 87% of its funds for sectors with high development impact and 69% for countries facing high financial constraints. It creates limited risks to financial stability. It brings knowledge and technology transfer.” – Judith E. Tyson

Valentine Chitalu is the Chairman of Phatisa Group, MTN (Zambia) and SABMiller (Zambia). He also participates on a number of boards of listed companies in the United Kingdom, Australia and South Africa as well as being a main board member of CDC Group plc. Valentine is a chartered accountant and has worked with KPMG Peat Marwick, United Kingdom and Meridien Financial Services, Zambia and the Zambia Privatisation Agency where, as CEO, he oversaw the disposal and privatisation of around 240 businesses. He was previously Chairman of the Zambia Venture Capital Fund, was on the board of Commonwealth Africa Investments (Comafin) and was Central African Director for CDC Capital Partners where he initiated and executed a number of private equity transactions. As an entrepreneur, he has made a number of private equity investments in the Zambian economy and the region.

About Phatisa

Phatisa logo_235x140Phatisa is an African private equity fund manager, operating across sub-Saharan Africa, with offices in Mauritius, South Africa, Zambia, Kenya, and Ghana, as well as London. The firm has two sector-specific funds under management, totalling more than US$285 million, focused on food and affordable housing. Phatisa comprises a team with a significant track record of managing private equity funds and businesses throughout the continent.

Phatisa’s African Agriculture Fund has committed investments in excess of US$135 million, from Sierra Leone in West Africa to Mauritius, East Africa and 13 other countries in between. This reflects a total of eight portfolio companies across diverse sectors: primary farming, palm oil, processing, inputs, mechanisation, fertiliser, protein production and FMCG beverages. Phatisa also introduced an eastern and southern African investment initiative in response to the ever-increasing housing shortage – the Pan African Housing Fund (PAHF). The US$41.95 million Fund commenced operations during Q1 2013 and has concluded three investments to date.

At the heart of Phatisa is development equity, as embodied in the unique formula of DevEq = PAT * x + i 2 ™; a balanced blend of private equity and development finance – striving to build sustainable assets on the ground; ensuring best possible returns for investors, including the community in which these operate.