Africa-focused private equity firm Development Partners International announced in early October that it had reached a $900 million final close for its latest fund, African Development Partners III (ADP III). We spoke to Babacar Ka, a partner at DPI, about investment opportunities in Africa and how the firm mitigates risks on the continent.

DPI is focusing on ‘innovation-driven’ companies for the ADP III fund. What is the reason for this?

Over the last three years, starting even before Covid-19, a lot of the companies we invested in were adopting technology as a way to innovate and become more efficient. We saw that trend before the pandemic and it was clear digitalisation was important for these companies. Covid-19 accelerated this view that to not only survive Covid, but to become better, they needed to fast-track their digitalisation strategy.

There are great examples in a couple of our portfolio companies. If I take B.TECH (an Egyptian retailer and distributor of consumer durables and electronics), for example, there were no online sales when we initially invested. Now, it’s close to 25%. To compete against the best in our target sectors, we have to continue to innovate and technology will enable this. That’s why there’s a bigger focus now on digitalisation within the new fund. We assess how strongly companies can innovate and how strong they are in terms of technology.

ADP III has so far invested in two fintech businesses: Egypt’s MNT-Halan and Channel VAS. Explain the attraction.

Channel VAS is a fintech company that primarily provides airtime credit services to telco customers and has expanded into mobile financial services. The company is present in 25 countries across Africa, the Middle East, Asia and Europe, with over 85% of revenue being derived from sub-Saharan Africa. It has developed an AI-based internal system to predict customer behaviour, which it uses to support decisions on providing nano loans. It was an attractive business as it was growing quite rapidly, in double digits, and it had the ambition to expand throughout the continent and beyond. At the core, this company saw a gap in the market in terms of providing credit to telco consumers. It was done by others in the market, but not as efficiently as Channel VAS.

MNT-Halan is Egypt’s largest and fastest-growing lender to the unbanked, focused on providing payment and finance solutions to critically underserved communities. Created following MNT’s acquisition of Halan in June 2021, the company is Egypt’s first “super app” operating across three verticals: business and consumer lending; digital payments; and logistics.

Our second fund has been invested in MNT since August 2018. The founder had the vision to shift the business model from brick and mortar to a more digital offering. That’s exactly what’s happened. It acquired one of the leading technology companies in Egypt. Today, it has essentially become a fintech.

The company needed additional funding to grow and some investors wanted to exit, so ADP III took a look and the deal was finalised a couple of weeks ago. There is strong growth in the traditional microfinance business but more on the fintech business. Combining these two has made the company a leading microfinance player and the leading fintech player in Egypt.

Tell us about other areas within the digital transformation space that excite you from an investment perspective.

We’re also seeing more innovation in education and health.

In education, we have seen innovation, especially with hybrid systems where students still come to the campus but also take classes online. We’re invested in a higher education company, so we’ve seen by providing students with options to take courses online, the business is more efficient. Students get more choices too. Instead of a semester where you would take three or four courses, because of the hybrid model we can push that to six courses while the cost base for the universities is the same. There’s a lot of operating leverage using the hybrid model, so we think the universities that use this technology will be quite attractive.

Another sector with a lot of opportunities for digitalisation is healthcare, particularly pharma. There is innovation in terms of the distribution of products to the various vendors and pharmacies.

If you look at how pharma works in Africa, traditionally, manufacturing companies went to wholesalers which distributed to pharmacies. In West Africa, pharmacies have a lot of issues with not knowing how much product to have in stock as their stocking strategy is not efficient.

What we’re witnessing is more advanced distribution companies popping up. These players use data provided by the pharmacies to gauge how each product is selling each month. With this data, they can order just-in-time from the manufacturer, which hasn’t existed in the industry until now.

The distribution companies also realised pharmacies have working capital issues because they traditionally had a 30-day period to pay the wholesalers. These companies are embedding working capital financing in their tech for the local pharmacies. The pharmacists now have somebody who can assess exactly how much product is required on a monthly basis. Over and above this, they provide financing as they have the sales numbers.

Investing in tech companies have typically been the domain of venture capital (VC) firms. However, there seems to be an increasing number of larger private equity funds now backing tech companies in Africa. Is the line between private equity and VC blurring?

I think it’s starting to blur a little bit, but many private equity firms – including ourselves – may not be able to invest in non-profitable companies. Our strategy is to invest only in profitable companies. We can’t do what a VC does; we cannot do pre-seed, seed or series A but we can perhaps do a series B or C. At that level, the unit economics would have been proven.

You still need VC as an ecosystem to allow founders to find funding to get to the next stage. What we and VCs do is quite complementary. VCs will back the founders, tackle the pre-seed, seed or series A and once the business model is proven, we can intervene as a private equity fund. I understand some other funds may have more flexibility to do early stage but we’re quite disciplined when it comes to that.

DPI has backed Tunisian tomato processor SICAM. What agribusiness sub-sectors in Africa are you most enthusiastic about from an investment perspective?

Established in 1969, SICAM is a tomato processor in Tunisia. Its product range covers several canned fruits and vegetables in various formats, with tomatoes and pimentos (used to make harissa) being the main products. Tunisia is an interesting market because it has the highest per capita consumption of tomatoes in the world. With a vertically integrated model yielding above industry-average margins, operating in a defensive industry and strong export prospects, SICAM was a very attractive investment.

As a firm, we understand agri-processing but we are not that familiar with primary agriculture. Once you start processing and going up the value chain, agribusiness appeals because the processors sell to the mass market and can add value to the product through innovation. If you look at the value chain, that’s where we want to play. If a country has a specific competitive advantage in certain products and can compete at a global level, that’s what we want to see in agri-processing. Morocco, for example, has a great strategy on a macro-level with strong players and entrepreneurs in this space.

Import substitution is an interesting investment opportunity. There’s innovation in import substitution in Nigeria, Côte d’Ivoire and Senegal but the key is how sustainable it is. Efficiency and execution are extremely important when you have these opportunities. We typically benchmark local players against the best in other markets. If they’re able to innovate locally or have a competitive advantage that allows them to compete – regardless of government intervention – it becomes attractive.

DPI has also invested in Kelix Bio, a pharmaceutical platform broadening access to speciality generic drugs in Africa. Explain what motivated this investment and what growth opportunities exist in this industry.

Besides South Africa and possibly Morocco and Egypt, there is very little drug manufacturing on the continent. Most of our pharmaceutical products are imported, which means you don’t get the best pricing and need international currency.

DPI and its partners created biopharmaceutical platform Kelix Bio to broaden access to vital specialty generic drugs across Africa. With our partners, we have committed an initial $250 million of capital that has been used to fund the acquisition and combination of Adwia Pharmaceuticals, an Egyptian generic drugs manufacturer, and Celon Laboratories, an Indian oncology and critical care specialist. The platform will leverage the R&D and talent from India to strengthen local manufacturing operations in Africa.

This first-of-its-kind pan-African platform is designed to compete in large, fast-growing markets as well as high-demand, differentiated therapeutic areas such as oncology through innovation and cost leadership. The platform will improve the delivery of essential and affordable specialty generic pharmaceuticals across the African continent.

The pharmaceutical industry in emerging markets will grow faster than the rest of the world driven by key factors such as shifting demographic profiles with the prevalence of chronic disease, implementation of universal health coverage and increasing government efforts at enforcing stricter generic substitution. Expected growth for generic pharmaceuticals in emerging markets is anticipated at about 10-12% in value terms over the next five years.

Identify the biggest risks in Africa today.

Our approach is to conduct a top-down analysis for each of our investments that help us to identify and mitigate risks. For example, if you look at Nigeria today, currency risk is the biggest concern for investors. The FX situation in Nigeria has been quite unstable. It’s a challenge; however, it doesn’t make Nigeria un-investible. What it means is that when you look at transactions and opportunities in Nigeria, you need to be aware of the FX situation and find ways to mitigate this risk. We are very active in Nigeria and think Fund III will do one or two investments there.

As a firm, we tend to shy away from what we call government-linked businesses. We try to be as independent as possible from the government and we haven’t had an experience where we lost a company, or we destroyed significant value on a company, because of political risk. Some sectors are highly regulated, but we make sure that the government is not our biggest customer and we don’t rely on the government for the business case.