East Africa 'has all the ingredients for private equity'
TBL Mirror Fund looking to "buy into the growth story" of entrepreneurial businesses.
East Africa is experiencing a wave of private equity flows as investor confidence in the region increases. The number of private equity deals carried out in 2013 in the region doubled to 26 compared to the previous year, according to a recent survey by professional services firm Deloitte.
Eline Blaauboer, managing partner at TBL Mirror Fund, says the Dutch-based fund chose to invest in East Africa because “all the ingredients of private equity” are present in the region.
Established in 2007, TBL Mirror Fund invests between US$250,000 and $4m in small and medium enterprises (SMEs) in East Africa and Nigeria with a focus on high growth sectors. Blaauboer says East Africa’s large SME sector, expanding middle class, good talent pool and fast growing economies make for an attractive destination for private equity.
“We came here because there were hardly any funds around at the time. We saw a lot of opportunities for investing equity in SMEs. Since then competition has really increased but I think it’s only good because it is confirmation of our assumptions.”
She adds that the presence of good advisors in hubs such as Nairobi, coupled with its “developed stock market and increasing number of companies” coming into the region offer exit possibilities for funds.
Blaauboer, who worked in venture capital in the Netherlands for five years, shifted her focus to Africa as there were not many challenges back home.
“I was looking for new challenges. I wanted to be in a place where there was more need for capital. I had always been interested in Africa and I felt an entrepreneurial vibe whereas there was just hardly any equity at the time.”
Blaauboer quit her job in 2003 and for the next two years studied the African private equity market looking at mistakes made by other funds, risks and challenges in the market and ways to mitigate them.
TBL has since made several investments in “fast growing industries driven by growth in consumption” such as ICT, healthcare and consumer goods. Its portfolio includes Highlands Mineral Water Company, Meridian Medical Centre, International Medical Group, Research Solutions and technology companies Cellulant, Software Technologies and KenCall.
Blaauboer argues that there is huge potential in sectors driven by the growing middle class, citing its recent acquisition of a minority stake in Neo Amadiva, a high-end Nairobi salon chain.
“If you look at the growing middle class here one of the things they are spending their money on is beauty. It is an interesting industry and we see lots of opportunity for a strong hair salon brand. In the future we hope to eventually grow [Neo Amadiva] through franchising. Usually stylists are creative people so if you take away a bit of the headache of administration it could be interesting.”
Risks to doing business
Blaauboer notes that there are risks to doing business in Africa but many are not different from what an investor would encounter in other markets.
She notes that one typical risk private equity funds face is that of making huge losses in the event that an investee collapses, where it then has to make the returns from another investee more than doubling in value. “As a private equity investor the returns can be high and that is because the risks are also high. Although you would try to protect your downside in a couple of ways there is always a chance that if a company goes bankrupt then as a shareholder you come last.”
She explains that the “flexibility that the market has makes it interesting”, citing the case of local SMEs surviving despite late payments.
“I think that risk is sort of lower here because companies don’t go bankrupt easily. It is known that a lot of big companies and governments here pay really late. So if a company is being paid only after 150 to 200 days it forces them to also pay their suppliers and staff late. So a lot of companies here that should have theoretically gone under can keep pushing because they can push payments. It is interesting that these companies have a longer lifeline.”
Blaauboer says the biggest risks in the region are the high cost of doing business and the fact that SMEs struggle to comply with stringent regulations and are continuously harassed by corrupt government officials.
Looking for ambitious entrepreneurs
The TBL boss explains that for the fund to invest in an SME it really has to believe in the team and “buy into the growth story” of the business. She adds that TBL likes to invest in entrepreneurs who have a shared vision and “ambitious growth in their minds”.
“It doesn’t really hurt if someone approaches us and says they want to grow from one to 10 and then we convince them that it could also be to 100, but they should have at least thought about growth. They should also understand that we would like to take the company to a place where it could potentially be completely sold. So if the entrepreneur says they want to be there always then that could be a problem. We would have to agree on how we would exit.”
Entrepreneurs should also have “self-knowledge and a little bit of humility”.
Blaauboer says misconceptions about the nature and activity of private equity and venture capital funds have changed. “When I first got here I would spend an hour explaining that I was not giving any money or lending any money. Today a lot of sophisticated entrepreneurs understand private equity.”
Blaauboer is the current chair of the East Africa Venture Capital Association, an organisation that seeks to create awareness in the industry, build talent, produce data and lobby government to adopt favourable investment conditions.
According to Blaauboer, the growing number of private equity funds coming to Africa will have a “catalytic effect”. Not only are they a “confirmation of ongoing growth”, their investment in crucial industries will also bolster economic growth.
She advises funds considering investing in Africa to take a long-term approach and have a team on the ground to be close to their investees, especially if they are doing early stage funding. Funds should also hire people who have experience in structuring deals and good local networks to identify the right investees.