PSG Africa targeting consumer-facing companies for private equity deals

"The middle class is growing and the consumer is gaining more purchasing power," says Michiel le Roux, investment executive at PSG Africa.

The PSG Group is one of South Africa’s most successful investment companies. Founded in 1995 by entrepreneur Jannie Mouton, the PSG Group has stakes in South Africa’s Capitec Bank, Pioneer Foods, and Distell, to name a few. The company said in its 2012 annual report that if you bought 100,000 South African rands worth of PSG shares in November 1995 and reinvested the dividends, it would be worth approximately 136 million rands today. Traditionally PSG has only been focused on companies in South Africa. It has now, however, started to actively look for opportunities in the rest of the continent. PSG Africa was created as a vehicle for the group to make private equity investments into companies either operating in the rest of the continent, or those with exposure to the region. How we made it in Africa’s Jaco Maritz spoke to Michiel le Roux, investment executive at PSG Africa, to find out more about the company’s investment strategy. Which sectors is PSG Africa currently targeting for its investments?

The reason why the continent is changing is because of the growing consumer. The middle class is growing and the consumer is gaining more purchasing power. We are interested in any industry with direct exposure to the growing African consumer. We believe in the growth story of the one billion Africans – the middle class is becoming bigger, African consumers are becoming more brand conscious, and there is a change in spending patterns. We are looking across the board at any consumer-facing industry; this can include health care, education, technology and retail.

Can you give us some insight into your investment criteria?

We are looking at private companies, not listed companies. We are looking to deploy anything upwards of US$10 million all the way up to about $50 million per investment. We are pretty much aligned with the broader PSG Group’s investment philosophy of taking a significant minority, or a majority stake in any investment we make. It has to be a significant stake, so that it gives us influence on the board level.

Are you finding many suitable companies that fit into these criteria?

There are lots of companies out there. It differs from country to country whether the transaction size we are trying to do is feasible. If you look for example at Kenya, there is a large range of companies that fall exactly within our mandate. If you look at a country like Malawi, maybe there aren’t that many. What is happening at the moment, is there are quite a few funds that are looking to do transactions in this consumer space. So there are probably more funds going around chasing deals, and not that many deals closing. But we’ve come across several companies and there are great opportunities out there.

Have you made any investments to date?

We have made one investment into a company that provides outsourced merchandising, sales and distribution services for FMCG principals located in Botswana called CA Sales. CA Sales is a market leader in its industry in Botswana, and we are growing the group into other parts of the continent so that we can offer clients Africa-wide reach for their distribution.

How would you describe the competition for these private equity deals in Africa? For example, if you are considering to invest in a company, is there a good chance that someone else is also looking at them?

It is hard to generalise, and again it differs from country to country. To get back to Kenya, there is a lot of money from the UK in Kenya. But then if you look at a place like Zimbabwe, there is a dearth of capital at the moment. So I think the dynamic changes from country to country. We see a lot of opportunities in places like Zambia, Botswana, Mozambique – our neighbouring countries where as South Africans we have a competitive advantage with our knowledge, contacts and relationships.

Which other countries do you like?

I mentioned Zambia, Botswana, Mozambique before. We are open to any Southern African country, anything from Namibia, all the way up to Kenya. We are not looking very hard at West Africa at the moment, although we are very aware of the developments that are happening there.

Are you seeing a willingness from these African companies to sell a stake in their businesses to private equity players such as yourselves? Is it easy to convince them to partner with you?

A guy told me in Uganda once that he can get money from his friend who has mines in the DRC, but money was not what he was looking for; he was looking for skilled people to contribute to the operations of the business. I think there is an advantage for South African corporates who can make a real operational contribution to these businesses. But we as PSG Africa have our ways to engage companies, and to convince them that we are a suitable investment partner for them.

What are some of the things you have learned about doing business in the rest of Africa?

It can take quite a while for these deals to close. I think specifically private equity is quite underdeveloped on the rest of the continent.

There are a lot of foreigners that have been involved in our neighbouring countries long before South Africans have woken up to the fact that we even live in Africa. Not only the Indians and Chinese, but also the Lebanese and Portuguese, for example, have been operating in these markets for a very long time.

On-the-ground presence is very important. Flying in and flying out is very difficult. It helps to have a local partner, or your own person on the ground, to really get traction on these deals.

And lastly, can you describe the challenges you face in doing business in the rest of the continent?

I think on-the-ground presence is probably one of our biggest. It is not feasible for us to have an office in every country, but if you fly in and fly out the deal can easily lose traction. So that is definitely a challenge for us.

Bureaucratic red tape is always an issue. Some countries handle it a lot better than others, and it can definitely slow things down. A lot of countries are now starting up competition commissions. For some of them our deals have been their very first cases, and these guys are still learning. It takes longer than in South Africa or in a more developed economy.

And then the political and regulatory environment can change very quickly. In Malawi the currency has been a huge problem for corporates operating there. In Zambia the minimum wage was dramatically increased last year without any public consultation or anything like that. The government has also stopped anyone from invoicing in US dollars, which had a big impact on the way people do business there.