Private equity: Addressing the exit challenge in Africa
By Alexis Caude, managing partner, Mauritius, Adenia Partners
By almost every measure, the outlook for private market investments in Africa seems bright. Nearly nine out of 10 limited partners (LPs) say they plan to maintain or increase their allocation to African private equity over the next three years, according to a 2021 survey by the African Private Equity and Venture Capital Association (AVCA). And among the most important factors driving interest in African private equity, cited by those LPs, are opportunities to generate positive social impact and strong financial performance.
Amid this optimism, however, there is one concern: the lack of control and options LPs feel they have when it comes to unwinding those investments. Indeed, 76% of LPs consider “limited exit opportunities” in Africa as the biggest challenge faced by private equity fund managers investing in the continent.
This is hardly a new story. The muted exit environment in Africa has been a long challenge and has a number of root causes, including the lack of thriving IPO markets. Among the 33 reported African private equity exits last year, not one took place through an initial public offering. In 2019, only one out of the 44 exits in African private equity went the IPO route. In addition, a large number of private equity investments in Africa are minority stakes, which are traditionally more difficult to exit.
Still, there are some positive signs that hold out hope. For starters, the range of potential buyers is broadening out, creating the potential for greater liquidity in the years ahead. In 2017, for example, one out of four African private equity exits was made through management buyouts (MBO), which tend to cater to smaller-sized deals, while 60% of exits involved sales to financial or strategic buyers, according to AVCA’s industry survey. Last year, strategic and financial buyers accounted for nearly 80% of exits, while MBO-related exits shrank to 15%. This is a trend that the vast majority of general partners (GPs) expect to continue over the next three to five years.
Over the last 20 years of investing in Africa, at Adenia we have completed 31 investments and 16 exits, including the full liquidation of our first two fund vehicles, Adenia Capital I and Adenia Capital II, in line with the timeframes specified in our LPAs. This track record of experience has given us some insights on how to get exits done and maximise their value.
How you structure an investment from the onset can help determine the success of your eventual exit. At Adenia, we are control investors, favouring majority or outright ownership so that we have the authority to help companies grow the right way – by installing experienced managers, professional systems, and operational and strategic expertise. This type of control not only helps us transform portfolio companies, leading to better financial performance, it expands the universe of potential buyers at exit. Think about it: having the authority to sell 100% of the business is particularly appealing to financial and strategic buyers that have control requirements of their own.
Of the 16 exits Adenia has completed thus far, six have been through management buyouts, three through sales to financial firms, and seven through sales to strategic buyers. Early on in Adenia’s development, management buyouts were a more common route for exits. But as our deal sizes have grown, financial and strategic buyers have become more common targets, as they are for larger private equity fund managers in Africa. For these groups, process matters.
Established financial and strategic buyers cannot acquire companies that do not meet their financial and operational standards on day one. That’s where control investors like Adenia come in. We help instal experienced managers, directors and advisors at our investees while implementing professional hiring, development, and training programmes as well as proper financial systems.
A good example is Ademat, a leading power security provider based in Côte d’Ivoire that Adenia acquired in 2016. At the time, Ademat was a family-owned business still being operated in a highly centralised fashion by its founding family. Upon acquisition, Adenia reviewed the company’s overall strategy and recruited a new CEO to implement our plans. The result: Ademat introduced innovative management tools, including analytical accounting tools to enable better monitoring of financial performance. A modern automated management system was installed to enable technicians to monitor customers’ equipment remotely and a smartphone application was established.
Working conditions were also modernised. Ademat invested €700,000 to build a bigger, tailor-made headquarters with three times more storage capacity and that facilitates better communication between previously separated teams. And, finally, Adenia worked on building operational excellence by empowering mid-level managers to strengthen the organisation. All these efforts made Ademat appealing to financial and strategic buyers and positioned Adenia to sell its 100% equity stake in Ademat to SPE AIF I, an Africa-focused private equity fund.
More than 90% of Africa-focused LPs either have a responsible investing or ESG policy in place or are in the process of developing one. And of those LPs with an ESG policy in place, 60% say they plan to increase their allocation to African private equity over the next three years, according to the AVCA survey. The reason? Most cite their investment mandate and their desire to make a positive social or environmental impact.
At a time when ESG and sustainable investing factors are a growing part of the investment mandate of European and US-based LPs investing in Africa, installing ESGI (with “I” for impact) processes expands the potential universe of potential buyers.
Consider the case of the leading paint and coatings manufacturer in Mauritius. At the time Adenia made its initial investment in 2014, we understood the optimal exit scenario was to sell to another paint company. To that end, Adenia designed a strategic plan, which notably included more modern and environmentally friendly facilities, as well as the implementation of waste management and solvent recycling systems that are in line with the development of a formal environmental and social management system that is required by leading paint companies. In January 2020, Adenia sold Mauvilac to AkzoNobel, the third-largest paint manufacturer in the world, which emphasised Mauvilac’s high ESGI standards when it acquired the firm from Adenia.
Access to a global network of financial partners also expands the potential universe of buyers. This is where the experience and influence of the private equity fund manager come into play. At Adenia, we prefer to use the support of investment bankers to manage a sale, as it often increases the competitive tension in the process. Depending on the situation, however, Adenia may also engage directly with a specific party if the valuation is appropriate. In either case, Adenia will also engage with top-tier advisors to ensure a smooth process. This often includes the preparation of a vendor due diligence (VDD) report by one of the big four accounting firms to ensure the availability and quality of information required by potential buyers. To help with Mauvilac’s exit, for instance, Adenia hired Lazard as M&A advisor and Ernst & Young as financial VDD provider.
As any LP will tell you, a private equity fund’s expertise in the exit process is as critical as its performance track record as one of the main criteria to attract and retain investors. Adenia believes that a majority ownership strategy, coupled with a strong value-creation plan for best-in-class operations and sustainability, creates the credibility necessary to achieve successful exits in Africa.
This article was first published by the African Private Equity and Venture Capital Association.