Sub-Saharan Africa excluding the region’s biggest and most advanced economy, South Africa, poses unique challenges for private equity investors as acquisition targets on the continent tend to be cash hungry and often require additional capital injections to boost growth, according to Standard Bank.
“The strategy of the private equity investor in sub-Saharan Africa tends to be more focused on deploying expansion capital as the companies on the continent tend to be in a growth phase, which means their cash flow is often constrained. This poses challenges for traditional cash flow based lending structures,” says Brian Marshall, co-head of debt products at Standard Bank’s corporate investment banking unit.
“In contrast, South African private equity investing tends to be more similar to developed markets, in which private equity investors focus their energies on driving efficiencies within acquisition targets that are fairly mature and well-established in their line of business.”
Marshall says lenders such as Standard Bank need to apply a completely different mindset when financing private equity transactions in sub-Saharan Africa, as deals are often financed in completely bespoke structures.
The tendency for less-mature, fast-growing companies in sub-Saharan Africa to absorb large portions of cash generated by the entity in question, means that the entire purchase price of such businesses must usually be funded completely by equity. Leveraged financing provided by banks is then either used against the value of the equity stake or, once the business matures, refinanced against stable, bankable cash flows.
Marshall says the challenges of structuring leveraged finance deals in sub-Saharan Africa are further complicated by the fact that each country in the region has different regulatory, tax and foreign exchange regimes. This can be particularly tricky when the target entity has operations in several African nations making debt push down difficult to achieve, he adds.
“You can’t simply use a one-size-fits-all approach in Africa,” says Marshall. “Every country is different, as are their regulatory and financial landscapes. We have spent a great deal of time understanding these environments for our own banking group and are happy sharing what we have learnt with our own customers, private equity or otherwise, looking to raise financing in multi-jurisdictional structures.”
On the strategy for servicing local markets Marshall says: “Any top tier private equity investor will tell you the importance of understanding the local nuance when investing regionally. This can only be obtained by having local people on the ground tapped into the local environment. Banking and lending are no different. As a result, we have regional product teams in Nairobi serving East Africa; Lagos for western Africa; Johannesburg for South and Central Africa; and London for investment into Africa. These teams consist of returnees from the African diaspora, many of whom have experience working for large banking institutions in Europe and North America, which then allows them to apply international best practice to local situations.”
Marshall says banks tend to look at three main criteria when considering whether or not to finance a private equity deal. Firstly, the strength of the management team; secondly, the strength and reputation of the equity sponsor; and thirdly, the strength of the target entity, with countercyclical businesses in the top quartile of their market being favoured.