Africa is growing, and African companies need cash to expand. Investors want in on the action, especially given low returns in many other parts of the world these days. But with few stocks and bonds, and scant liquidity for those out there, how do investors get a foothold? And how do African firms access much-needed cash?
Enter private equity – the purchase by a private investor of a share of a company that is not listed on a stock market. The company can take the money from the sale and use it for expansion or other investments. In exchange, the owner gives up some control, as the new partner gets a seat on the board or, in smaller companies, plays an advisory role. Eventually investors make money by selling their shares or receiving dividends.
In Africa, private equity is all the rage. “If you look at all the opportunities,” says David Jeromin, managing partner of the US-based Golden Mean Capital, it is like the “nightmare” of someone with attention deficit disorder. “There is just so much stuff.”
Announcements of new African private equity funds come regularly. In February the African Development Bank (AfDB) announced that it would chip in US$50m towards a fund of the US-based Carlyle Group, which plans to invest at least $500m in sub-Saharan Africa. In May, the Brazilian investment bank BTG Pactual launched a $1bn Africa-focused private equity fund. In the 15 months from January 2011 to March 2012, eight new funds focusing on East and Southern Africa were launched.
East Africa alone has 16 dedicated funds, out of 53 active in that region. Officials of nearly three dozen funds responded to a survey, released in March by Deloitte, a global consultancy, and Africa Assets, a private research and consulting firm, showing that nearly four-fifths planned to increase outlays in the next year.
The overall numbers are impressive, although a bit volatile. Private equity investment in sub-Saharan Africa jumped from $741m in 2003 to $1.3bn last year, with ups and downs in between, according to the Emerging Markets Private Equity Association.
Private equity placements come in all sizes. The biggest in East Africa last year was a $287m deal by Egypt’s Citadel Capital to invest in Rift Valley Railways, which operates the railroad from Kenya’s Mombasa seaport to Uganda. The AfDB, whose private equity portfolio stands at $1.1bn, regularly invests in independent funds that make equity placements in Africa. These funds have invested in 294 companies, of which 54 topped $15m and 163 were under $1m.
Infrastructure, banking, mining, oil and gas, and other commodities generally attract the heavy hitters. At the other end of the spectrum, venture capital focuses on less mature companies, which are generally small and often headed by a charismatic entrepreneur.
One such company is Cheetah Palm Oil, a start-up in Ghana founded by the well-known economist George Ayittey. Cheetah has backing from Golden Mean Capital. Instead of buying land and growing crops, it will work with a producers’ cooperative to help market products internationally and to ensure that farmers get fair prices, microcredit and agricultural extension services. The project has the potential to encompass 50,000 small growers with farms covering 75,000 hectares of land.
This is not your genteel, Silicon Valley-style venture capital. “You have to rally resources around the entrepreneur and build infrastructure,” says Jeromin, whose firm is solidly in the venture capital realm. “It takes a heck of a lot of time.”