Venture capital remains a small subset of all private equity operations in Africa, partly because it is so labour-intensive. “There are a lot of people who do not want to get their hands dirty,” Jeromin complains.
A rutted road
Even for larger investors, the path to profitability can seem more like a rutted dirt road than like a freshly paved expressway. “Private equity is not challenging in terms of finding investment opportunities,” says Larry Seruma, chief investment officer and managing principal of Nile Capital Management, based in the US state of New Jersey. “It is like fishing in a barrel. The problem is with managing the business. Often there is not enough talent to take it to the next level. If you are a minority shareholder, you might not find the right people to represent you on the board, for example.”
On the talent front, Seruma, himself a native of Uganda, finds hope in the return of people who were once counted as drops in the brain drain. “The African diaspora is huge,” he says. “Well educated people are going back. Employment in the developed markets is not that good anymore, and Africa is growing. Local talent is moving back.”
Investors are also worried about their “exit strategies,” a euphemism for how they expect to realise returns on their investments. After all, these are profit-seeking capitalists, not philanthropists.
Venture capitalists like Jeromin sometimes look to larger private equity firms to buy their stakes as their protégés grow. Another option is known as a “trade sale,” selling all or part of a firm to a muscular multinational company looking to expand. Potential buyers could include major players in neighbouring countries seeking cross-border expansion to take advantage of the liberalised flow of goods and services within regional trade blocs.
Recently the Aureos Southern Africa Fund sold its 49% stake in Zambia’s foremost producer of table eggs, Golden Lay, to the African Agriculture Fund, a private fund managed by Phatisa, which invests in sustainable food businesses across Africa. “This marks a very successful investment and exit for Aureos,” says Ron den Besten, its managing partner. “Golden Lay has made great strides in the last five years. Production capacity has more than doubled as a result of our strategy of investment in new state-of-the-art laying houses, providing the impetus for exponential financial growth during our investment period.”
One popular exit strategy elsewhere, especially in the US, is the initial public offering (IPO), in which an investor sells at least part of its stake when the company puts its shares up for sale on a stock market. But African stock markets tend to be thin and illiquid, and so IPOs have been relatively rare, although not unheard-of.
Jeromin reaches back into US history for another strategy. “If you go back to the 1800s, before there were liquid markets, investors got their money through dividends. You can set up a preferred-share structure,” in which certain shareholders receive privileged pay-outs.
Private equity is not without its drawbacks. Company owners and entrepreneurs will not always be pleased by pressure they might get from their new partners. And investors may lose interest if their exit strategies prove elusive.
But private equity seems to be starting to fill a void that cannot be handled by banks alone. “For most companies in Africa, raising money means going to the bank,” says David Levin, senior managing partner of Nova Capital Global Markets in New York. “We bring in a different level of financing.”
This article was first published in Africa Renewal