Private equity requires family businesses to become more ‘corporate’
East Africa has in recent years seen a growing number of private equity funds setting up shop and investing in local businesses. One study shows that in 2015 there were 40 private equity deals in the region, worth about US$1.44bn.
George Odo is managing director for East Africa at AfricInvest, a pan-African private equity firm headquartered in Tunisia. AfricInvest manages $1bn across 14 funds. Odo speaks to How we made it in Africa about deal flow, local fundraising and emerging investment opportunities. Below are edited excerpts.
What is your view of the private equity industry in East Africa?
The industry is more mature in Kenya but we have seen a lot of growth in the other markets. A couple of funds have opened offices in Tanzania, Uganda and Ethiopia, and we are also seeing transactions in those countries. There is also a lot more awareness of private equity in the region. So today it is possible to close deals a lot quicker.
However, the disadvantage is that valuations have become a lot higher. This was previously a buyer’s market but today it is probably a seller’s market because there are so many private equity players and more transactions taking place. The East Africa Venture Capital Association (EAVCA), which we co-founded, has more than 40 members. There are at least 20 core private equity and venture capital funds based here. The market is also segmenting itself. You find funds doing the $1m ticket deal, others doing $50m, and you also have funds that are very specific on sectors.
But I must admit that there are still not enough venture capital funds around here. We find small businesses with great models that are too early stage for us to invest in. We need more VCs to help these businesses grow to a level where private equity partners can then come in and take them to the next growth phase.
Previous reports have shown the majority of East Africa-focused private equity firms source money from investors in North America and Europe. How would you describe the local fundraising situation?
In the West most of their private equity money comes from pension funds and insurance companies. In South Africa they also have money coming from local institutions. But in sub-Saharan Africa we are in a situation where we don’t have enough local money. The challenge is pension fund managers don’t understand private equity because it is a fairly new asset class in this part of the world. As an industry we have tried to do a lot of education and now we are seeing some local pension funds back some private equity funds, but they are still mostly putting in little bits of money.
Part of the problem has been that as private equity investors, in the past we were behaving like a private club and a lot of our transactions were shrouded in secrecy. We realise now that we must speak more about the industry, its successes and opportunities. As there is more familiarity with the asset class, as there are more success stories, and as people realise that some of the big shopping malls here and banks were built by private equity – they will want to get involved. In our new fund, for example, we have seen high-net-worth families and pension funds paying attention. I think the tide is starting to turn.
Given the increased number of private equity funds focused on the region, how easy is it to find companies to invest in?
I have heard some of my peers say there aren’t enough deals and everybody seems to be chasing after the same companies. I think if one sits in the comfort of their offices and wait for transactions to come to you and for advisors to bring you deals, then they will show you the same deals they have shown everybody else, which will invariably lead into a price war. But if you make an effort to go out to meet people, look for deals, figure out who the market leaders are in growth sectors, and identify the tier-two and tier-three companies that will be the champions of tomorrow – then you will find the right businesses to invest in.
Right now we are looking at about six banks and I will probably end up investing in one of them. We are studying opportunities in agribusiness, banking, insurance, health, FMCG and education. There is no shortage of businesses to invest in, but you have to reach out to companies and entrepreneurs because sometimes the idea of getting a private equity partner has not even crossed their mind. If you are actively digging for deals you will find that very often you wish there was an eight-day week.
What difficulties do investees struggle with after partnering with a private equity fund?
Majority of the businesses we have invested in come from a strong family background. That shift from family to a corporate structure is challenging, especially in decision making, and sometimes there can be tension. I remember an instance where we went to a board meeting and they said to us, “Yesterday we had a directors meeting and this is what we want to present to the board.” My colleague and I, who had flow in for the meeting, looked at each other. He was wondering, did George attend another meeting yesterday and I was thinking the same thing about him. So we told the family, “Don’t have a meeting to prepare for us, let us have a meeting together.” Eventually this ended up being one of the strongest partnerships in our portfolio. So moving from a situation where the family is making all the decisions to where there are other stakeholders, is not always an easy transition. Sometimes it is a conversation that we can have with a light touch and sometimes it is a bit firm.
The other challenge is when the business is used to doing things so informally, it takes time for them to change and in that case the private equity partner needs to be patient. I can’t afford, as a private equity partner, to get upset and snap at every little thing that goes wrong. Not all businesses have the same level of corporate governance and it is difficult to figure out how long it will take for our new partners to learn how to run a board meeting, how to send out timely and complete meeting notices and how to come to a decision on important matters. In cases where there are gaps, we have to carry them along, and very often it works. It is often a relationship management issue.
Looking ahead, where do you see opportunities for private equity investments?
There is a shortage of real estate funds, so there is room there for more players. We also have a shortage of large infrastructure private equity funds. Right now we have development financial institutions like the African Development Bank Group (AfDB), the European Investment Bank, and the International Finance Corporation (IFC) doing infrastructure projects. But private equity funds doing infrastructure are still not present in East Africa. That is a key gap because we need these assets for development going forward.