Show Numbers, We'll Show You The Money
Talking to people who work in private equity (PE) can be a bit challenging: either you get nothing out of them as they wave you off with mumblings of confidentiality, or you end up with statements so bland they make IMF press releases look like a kicking read. One person who I interviewed for some additional material for our East Africa Private Equity Confidence Survey that we did with Deloitte’s Nairobi office gave me such thrilling snippets as ‘sound fundamentals’ and ‘regional growth dynamics’. That’s all very well and accurate, too, but by the time he was through, my attention had wandered off to the pressing issue of whether the intrepid doglet had scrambled through the fence to visit the neighbouring puppies or was merely loitering around in the front garden where I couldn’t see him.
Since PE people are often quite guarded, it was nice for a change to speak to Ngozi Dozie from Nigerian Kaizen Venture Partners. His fund focuses on distressed assets, and he’s enthusiastic: Kenya is great, he gushed – competent people, great systems, interesting companies. And then he got even gushier - interest rates will stay high for the foreseeable future, and the economic environment will probably be wobbly, too, so companies might come under pressure. Because banks are conservative, they can’t and won’t act quickly. Hoorah! This is all incredibly exciting and promising– well, if you’re Ngozi, and your main investment focus are distressed assets, and you have some money to spend to invest in such firms. It was a great interview, even though I wondered whether I should soften it a bit in the final edit – Gordon Gecko clearly had nothing on him, but did suffer from a bit of an image problem.
Outside of South Africa, private equity is still a fairly young industry in sub-Saharan Africa, but one that is growing rapidly. In 2011, we – by which I mainly mean number-cruncher-in-chief Rachel Keeler who built the Africa-assets.com database – estimate that USD3.02bn was invested in 66 private equity deals across the continent. This is an estimate: not all PE funds will disclose the value of deals, for example. Confidentiality, don’t you know. So far, our database only covers 2011 deals, and even that took a lot of wheedling and pestering and also guess work. This is not unusual; most economic analysis does involve some guess work, some assumptions, and some decisions on methodology that will shape your data.
There are a number of reasons why private equity investments are growing in sub-Saharan Africa. For one, there is money to be made. Hell, even Bob Geldof, Lead Griot for more aid money, has recently realised this (Karibu, Bob, better late than never). Improved macroeconomic stability helps, as does the fact that there are actually a lot of business opportunities connected to the growth of the nearly-mythical emerging middle class on the continent. People consume more, and want more services. When they have a bit of spare cash, they also look for an alternative to barely-there or incompetent public services like healthcare and education. And funds are waking up to the investment potential in green energy and agribusiness, for example.
But private equity is still a relatively young industry around here, and most of the capital for private funds comes from development finance institutions (DFIs). They have placed more weight on private equity investment in recent years, hoping that such a hands-on, market-oriented approach will help companies, especially SMEs, grow and so generate more employment. But ultimately, DFIs can only provide so much capital. Private sector investors will be able to invest vastly larger amounts across the continent. But they don’t need to be nice like DFIs. They need to make money. And for many of them, Africa now looks interesting: economic diversification, strong GDP growth and regional integration into larger more efficient markets (and the EAC usually gets a positive mention here). But before they hand over millions or even billions, they want to see performance. Janusz Heath, the Managing Director of Capital Dynamics, was quite clear about this when he spoke at the SuperReturn conference last December: show us the numbers. We need to see results before we can put any money into African private equity. But, encouragingly, he also said it’s probably just a matter of time, comparing the state of play in Africa’s private equity industry with Britain’s venture capital industry a decade ago. It will happen.
And there is actually a sizeable amount of capital on the continent: African institutional investors have not really made major inroads into private equity. There are several reasons for this, partly regulatory ones. But to convince pension and insurance funds that private equity is a worthwhile investment, they will equally want to see performance data. And before policy makers start the laborious process of changing policy, and then regulations, they will probably want to see some even more basic data on how private equity can be useful – how much capital does it make available, how much employment and taxes can it help generate. So we’re back to harassing people for figures – they might actually end up finding this useful, after all.