Africa’s economic transformation has made it a key target for globe-trotting private equity houses. Can the continent pay out for the lengthening queue of investors?
For the private equity (PE) community, where risk and return are uneasy bedfellows, Africa represents less of a gamble. Given the continent’s increasing political stability and steady economic growth, the stakes are becoming stacked progressively in the sponsors’ favour. Not so long ago, investors’ bets were as safe as buying a handful of lottery tickets.
Yet as a new frontier, Africa has plenty of attractions for those that have an appetite for risk. In 2014, Jeff Immelt, General Electric’s chief executive, announced that the company would invest some $2bn into the continent by 2018. In an interview with CNN, he acknowledged that investment in Africa represented a balance of risk and reward, but declared that the ‘upside is vast’.
‘Many of our core global clients had offices in Africa, including in Johannesburg, and so it was logical to be on the ground there.’
Martin Kavanagh, Herbert Smith Freehills
It is a sentiment shared by the global PE community. Deal volumes are only just returning to pre-financial crisis levels: Africa PE exits amounted to $7bn in 2014 according to Preqin, the alternative asset industry data provider, but while local and regional PE houses have traditionally dominated the deals in Africa, global players are now very much part of the scene.
Kohlberg Kravis Roberts (KKR) and The Carlyle Group – which has offices in South Africa and Nigeria – both have significant Africa-focused teams and dedicated capital aimed at the continent. In 2014 The Blackstone Group partnered with Black Rhino Group, the African infrastructure development company, to focus on major infrastructure projects across sub-Saharan Africa. London-based Helios Investment Partners launched the first $1bn-plus Africa-focused fund earlier this year, while TPG Capital announced that it would invest up to $1bn in Africa through a partnership with Satya Capital, a PE fund headed by Sudanese billionaire Mo Ibrahim.
Only 1% of global PE capital is channelled into Africa, according to The Economist, but with buyout houses filling their war chests, significant change is on the horizon. Nicole Paige, a partner at Linklaters’ South African ally Webber Wentzel, sums up the current sentiment: ‘There has been a massive amount of capital raised by African-focused funds recently – around $2.88bn has already been raised this year. These funds tend to have a five-year period to deploy their capital so you should see a lot of investments being made in the next few years.’
Teething troubles
For PE investors and their advisers, the challenge is always going to be identifying appropriate targets and envisaging possible exits. Africa is not awash with large companies that have a presence throughout the continent. So far, PE houses have tended to follow a buy-and-build strategy, bolting on additional acquisitions to an original portfolio company. But even this is a testing route.
Many influential family-run organisations have shown reluctance to cede control to a PE investor. However, Kenneth Barry, a London-based PE specialist who joined White & Case as a partner from Debevoise & Plimpton in November, says that sentiment is shifting. ‘Five to ten years ago, not only were PE firms more wary of investing in Africa, but business owners on the continent were reluctant to take on PE funding. They were unwilling to relinquish the level of control that typical PE firms look for. Now larger businesses are more familiar with PE investors and more accepting of the governance arrangements that are put in place.’
Even with changing attitudes towards financial sponsors, investors still typically find it hard to identify appropriate targets and when they do they are normally part of a chasing pack.
As in Europe, Africa-focused funds have raised plenty of capital but are struggling to deploy it. Gavin Davies, a London-based corporate and M&A partner at Herbert Smith Freehills, says: ‘There is a concern about too much dry powder in Africa, as a number of different types of investors, including strategics, seek exposure to the “Africa rising” story [the narrative that improved governance means Africa is almost certain to have a long period of mid-to-high single-digit economic growth, rising incomes and an emerging middle class]. The opportunity in Africa is sometimes equated with the emerging market opportunities in India and China some years back. It is worth remembering there are some key differences, particularly that Africa is comprised of 54 different countries, many quite small–scale, each with its own investment microclimate. Mali is not the same as Mozambique. That means a lot of upfront investment work to understand these individual environments.’
Despite this, market fundamentals remain convincing. Political stability has created a much more attractive environment for financial sponsors. Following the presidential election in Nigeria earlier this year, power transferred peacefully from the incumbent People’s Democratic Party leader Goodluck Jonathan – the PDP had ruled since 1999 – to the All Progressives Congress candidate Muhammadu Buhari.
Revolving doors: building a presence in Africa
As the primary entry point into sub-Saharan Africa, Johannesburg has become an intense fighting ground for legal talent. In 1995, White & Case was the first international firm to open an office there and maintained a very lean presence until 2013. It now has five partners in Johannesburg. The stream of international firms entering South Africa in recent years has exaggerated this trend.
The examples in the last 18 months or so are myriad. Clyde & Co launched a South Africa practice in 2014 with a four-partner team headed by prominent insurance litigator Daniel Le Roux. In October 2015, it announced the hire of five further partners to its Johannesburg and Cape Town offices.
In 2014, Allen & Overy also hired a senior finance team headed by the celebrated Lionel Shawe from South African law firm Bowman Gilfillan. It followed this up with the recruitment of prominent projects partner Jason van der Poel from Webber Wentzel in 2015.
These moves follow Hogan Lovells’ merger with South African firm Routledge Modise in 2013, and Baker & McKenzie’s Johannesburg launch in 2012. Dentons is another international firm to expand its presence in South Africa. It launched a Johannesburg office in 2015, following its Cape Town launch in 2014.
Herbert Smith Freehills (HSF) is the latest international firm to establish a presence in Johannesburg and DLA Piper is poised to do the same after ending its association with Cliffe Dekker Hofmeyr earlier this year. South Africa has suddenly become a focal point for the international legal services community.
In October, HSF announced that Brigette Baillie and Peter Leon would join from Linklaters’ South African ally Webber Wentzel. Baillie is a market leader in projects and energy, according to The Legal 500 EMEA, having represented the South African government on its headline renewable energy programme and pushed forward the firm’s projects practice in sub-Saharan Africa. Leon has a similarly distinguished reputation in mining law.
HSF has been a potent force in Africa over the years, primarily through its London and Paris offices as well as other key branches in its network, but Martin Kavanagh, a London energy partner, says that it became important for the firm to demonstrate greater commitment to the region by establishing a physical presence. ‘Many of our core global clients had offices in Africa, including in Johannesburg, and so it was logical to be on the ground there.’
Speaking of the demise of the firm’s association with leading South African firm Cliffe Dekker, David Church, DLA Piper’s international development partner, remarks: ‘The strategic ambitions of the firms diverged somewhat. We were keen to have an office in South Africa that was integrated as part of the global and pan-African practice.’
DLA Piper has hired Cliffe Dekker’s former chief operating officer, Michael Whitaker, and is poised to announce a series of lateral hires into its new Johannesburg office, according to Church.
Elsewhere on the continent, Eversheds has continued to cement its emphasis on Africa and expanded its Eversheds Africa Law Institute (EALI) with five new member firms in 2014. Through EALI, it is now present in 35 African jurisdictions.
In 2015, Norton Rose Fulbright further extended its coverage in Africa by striking alliances with firms in Uganda and Zimbabwe. It entered Africa in 2011 through a pioneering merger with leading South African firm Deneys Reitz.
Egypt is another key jurisdiction for international firms and in February Shearman & Sterling said it was considering launching a Cairo office focused on arbitration and projects.
Casablanca is emerging as the principal hub for North Africa and West Africa, particularly the francophone states. DLA Piper is the latest international firm to establish an office there with the arrival of Christophe Bachelet as managing partner from Clifford Chance and Mehdi Kettani from Kettani Associés.
Church says the launch of the Casablanca and Johannesburg offices are essential to the credibility of the wider DLA Piper Africa Group, which includes an alliance of law firms in key jurisdictions across the continent. ‘Casablanca is one of the business hubs for Africa. Morocco is important not only in the context of the Maghreb [North African states other than Egypt] but also for West Africa and francophone Africa, as well as being a significant market and developing economy itself,’ he remarks. ‘We have a commitment to work in a variety of jurisdictions. Casablanca and Johannesburg are part of the overall play and not just in the context of their own markets.’
The election is thought to be symbolic of Africa’s move away from volatility, despite considerable tension and civil unrest in states such as Somalia and South Sudan, while the Arab Spring of 2010 and 2011 is still fresh in the memory. The recent Metrojet Airbus A321 tragedy in the Sinai Peninsula and the suspicion that it was caused by ISIL terrorists will not help Egypt’s status as a destination for investment.
However, Joshua Siaw, a partner in White & Case’s Johannesburg office, says that financial investors are now less influenced by the possibility of a political change: ‘Ten years ago with an election, investors would wait and see what happens, but this has changed dramatically over the last few years and investors seem a lot more comfortable now.’
Mehdi Bennani, the managing partner of Casablanca-headquartered Bennani & Associés, a firm with additional offices in Algeria and Tunisia, believes that Africa’s image as a fast-growing developing market with a quickly expanding middle class is crucial to investor appeal: ‘If you look at Africa as a whole, the one element that has prompted this wave of interest and excitement is that the continent has given the impression that it is more politically stable. There have been fewer overthrown governments and political coups in Africa. That element is extremely important for investors.’
‘There is a concern about too much dry powder in Africa, as a number of different types of investors seek exposure to the “Africa rising” story.’
Gavin Davies, Herbert Smith Freehills
With 54 African states recognised by the United Nations, there are always going to be exceptions to the rule that Africa is becoming less volatile. Greg Boyd, a native South African and emerging markets specialist at Harneys’ British Virgin Islands office, says that perceptions of Africa have materially changed: ‘What we are seeing is a change in mindset. Before 2000, Africa was a place for foreign aid. It is no longer about foreign aid but about FDI and investment opportunities.’
Much of this is driven by the gradual urbanisation of the population and the growth of the middle classes and disposable incomes. With that comes a greater demand for consumer goods and services, which falls into the ‘sweet spot for private equity’, according to Hogan Lovells London partner Keith Woodhouse.
Mobile phones and fast internet have dramatically changed African economies. M-Pesa, a mobile-phone-based money transfer product pioneered by Vodafone, initially in Kenya and Tanzania, has transformed the way Africans engage with the economy. Only a small proportion of Africans have bank accounts so technology has become a vital means of transferring money.
Consequently, an increased demand for power has led to a stream of renewable energy projects across the continent. Blackstone announced in 2014 that its development partner, Black Rhino, and Dangote Industries were to invest $5bn in African energy projects over the next five years. In September 2015, Black Rhino signed an agreement to develop a $1.55bn fuel pipeline between Djibouti and central Ethiopia.
Although high-value PE transactions are still rare in Africa, the larger players have clearly taken the field. Carlyle invested $147m into Nigeria’s Diamond Bank in 2014 through its Sub-Saharan Africa Fund. Clifford Chance (CC), led by Mike Taylor and Nigel Wellings in Dubai, advised Carlyle, with Nigerian firm Udo Udoma & Belo-Osagie (UUBO) operating as local counsel. UUBO partner Ozofu Ogiemudia, who worked on the deal, says that it represents ‘international recognition of Nigeria’s prominence in the sub-Saharan African PE growth story and continuing investor appetite for the dynamic Nigerian financial services sector’. Nigerian firm Banwo & Ighodalo advised Diamond Bank.
‘This is a boom market. Our staff numbers are growing 15%, 20%, 30%, every year. Managing growth is the biggest challenge.’
Karim Anjarwalla, Anjarwalla & Khanna
CC also advised KKR last year on its first foray into Africa through its $200m investment in Afriflora, the Ethiopian flower grower and exporter. London and Amsterdam-based partner Thijs Alexander led on the deal. Spencer Baylin, head of emerging markets private equity at CC, remarks: ‘Elections, FX and oil prices are obviously a factor in activity levels, pricing and deal timelines, and certainty, but the emergence of auction processes and PE IPOs reflects a market that is both resilient and developing, and the pipeline for 2016 looks strong.’
A further sign of the maturing market was Carlyle’s first exit in Africa – advised by its go-to law firm Latham & Watkins – when it sold its stake in Export Trading Group (ETG), the Tanzania-based agricultural supply manager, to the company’s management team and founders for an undisclosed sum.
An expanding map
Carlyle’s investment activities in Tanzania illustrate the wider investment reach that PE houses are attempting. For years, South Africa and Nigeria have dominated deal values and deal volumes, but there is a gradual recognition that other parts of Africa are becoming increasingly pivotal.
Kem Ihenacho, a London-based M&A partner at Latham, remarks: ‘This is to be expected as South Africa and Nigeria are the two biggest economies on the continent. That said, our clients are looking at deals across a number of other countries including Ghana, Ivory Coast, Morocco, Egypt, Ethiopia and Uganda.’
The biggest deals still centre on Africa’s largest economies – Nigeria overtook South Africa as the continent’s largest economy, when its National Bureau of Statistics restated its GDP for 2013 at $488bn, some way ahead of the World Bank’s 2012 figure of $384bn for South Africa.
John Bellew, a PE specialist who recently joined Johannesburg-based Bowman Gilfillan from local rival Webber Wentzel, recognises that sponsors are beginning to look at less-established markets. ‘The South African market is becoming mature, there is competition for assets and the internal rate of return is coming down. At the same time, Africa is opening up with political stability, an emphasis on anti-corruption and the higher returns that South Africa was offering in the early days. It is very much a pioneer market,’ he comments.
East Africa is one region in which PE houses have taken a particular interest. Kenya is showing consistent annual GDP growth of in excess of 5.5%, achieving 6.9% growth in 2012. In Tanzania, GDP grew by 7.3% in 2013 and 7% in 2014. Uganda is following a similar trajectory.
Simon Toms, a London corporate partner at Allen & Overy, identifies Tanzania and Rwanda as two African states that are reaping the rewards of investment. ‘They are small markets but very active ones that allow private capital to develop the economy,’ he says. Tanzanian house Mkoba Private Equity Fund launched a $200m fund in 2014, after a series of investments by South African and Kenyan PE houses in the jurisdiction. Kenya’s Fanisi Capital bought a minority stake in Tanzanian agro-processing company Kijenge Animal Products for $6m in 2015.
Salad days: facing up to the commodities slump
He recalls: ‘There were two hotels in Luanda and three restaurants where you could go. You had to live and work in a confined environment. There were a handful of oil company clients that had their offices downtown in a relatively small area and you could not go outside the city centre. By 10pm the city was dead with the curfew.’
Today, Luanda is a modern city, full of cranes and high-rise buildings. An annual survey by the consultancy firm Mercer ranked it as the most expensive city in the world for expatriates.
However, just as peace has descended on Angola and prosperity has taken hold, the collapse of oil prices has put a brake on economic growth. GDP growth stood at 4.7% in 2014, down from a startling 23.2% in 2007.
The commodities boom put Africa at the heart of the global economy, particularly following the global financial crisis. But China’s cooling economy has taken a toll on resource-rich states as global demand for commodities and natural resources has declined dramatically.
Firms that were at the centre of the commodities boom remain upbeat about their African prospects, even in economies that have been heavily reliant on their natural resources. Oil production and sales account for some 45% of Angola’s GDP. Ricardo Rodrigues Lopes, a partner at Portuguese firm Caiado Guerreiro & Associados comments: ‘Although the fall in prices has clearly reduced foreign investment in Portuguese-speaking Africa, the economic diversification implemented is creating and developing new business opportunities.’
Diogo Xavier da Cunha, managing partner of Miranda & Associados, the Portuguese firm that operates in 17 jurisdictions through its Miranda Alliance network, says that countries such as Angola are making a real effort to diversify their economies and attract investment. A big problem for Angola is its lack of foreign currency, but Xavier da Cunha believes that the bigger picture is much more positive. ‘We strongly believe in the future of Africa,’ he states. ‘For a lot of countries, even with the impact on commodities prices, the forecast is still for growth to carry on.’
Duarte de Athayde, managing partner of Abreu Advogados, says that the firm is still focused on Angola, but is looking to other lusophone states such as Mozambique, which has a broader economy. Indeed, Mozambique’s recent discoveries of oil and gas represent something of a bonus to an already growing economy. GDP growth has stood at around 7% for the last few years.
Luís Pais Antunes, the managing partner of PLMJ, which is associated with GLA in Angola and Mozambique’s TTA, says that he is still ambitious when it comes to lusophone Africa.
‘African countries will remain focused on a strong development of their infrastructures, as well as on the consolidation of the economy, the restructuring of their legal systems and the improvement of education and professional training,’ he remarks. ‘Angola and Mozambique, in particular, have attracted a growing number of multinationals seeking to exploit the country’s mineral resources and all associated activities. Projects in the mining, rail and maritime sectors have brought in high levels of investment by large foreign companies that enjoy attractive tax conditions for their projects.’
As far as economic cycles go, Amendoeira says Vieira de Almeida is committed to riding out the tough times: ‘I am optimistic for the medium to long term. This is the third oil price slump I have experienced and I have been working in this field long enough to know that prices rebound and usually do so rapidly. A lot of people are predicting oil prices to rebound next year.’
Kem Ihenacho, a London-based M&A partner at Latham & Watkins, says that the commodities slump and the increasing strength of the US dollar have had both positive and negative effects: ‘In some cases it has resulted in an increase in the valuation gap between founders and owners and PE houses. In others it has led to greater opportunities, as businesses require additional capital given the stresses imposed on their revenues by the currency and commodity price issues.’
Karim Anjarwalla, the founding partner of Nairobi-based Anjarwalla & Khanna as well as the Africa Legal Network – an alliance that covers 12 African jurisdictions – says that PE work is becoming critical to African firms. ‘It is huge. It is the largest part of our M&A practice, bigger than trade buyers. We are seeing more investment in companies by way of PE than we do from strategic investors. This will increase because the cost of debt has gone up in the recent past and that will remain for a little while. It means it is less risky to bring in equity and it helps to deleverage a bit.’
In June 2015, Anjarwalla & Khanna advised Helios Investment Partners, the Africa-focused investment fund, on the disposal of its 25% stake in Equity Group Holdings, a company listed on the Kenya, Uganda and Rwanda stock exchanges. Helios’ interest was sold to multiple purchasers, the final stake being sold to the National Social Security Fund of Uganda (NSSF). Ugandan law firm MMAKS Advocates also advised Helios, with NSSF represented by African Alliance Uganda.
Anjarwalla & Khanna also acted for Actis, the emerging markets-focused fund, on its $40m equity investment in AutoXpress Group, the East African tyre wholesaler and retailer.
Anjarwalla says that funds are increasingly teaming up with the strategic buyers and bringing their local knowledge to transactions in the region. ‘They can bring credibility, local knowledge and standing. Strategics do like their network and knowhow.’
It is a far cry from when Anjarwalla returned to his home country in the mid-1990s after studying and practising in the UK. He came back and found a nation still under a dictatorship, where freedom of speech was virtually non-existent and FDI was negligible. The state was reliant on aid and was under the cloud of the HIV/AIDS epidemic. ‘The logical thing would have been to continue my career in the UK,’ he admits.
But today Anjarwalla is hugely enthusiastic about being part of one of the world’s fastest-growing frontier markets. ‘This is a boom market. Our staff numbers are growing 15%, 20%, 30%, every year. Managing growth is the biggest challenge.’
The long view
But this does not mean Africa has become a deal-making nirvana. Many of the concerns that caused PE houses to be tentative about the continent remain. Bribery and corruption is still a predictable and grave risk, not least because of the extra-territorial nature of the Foreign Corrupt Practices Act (FCPA) in the US and the UK’s Bribery Act.
Investors are understandably nervous about becoming embroiled in a corruption scandal. Transparency International still rates a number of African states as among the most corrupt in the world. Somalia ranked number one in Transparency International’s 2014 corruption index, alongside North Korea, with Sudan and South Sudan close behind. Even Kenya, one of the more progressive economies in Africa, still has deep-rooted problems with bribery and corruption.
For investors, the widespread corruption means that additional due diligence is required to ensure portfolio companies don’t become a liability or a reputational stain. Raj Karia, the London-based EMEA head of corporate, M&A and securities at Norton Rose Fulbright, says: ‘Anti-bribery and corruption due diligence is often the starting point when it comes to deals. Private equity houses are spending the time and effort to get this right and investee companies understand that they have to accommodate this if they want private equity capital.’
In early 2015, Norton Rose Fulbright advised Norfund on its $250m acquisition of a 12.25% interest in Equity Bank Kenya from Helios.
Brian Dennehy, a tax partner at Webber Wentzel, says the execution of deals in Africa can take considerably longer and are far more intense: ‘The due diligence process is at least twice as long as it would be for assets in other regions. There is a growing trend towards warranty and indemnity insurance becoming a requirement for getting the deal done.’
In 2014, Webber Wentzel advised Abraaj Capital, the emerging-markets focused fund, on its $353m investment in Liberty Star Consumer Holdings, the South African fast-moving consumer goods manufacturer.
‘What we are seeing is a change in mindset. Before 2000, Africa was a place for foreign aid. It is no longer about foreign aid but about FDI and investment opportunities.’
Greg Boyd, Harneys
Toms agrees that PE deals in Africa are distinctive. ‘On average, the deal sizes are smaller in Africa, but the legal complexity is often greater than in Europe or North America. The transaction costs are higher and investors recognise that this is part of doing business in the region. There are local requirements and the deal needs to be structured so that you can enforce your claim in the event of a dispute. In the western context, you wouldn’t necessarily have to think of issues such as exchange control.’
For larger deals that are multi-jurisdictional – only a handful of transactions have broken the $100m barrier – this creates further difficulty due to diverse African legal systems, as Davies comments: ‘Ideally an investor would find the right opportunity to spend its money in a single country, but given relative scale, the larger deals are often across a number of jurisdictions. Some situations allow for a single offshore investment to achieve this, but often this means executing separate country deals simultaneously, which brings added complexity.’
Davies believes PE houses are following a different strategy to the mainstream buyout model that exists in the developed world. Investors tend to deploy a much more long-term model, at times more akin to a special situations investment. The three-year flip or exit via IPO, is not something many PE houses can hope for. Options are limited. Africa’s capital markets are immature, although growing sophistication is becoming evident. The Nigerian Stock Exchange adopted Nasdaq’s X-Stream trading platform in 2013.
Further efforts have gone into creating a more exit-friendly environment. The West African Capital Markets Integration Council (WACMIC) was established in 2013 to create a harmonised regulatory landscape for issuing and trading securities throughout the region.
As global capitalism’s hinterland, Africa represents a compelling picture for PE investors who wish to become part of Africa’s much-touted rise. It is a narrative that promises much, but the end of the tale is uncertain. Targets are hard to identify, deals can be especially risky, and transaction costs can be far in excess of the western world. But the increasing focus and presence in Africa (see box, ‘Revolving doors’, above) suggests that these inflated risks are worth taking.
Like other developing regions, including parts of Asia and Latin America, PE houses and their legal advisers’ African strategies do not hinge on a short-term view. Pervez Akhtar, Freshfields Bruckhaus Deringer’s managing partner for the MENA region, concludes: ‘If you look at the volume of deals, you are seeing them, but it will take time to get a sustained pipeline like you see in more mature markets. Private equity firms are trying to navigate the various jurisdictions, what they like and what they don’t, what opportunities there are and what businesses are available for acquiring, and whether they are mature enough in terms of governance and other things. All of that takes a bit longer.’ LB