Discovering the still widely-ignored "unlisted African" asset class

What if Africa was investors’ next Eldorado?

Many major investors support this idea. With annual GDP growth of 4.54% since 2007¹, Africa and the Middle East have seen their GDP increase by USD 1,780 billion over the last decade. Growing interest in the region can notably be explained by the emergence of a middle class on this continent that was estimated to incorporate some 330 million people in 2011². Investment in unlisted assets, in particular venture capital, is benefiting from this trend. Between 2012 and 2017, 953 venture capital operations³ were concluded on African markets for a total value of USD 24.4 billion, according to the African Private Equity and Venture Capital Association (AVCA).

Venture capital represents a source of financing for SMEs in emerging countries and, for international investors, this class of financial products represents interesting access to Africa’s development potential. For comparison purposes, while there were 23 stock markets for 54 African countries in 2016⁴ with some 1,500 listed companies, there were an estimated 400,000 unlisted companies just in South Africa⁵. That same year, there were 2,467 listed companies on the London stock market alone.⁶

Despite the trends observed over the last decade, there is still a certain reticence among European investors regarding the African markets because of the perceived risks, and more specifically concerns about the risk/return balance. This is understandable, as the African continent is not a homogenous ensemble and remains a region that is difficult to understand.

Today, investments are concentrated by sector or geographical zone. The Africa Attractiveness Index, a measuring instrument created by Ernest & Young, notably provides an estimate of opportunities and risks by country. According to “Connectivity redefined”, the latest publication based on this Index, published in 2016, South Africa, Morocco, Egypt, Nigeria and Kenya accounted for 58% of direct foreign investment projects that year.

French-speaking countries of Western Africa represent an opportunity for cross-border companies that can draw on a joint stock exchange, the Banque Régionale des Valeurs Mobilières (BRVM), and a single currency, the CFA franc, which has a fixed exchange rate to the euro, enabling the currency risk to be almost entirely eliminated.

As well as this favourable ecosystem, the region is also economically dynamic:

“Ivory Coast has seen remarkable economic growth (8.6% on average since 2012) and relatively strong political stability since the end of the Ivorian crisis in 2011. The last few years have seen the arrival of multinationals like Carrefour, Decathlon and Heineken and the emergence of national champions in the agri-food, financial services and communications sectors, amongst others”, indicated Gregoire Fredet, Vice President of the Enko Africa Private Equity Fund (EAPEF), in an interview given to SGSS on 18 April, 2019.

Eastern Africa is also a very dynamic zone in terms of investments in SMEs and in innovation.

Data relates to capital investment between 2012 and 2017. Source: AVCA 2017 annual African Private Equity Data Tracker with regional spotlights

For institutional and individual investors, the most sought-after sectors in Africa are telecommunications, finance, media, consumer goods, logistics, renewable energy and renovation projects.

“Renewable energy projects in Africa tend to be larger than in Europe because of the large amount of available land and the continent’s excellent exposure to the sun and wind”, our client Andy Louw, a specialist in infrastructure investment at South African asset management company Stanlib, told us on 21 March.

Moreover, among recent investment projects on this continent we could mention UK company DFI’s $180 million investment project in the Liquid Telecom IT services company in Mauritius or the $200 million investment by Middle East-based sovereign wealth fund SWF in telecom services company Airtel Africa.

What are the strategies adopted by asset managers with a major African presence?

According to the AVCA¹¹, the number of fund managers specialising in venture capital in Africa jumped from 12 in 1997 to 140 in 2016.

With 25 years of experience on the ground, 8 offices in Africa and 18 investment funds in more than 25 countries across this continent¹², AfricInvest is a specialist in medium-sized and large companies with substantial regional and continent-wide development potential. This asset management company implements a ‘responsible investment’ strategy there.

“The priority for us, at AfricInvest, is to be close to the companies in which we invest. We choose to work with local partners and professionals in order to be a part of the domestic ecosystem to better understand the risks and opportunities”, Amina Ben Abdelkarim and Ann Wyman, Senior Managers at AfricInvest, told us in an interview on 26 March, 2019.

The group first began its activities via funds domiciled in Tunisia, invested in local markets, before expanding its activities throughout the Maghreb and then to Sub-Saharan Africa, mirroring the evolution of the African market. AfricInvest also enables its investors, in its fund range, to invest in a Franco-African fund (in which Societe Generale is a major shareholder) invested in French companies who want to develop their activities in Africa. The group is currently preparing to raise funds for a second such fund, the size of which is estimated at EUR 120 million.

“AfricInvest was a pioneer with the Fonds Franco-Africain, which was able to establish its position on the competitive venture capital market in France, thanks to this offer, appreciated by targets as well as by fund managers in France, providing support and advice to French SMEs regarding their African expansion”, adds Amina Ben Abdelkarim.

Asset management company Enko Capital, founded in 2007 and based in London and Johannesburg, began its activities in South Africa. The group, with its wealth of experience in Sub-Saharan Africa, currently manages over 300 million in assets via 3 specialised funds including the Enko Africa Private Equity Fund (EAPEF), created in 2014¹³. The EAPEF, a long-term investor (around 5 years), targets mid-sized growth companies.

More generally, Andy Louw tells us that the African continent continues to present enormous opportunities for asset management companies because of lower competition between investors:

“If you’re interested in an investment project in Africa, you won’t be exposed to a lot of competition. The challenge lies in carrying out the due diligence required to accurately identify the risks and the strategy to implement”.

How can we assess the risks inherent to the African markets?

Beyond the risks inherent to any transaction, the main risks associated with investments in Africa are political instability, the execution of the business model as well as currency volatility.

• Currency risk:

Some investments, highly profitable in the local currency, see their profitability decrease – sometimes substantially – when the currency is exchanged. You need to pay close attention to the exchange rate, convertibility and transferability. For example, Tunisia, Egypt and Nigeria have all experienced currency devaluation crises in recent years.

AfricInvest, for instance, came up against the consequences of the foreign currency shortage crisis in Nigeria, which resulted in a significant devaluation of the local currency (the naira) in 2016. Within this context, the government blocked imports, forcing local operators to develop local streams to replace imports. AfricInvest therefore had to review its entire business model relative to an agri-food company in its portfolio. This company, which originally specialised in importing rice (4th-largest local operator in that sector¹⁴), converted itself into a rice producer¹⁵ by creating its own brands and incorporating the entire value chain at local level.

Grégoire Fredet recommends taking the currency risk into account by “factoring it into the calculation of the company’s value, and thus its purchase price”.

Companies whose revenue is associated with exports or which generate revenue in hard currency enjoy natural hedging that enables them to minimise the currency risk. AfricInvest and Enko Africa Private Equity Fund recommend mitigating the risk by investing in cross-border companies, applying a geographical and sectoral diversification strategy.

For example, the EAPEF portfolio comprises 7 companies involving some ten Sub-Saharan African countries¹⁶ and various sectors of activity such as banking, insurance, IT software, education, logistics and telecommunications.

• Risk of political instability:

Stanlib was faced with the political instability risk when it undertook an indirect investment in Nigeria pertaining to the construction of a motorway. Indeed, twelve months after the contract was signed there was another state election. The new government was unwilling to meet its contractual obligations. The matter went to court in London, in the presence of all parties. The investment company won the case.

“You have to make sure the due diligence work is properly carried out and seek advice from local market experts. In the case of this investment project, signing a contract under UK law probably helped us win the court case. We had a clear vision of each party’s rights and duties”, said Andy Louw about the affair on 21 March.

To guard against the risk of political instability, there are a certain number of products, such as the World Bank’s Multilateral Investment Guarantee Agency (MIGA), that can insure you against a broad range of risks and provide resolution solutions when there are disputes between governments and investors. Although they are effective, these solutions are expensive and sometimes poorly-suited to investment funds, which have a lifespan of at least 5 years. Asset management companies have thus made little use of these products.

• Risk relative to the execution of the business model:

What is the execution of the business model? It is the ability of the management of the companies in the portfolio to follow and carry out the business plan sold during the due diligence process. The success of a transaction depends mainly on the quality of the companies’ human capital, and notably the management team, which must have substantial experience in the countries and sectors in which the company operates, proven high-quality management and impeccable corporate governance and integrity”, according to Grégoire Fredet.

Moreover, a poorly-identified sponsor can represent a real threat for the activity of private companies, mostly family-run. Some funds thus choose to invest in African markets by joining forces with a local partner who can prepare the ground beforehand and also share the risks.

What trends should we expect in this region over the coming decade?

Grégoire Fredet has an optimistic view of the future of venture capital in Africa:

“In 2018, total investments in African startups reached a record level of around USD 725.6 million, up 300% on the previous year. We are seeing a proliferation of venture capital funds on that continent, as illustrated for example by the recent raising of USD 125 million by Partech to finance African startups or the launch of the Choose Africa initiative, promoted by the Agence Française de Développement French development agency and its Proparco subsidiary, which aims to provide African startups, VSEs and SMEs with a set of tools to assist their financing and accompany their various stages of development. Moreover, we (EAPEF) have recently signed a partnership agreement with Ariès Investissement, an independent Congolese investment bank, within the framework of a fundraising campaign dedicated to central African startups”, Grégoire Fredet told us in an interview on 18 April, 2019.

The African zone’s dynamism has also led to other initiatives such as the Efficience Africa Fund project, the African diaspora’s first investment fund, under the impetus of the Club Efficience and the Investors & Partners investment group, which aims to raise EUR 50 million. This initiative has notably received the support of the French Ministry of Europe and Foreign Affairs and of BPI France.

“Africa offers exciting opportunities for any investor who are seeking above-average risk-adjusted returns. This expected return is available due to a poor understanding of African markets by international investors that misunderstand actual risks and the perceived risks. When an entity takes the time to understand these markets, significant reward opportunities emerge.
In my opinion, European pension funds should look to innovative sources of revenue to counter the challenge of an aging population and pension payment issues. This opportunity could compensate for European markets that are currently incapable of providing them an acceptable return”, concludes Andy Louw regarding the opportunities offered by the African continent.

Article written by Marine Ledoux, Business Analyst within the SGSS International Country Supervision team, and Jean-François Marchand,  Supervisor for Africa & India within the SGSS International Country Supervision team. 

Contact us to discover the support SGSS can provide to venture capital managers in Africa.
 

[1] Calculated using data taken from the World Bank portal data.worldbank.org/region/middle-east-and-north-africa et data.worldbank.org/region/sub-saharan-africa on 06/05/2019
[2] “The middle classes in Africa. Realities and challenges.” – Research carried out by BearingPoint and Ipsos for CFAO during the first half of 2015. The African Development Bank defines the middle classes in Africa as those who earn between $2 and $20 a day.
[3] Source: AVCA 2017 annual African Private Equity Data Tracker with regional spotlights
[4] Source: AVCA Guide to Private Equity, 2016
[5] Source: AVCA Guide to Private Equity, 2016
[6] Source: AVCA Guide to Private Equity, 2016
[7] Mauritania, Mali, Niger, Senegal, Burkina Faso, Nigeria, Benin, Togo, Ghana, Côte d’Ivoire, Liberia, Sierra Leone, Cape Verde
[8] Angola, Zambia, Zimbabwe, Namibia, Botswana, South Africa, Lesotho, Swaziland, Mozambique, Malawi, Comoros, Madagascar, Mauritius
[9] Ethiopia, Uganda, Kenya, Tanzania, Rwanda
[10] Morocco, Algeria, Libya, Egypt
[11] Source: AVCA Guide to Private Equity, 2016
[12] Source : Interview with Amina Ben Abdelkarim and Ann Wyman, Senior Managers at AfricInvest, conducted on 26/03/2019 by Société Générale Securities Services
[13] Interview with Grégoire Fredet Vice-President of Enko Africa Private Equity Fund (EAPEF), conducted on 26/03/2019 by Société Générale Securities Services
[14] Source : Interview with Amina Ben Abdelkarim and Ann Wyman, Senior Managers at AfricInvest, conducted on 26/03/2019 by Société Générale Securities Services
[15] Source : Interview with Amina Ben Abdelkarim and Ann Wyman, Senior Managers at AfricInvest, conducted on 26/03/2019 by Société Générale Securities Services
[16] Interview with Grégoire Fredet Vice-President of Enko Africa Private Equity Fund (EAPEF), conducted on 26/03/2019 by Société Générale Securities Services