Lessons to Grow By: Private Equity in Sub-Saharan Africa
A Disconnect Ushers In A Catalyst
Private equity has been a recent and powerful catalyst for economic growth  on the African continent, and it shows every sign of continuing to do so. The key to the effectiveness of the private equity model is that, by addressing the funding needs of African companies, it gives its investments a multiplier effect: Private equity not only creates profits for investors (e.g., limited partners, general partners and portfolio companies) but also engenders economic and social benefits for consumers, and has indirect effects on the stability and vibrancy of local and regional economies. At the same time, private equity channels significant flows of international capital into Africa. In other words, whether it is in building sustainable housing or health services options, private equity ultimately offers Africa more than just capital. Furthermore, each private equity success story represents one more step for Africa in its quest to permanently establish itself as a preferred destination for global capital flows.
Such successes are, however, still too few and too recent. Against them is the stark lack of liquidity with multi-faceted consequences. Despite the scale of rapidly growing populations and economies in many countries, capital markets in Africa are still, by international standards, nascent, and access to funding therefore scarce. Consumer and commercial lending markets in Africa are largely non-existent because perceived lending risks are too high for many African banks to enter into with any vigor, and interest rates are discouragingly high for borrowers. Fortunately, this disconnect has emboldened a handful of new private equity funds—those who have been able to spot “low hanging fruits” in these economies—to respond with resources to meet pent-up demand.
An Evolution Begets Evolutions
Compare the African private equity landscape of a decade ago to that of today. We witnessed the field go from a small number of generalist equity funds with comparatively low levels of funding to a diverse, dynamic ecosystem of funds that have increasingly targeted regional and sector (e.g., agriculture, healthcare, etc.) strategies. More local general partners are also entering the fray. In short, the African private equity sector is rapidly maturing. It has, at the same time, broadened its usefulness by filling gaps currently left vacant by more traditional sources of finance. African private equity will likely continue to increase its visibility and influence in Africa’s evolving economic landscape.
The Overseas Private Investment Corporation (OPIC), the U.S. government’s development finance institution, has had direct experience investing over $1.2 billion in private equity funds across Sub-Saharan Africa since 1989. We have therefore witnessed African private equity’s evolution firsthand. As would be expected for any pioneering experience, ours with private equity in Africa has had its share of challenges. Year after year, we often experienced the frustrations of trying to forge new paths for private equity in Africa but now feel that an important corner has been turned. More recently, we have been heartened and encouraged to see private equity funds bring tangible progress and benefits to African economies. We are fortunate to have supported and partnered with some of the true pioneers in African private equity, such as Helios, ECP and Actis. In so doing, we have seen how visionary private investors have transformed economies across the entire continent.
Consider the example of Celtel . Prior to 1998, the telecommunications industry in Africa was virtually non-existent, and what little existed was dominated by inefficient, government-owned landline operators. Most Africans privileged to afford a phone had to wait months and sometimes years to get a phone line. Enter Mo Ibrahim—along with fellow pioneers like Miko Rwayitare and Strive Masiyiwa—with the idea to create some of the largest mobile telecommunications companies on the continent. The aspiration was not simple in sum or task. One aspect of Mo Ibrahim’s genius was to anchor the raising and investing of some $415 million (an astronomical sum at the time) principally from private equity firms. Over five to seven years of herculean efforts, the network was deployed.
It is not an overstatement to say that his tapping into private equity investment helped him transform the telecommunications industry in Sub-Saharan Africa, introducing mobile telecom to over five million Africans across 13 countries who can today get a phone line within minutes and at a fraction of the cost previously offered by the mostly restructured, privatized or defunct government phone operators. In doing so, the continent largely leapfrogged the landline era of telephone technology and positioned itself as the fastest growing mobile market in the world, with a penetration rate of over 80 percent, as well as innovating on the broad usage of prepaid services ahead of developed countries like the U.S.
Tellingly, the advancement of this industry continues to be driven by the investment and guidance of private equity firms. Indeed, a new wave of fund managers is facilitating a next-generation shift, from captive tower networks to independent tower networks in countries such as Nigeria. Such a change will allow mobile operators to more seamlessly compete and expand their reach to the hinterlands of the African market, which in turn will help answer the socio-economic needs in rural areas.
This increased communications access has already begun to transform, in simple and profound ways, the daily lives and aspirations of Africans. It has changed their level and quality of dialogue and debate about issues such as local jobs, safe communities, education and health care. Of equal importance, it has already begun to change the economic infrastructure of Africa by transforming the way in which the financial services sector interacts with the banked, under-banked and un-banked, through technologies such as mobile banking. At this very moment, cell phones are providing Africans with additional innovation platforms such as access to the internet and social networking—with consequences that reach all the way into the political sphere. In short, this industry that was born of the marriage between a great idea and available private equity financing is likely to greatly influence African countries in the coming decade.
Necessity Must Still Be the Mother of Invention
Maturity of the private equity sector in Africa, however, is not inevitable. As any investor knows, liquidity itself is not sufficient to sustain a financial ecosystem, nor is political or macroeconomic stability alone. For African private equity to be effective over the long run, it must be in constant dialogue with central and local governments and regulatory agencies, it needs to proactively cultivate the development of capital markets, inform and engage consumers, partner where possible with nongovernmental organizations (NGOs), and engage the other constituents relevant to the economic ecosystem. The private equity managers who succeed in the long run will be those with the ability to adapt their mandate to the needs of the changing African environment.
Such funds are truly on the frontiers of the African economy, and their prospects will rise or fall in part through the amount of liquidity available in and around the pockets of economic potential they seek to target. They will rise or fall alongside public sector investment, development finance and commercial finance. Most importantly, private equity managers must engage local, highly visible captains of industry who profoundly shape the economic destiny of their respective countries. This orchestrated involvement helps immediately and narrowly benefits the economic ecosystem, but in the long run principally benefits the people of Africa.
Clearly, a key challenge facing Africans today continues to be food security, along with the development of a sustainable agricultural sector. In particular, the African agricultural sector is deficient in capital needed to improve farm productivity, enhance crop yields and produce more food for local consumption. Studies show that growth in the agricultural sector has up to three times greater impact on poverty reduction than growth in other sectors. Agricultural growth can help fight poverty, develop technology that changes lives, empower women, give kids the nutrition they need to go to school, usher in community and regional stability—with global implications—and create new markets and new jobs.
That is why OPIC supported the Silverlands Fund, a fund whose objective is to generate attractive long-term returns by investing in companies whose underlying assets are in the agricultural sector in Sub-Saharan Africa. The fund invests across the value chain in the agricultural sector but with a core focus on farmland and primary production businesses. OPIC will provide a loan guarantee of up to $150 million that is expected to have ripple effects throughout the regional economy by allowing companies to expand operations and provide more goods and services to customers.
Not a Panacea, But a Measure
Despite its accomplishments, private equity is far from a panacea. To benefit Africa in the short and long term, it will need to be more nimble and solutions oriented than it has been in most other emerging markets. This will require the creative and concerted involvement of other financial and non-financial intermediaries (e.g., international finance institutions, governments, banks, NGOs, political leaders and consumers) that comprise a proper and fully developed economic ecosystem. As we look forward to the next decade of Africa’s economic evolution, the best measure of private equity’s success will not be merely its rate of return, but how evolved and balanced the ecosystem of Africa’s economy has become.
Note: This blog reflects the views of the author only and does not necessarily reflect the views of the Africa Growth Initiative.
(1) For the purpose of this article, any reference to private equity is categorized within the sub-context of growth equity, as the predominate share of capital that flows to emerging markets is in this form. These references also do not include leverage buyouts which are in their very early stages in Africa.
(2) Currently known as Airtel.
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