How Venture Capital and Private Equity is Shaping the New African Economy

In what way is venture capital and private equity shaping the African economy?

‘There has always been a recognition of the lack of long term funding in Africa. There is no question about that. A lot of the African private businesses have traditionally been run by short term loans from banks. Today Venture Capital and Private Equity is assuming increasing prominence as a financing tool in emerging market economies - including those in Africa - to finance private and public sector requirements on the continent. Despite the recent developments in the US - sub-prime crisis - the trend is expected to continue and Africa focused funds in both 2006 and 2007 raised well over USD 2 billion for investment on the continent. Impressive numbers but in terms of the industry's contribution to GDP in many African countries, the figures are still woefully low and this means that there are major opportunities for the industry.

Credit has to go to DFIs like the IFC, AfDB, the FMO and the CDC Group who recognizing that gap in the early 1990s began the process of setting up venture capital companies, investing long term funds in the African private sector. Several of the first round funds were not particularly successful because the concept was new. However these institutions persevered and in doing so, were able to influence government thinking into creating a friendlier environment - legal and fiscal -for private equity.

Fortunately, over the last two decades increased democratization and stability across Africa has encouraged good governance and better macro economic management. Then again African economies have undergone a period of unprecedented economic growth rates - 5 to 7% - due to several countries taking advantage of the HIPC initiative to reduce their debt stock, sounder economic policies and also high commodity prices for both oil and non oil producers. For the first time several African governments and African central banks have been able to build up reserves they previously been unable to do. On the back of these developments, remittances from the African Diaspora have been phenomenally high leading to the highest rates of private capital flows into Africa for several decades.

During the same period, returns from developed financial markets have been steadily declining and investors have taken a more optimistic view of investing in Africa. Since 1994 Venture Capital and Private Equity players have been flooding post-apartheid South Africa for the exciting opportunities in that market. At the same time, the South African Private Equity players like Ethos and Brait are also looking for investment opportunities throughout the African continent.

On the other hand returns from African stock market, venture capital and private equity investments have been healthy with some fund managers - Emerging Capital Partners and Kingdom-Zephyr - returning good multiples to their Limited Partners.

As a result, over the last four to five years, we have seen an unprecedented level of Limited Partner interest in investing on the African continent, and African focused funds have raised record levels of resources. In 2006 African focused funds raised some USD 2.35 billion and the same figure was registered for 2007. These funds are finding solid investment opportunities in banking, insurance, telecommunications, logistics and infrastructure and at the same time creating jobs and providing tax income to governments.'

Which African countries and which sectors will prosper most and offer best opportunities for investors?

'In terms of opportunities we have to distinguish between SME venture capital - seed capital and early stage investments - and big ticket private equity activity - late stage expansion capital, buy outs.

In the Venture Capital space, opportunities exist in post conflict markets - coming out of a war situation. These are countries in need of a lot of help: Liberia, Sierra Leone, DRC, Rwanda, Burundi, Sudan and Somalia. Then there are a number of countries that are more developed and have a fairly sizable SME industry: Senegal, Cote d' Ivoire, Ghana and Cameroon - eventually when the government there gets its house in order. Further in East-Africa, Uganda, Rwanda and Tanzania and hopefully Zambia and even Zimbabwe, when they get their act together, are interesting investment destinations. The Maghreb also provides very interesting opportunities as has been proven by the Tunis based Africinvest and Tunivest funds.

In terms of Private Equity activity - big ticket transactions - we can look at Ghana, once the oil sector takes off, Nigeria, DRC, Angola, Mozambique, South Africa, Kenya and Tanzania. These are the key countries. Sectors to look out for include banking, insurance, mobile telephony, real estate housing, utilities and energy infrastructure.’

Recently there was the annual AVCA Conference, this time in Gaborone, Botswana. What are the main experiences and learning’s from this conference?

'The AVCA Conference is the highlight of the AVCA's calendar year and has so far successfully brought together essentially two parties. The first group are the Limited Partners - lenders and passive investors. They come to the Conference to identify investment opportunities and General Partners with good track record. The second group are the General Partners who are raising funds to fund their investee companies and projects. Now it is important to bring in a third group, which are the service providers: the law firms, accountants, bankers, regulators, the stock exchanges in brief, all the stakeholders who play a crucial role in enhancing the industry. Among the lessons learnt are need for early planning, recruitment of an events manager and the need for a solid local partner as a lead sponsor for the event.'

In recent years the AVCA and the AVCA Conference has grown considerably in terms of members and delegates and involvement of African players. What is the ambition of AVCA and the AVCA Conference for the next few years?

'AVCA's ambition is to become a knowledge centre acting as an industry catalyst, a promoter of private sector investment in Africa, and providing capacity building to our members. In terms of the AVCA Conference the objective is to make it the premier event on the calendar for anybody interested in investing in Africa. We want to increase the number of players and stakeholders who are attending to around 700 delegates. We really seek to use our Conference to create maximum impact for growth of a Private Equity industry in Africa.'

Interview by Bas Vlugt, Africa Interactive

www.avcanet.com
www.fmo.nl
www.cdcgroup.com
www.africa-interactive.net

AVCA Conference 2008, Gaborone, Botswana

More information:
AVCA

J Mawui Ababio
Johannesburg - South Africa
www.avcanet.com
T +27 11 881 59 40

Africa Interactive

Bas Vlugt
Haarlem - The Netherlands
www.africa-interactive.net
T +31 23 545 97 94