With limited partner interest increasing towards Africa as a whole, it’s hardly surprising that West Africa is seeing a dramatic increase in funds being raised for investment there. It is, according to CDC investment manager and Togo national Jean-Marc Savi de Tove, “one of the most dynamic regions in Africa”.
“We’re seeing quite a few new GPs emerge in the region and some long-standing ones raising capital,” says John Mawuli Ababio, managing director of the African Venture Capital Association. “There are six or seven that have just closed a fund or that are seeking capital now.” He points to those such as Ghana-based Fidelity Capital Partners’ latest US$35 million fund, Togo-headquartered Cauris Management’s US$15 million fund, Phoenix Capital Management’s US$100 million fund, which it will invest from its Côte d’Ivoire office, and the Advanced Finance & Investment Group’s US$100 to US$200 million Atlantic Coast Regional Fund that it is currently raising. Nigerian firm Travant has just reached a US$107 million first close on what is believed to be the largest fund raised on the continent outside South Africa; it is looking to raise a total of US$300 million. And that doesn’t take into account the pan-African and South African funds with allocations to West Africa.
Capital is flowing into the region on an unprecedented scale. And with good reason. “We are seeing sounder macroeconomic fundamentals across many of the countries in the region,” says Ababio. “With debt relief, governments have been able to build reserves, macro-economic policies have been more prudent and there has been a lot of regulatory reform.” He also points to increased investor confidence in following last year’s elections in Nigeria and the successful bond issue by Ghana’s government in 2006. “All this is showing that people are ready to do business in West Africa,” he says.
The driving force in the region is Nigeria. As Africa’s most populous nation with nearly 140 million people, it has a vast internal market. Although tainted internationally by associations with corruption and continuing internal conflict over its precious oil revenues, relative political stability and widespread banking and insurance reforms have done much to improve its economic outlook.
The banking reforms in particular have had a dramatic effect. The resulting consolidation, which saw the country’s 87 banks decrease to just 25, improved their capitalisation with many raising in excess of US$1 billion. “In Nigeria’s history, no other policy has induced so much resource inflows into any particular non-oil sector within a year as the banking sector revolution,” Charles Soludo, governor of the Central Bank of Nigeria is quoted as saying in the local press.
Well capitalised banks means much needed finance for growing businesses; an essential component to a thriving private equity market. But the success of the reforms has also meant a wealth of opportunities for firms investing in the institutions themselves. Many of the deals done in banking are some of the largest in West Africa to-date, where average deal sizes vary by country, but range from US$5 million to around US$30 million. Actis invested US$134 million in Diamond Bank last year, for example. The bank then went on to list on the Professional Securities Market of the London Stock Exchange earlier this year, raising US$500 million. Also last year was a US$161 million investment in Nigeria’s Intercontinental Bank by Vectis Capital, Emerging Capital Partners, AIG, Rand Merchant Bank and RICO. Intercontinental had previously merged with three other banks: Equity Bank of Nigeria, Global Bank and Gateway Bank to create the fifth largest bank in sub-Saharan Africa, with assets of US$5.5 billion.
Banking has already been a successful area of investment for many private equity players, from Emerging Capital Partners’ three-times return on Ecobank last year, to Cauris’s and Emerging Capital Partners’ investment in what has become one of West Africa’s largest banks, Bank of Africa.
With other countries in the region in the throes of banking reforms or at least looking at emulating Nigeria’s example, banks look set to remain a popular investment choice for some time to come. “What we’ve seen in Nigeria we’ll see in other West African nations,” says Rotimi Oyekanmi of Renaissance Partners. “In some countries, the banks are still fragmented and weak. They can’t stay that way. There is a real need for well capitalised banks.” Ghana has already increased the minimum capital requirement of its banks and the Francophone nations, which share the same central bank, are currently reforming their banking regulations to create stronger institutions.
Telecoms has also been a popular area for private equity investment in the region. In the absence of comprehensive fixed line infrastructure, the growth in mobile phone usage has rocketed. Ten years ago, Nigeria had just 40,000 phone lines across the whole country. Now, it has over 40 million mobile phone users and the numbers are growing rapidly.
The story is similar across the region. Africa as a whole has recorded massive mobile telecoms growth of 45% for 2006, the fastest growing market in the world, according to figures quoted by Emerging Capital Partners. West African growth, however, far outstripped this, recording subscriber growth of 75%. And, says Emerging Capital Partners, there are still markets in the region that are poorly served for mobile telecoms, which is the rationale behind its US$20 million investment earlier this year in Liberian company Cellcom that is looking to expand into Guinea and Sierra Leone. Emerging Capital Partners also has in its portfolio MTN Côte d’Ivoire and Starcomms Nigeria and was an early investor in one of Africa’s biggest business success stories, Celtel International, which sold for a staggering US$3.4 billion to Middle Eastern company MTC.
Extractive industries have historically provided opportunities for private equity firms operating in the region. Actis led a US$23 million investment in Mineral Deposits in 2004, for example, to help it develop zircon mineral sands and gold mines in Senegal. Emerging Capital Partners is also an investor in the company. Yet many believe there will be many more mining deals done as global demand increases, making mining a much more economically sound proposition.
“Natural resources have always been an attractive area for investments in Africa,” says Kofi Bucknor, managing partner at Kingdom Zephyr Africa Management. “That interest has grown considerably in recent times because of high commodity prices and growing demand, particularly from Asia. We don’t know how long the commodity price cycles will last, but many are betting that prices will remain high for some time to come.”
Another area in the region that could provide promise for private equity, in theory, at least, is privatisations. Many countries are undergoing a process of selling off state assets, including the two largest and most developed countries, Nigeria and, now that it has emerged from conflict, Côte d’Ivoire. “There’s a lot of private interest in some of the state assets that are likely to be sold,” says Oyekanmi. “Telecoms in Nigeria have now been opened up, for example, and power is set to be the next sector.” Yet in practice, many of these deals are likely to be fraught with political difficulties.
Nigeria’s telecoms privatisation has been dogged by accusations of improper practices, for example. Following Transnational Corporation’s acquisition of former state telecoms business Nitel in 2006, the government cancelled the sale earlier this year claiming that not enough had been done to transform the company. Last year, attempts at privatising Nigeria’s oil refineries stalled as Bluestar Oil, a consortium put together to acquire two sites, pulled out after widespread criticism of the deal and the likelihood that the new government was going to reverse the transaction in any case.
The Middle Class
Many firms are looking to capitalise on the rise of disposable incomes and the growing middle class that comes from increased economic prosperity. “In Nigeria, there are around one million in the middle class,” says Oyekanmi. “That will increase dramatically as the cycle of companies doing well, paying their staff more and their staff increasing their spending starts. We’ve seen it happen in other emerging markets. It will happen here.” With companies such as Arcelor Mittal investing as much as US$2 billion in Senegal, there is bound to be a profound impact on local economies and populations’ standard of living.
Although still nascent, the region is already starting to see transactions that take advantage of this trend. Actis’ 2004 investment in fast food restaurant operator and food producer UAC of Nigeria is a case in point, as is Aureos’ investment in bottled mineral water company Voltic.
Other areas set to grow in importance in these economies as a result of increasing disposable incomes are: financial services, healthcare, retail and other consumer product companies. “Everything to do with the growing middle class will be successful, from food and beverage sectors to pharmaceuticals and distribution,” says Savi de Tove. “Not a lot of capital from abroad has yet been invested in this area, much of it has gone into oil and gas, but this will come as investors start to see more success stories.”
With the exception perhaps of mining, what unites many of the investment opportunities in West Africa is the ability to scale up and build regional players. With the Francophone nations sharing not just a common language, but also a single currency, similar legal system and the same central bank, expansion beyond borders within this sub-region has historically been relatively straightforward and in some cases necessary as many of the countries have such small populations that domestic markets cannot sustain companies.
Yet now, many businesses in the region have more ambitious plans. “People understand that it’s not worth just staying in their own country,” says Savi de Tove. “Fund and company managers are now overcoming the barriers of investing across the Anglophone and Francophone regions. It started in telecoms and then in the financial sector. We’ll see it in other areas that are ripe for consolidation.”
He points to areas such as reinsurance, hotel management and even rubber. Emerging Capital Partners’ €11 million investment in Société Internationale de Plantations d’Hévéas, a rubber plantations and processing business with operations in Côte d’Ivoire, Ghana and now Nigeria, is an example of this.
Such changes are being driven by both the supply and demand side. Private equity firms are able to raise more capital and LPs are looking increasingly at Africa as a promising emerging market. But there is also a greater pool of good management teams in the region than ever before. Following the diaspora and consequent brain drain from the region as people fled from conflict and poverty, many are now returning home as conditions improve, having had valuable training and experience elsewhere.
“We’re now seeing a lot of people return home and establish their own businesses,” says Savi de Tove. “We’re seeing it in Nigeria, Senegal and Côte d’Ivoire especially. There’s a real generational change in many of these countries and the younger ones are able to be much more entrepreneurial now that economic conditions are more favourable.” There are also now more African business success stories, the founders of which are starting to act as role models for younger generations. Celtel founder Mo Ibrahim is just one example. The sale of his company generated, in his words, “US$2 billion for reinvestment in Africa”.
This article first appeared in emerging Private Equity’s July/August 2008 issue. For more information, please visit http://www.emergingpe.com.