Monday, February 21, 2011

Report from the Harvard Business School Africa Business Conference: Post # 2: 5 Take-aways from the Private Equity Panel

Moderator: Lena Sene, Director at New York-based Deer Isle Capital LLC. Her articles on the "missing middle" from and Huffington Post can be found here.

Yemi Lalude, Founder and Managing Partner, Adlevo Capital Partners, Lagos. Also has Jo'berg office.

Paul Kavuma, Fund Manager and CEO for Nairobi-based Catalyst Principal Partners, reportedly closed first $70m on 24-Dec 2010, and expects US$100m by June 2011. East Africa-focused.

Hurley Doddy, MD, Founding Partner, and Co-CEO of Emerging Capital Partners, based in Washington, D.C., over US$1.8b in the last decade in at least 6 funds, more than 28 investments spread across 40 countries.

At any good conference, it can be painful to decide which sessions to attend, which means missing all the other concurrent discussions. Despite some compelling options, the Private Equity panel was excellent and informative, with three brilliant, veteran African PE panelists and an equally accomplished and knowledgable moderator, all of whom provided revealing, insightful, and at times unexpectedly frank advice on fund-raising, deal-flow and transactions, as well as career advice on ways into the African PE field (general consensus: its a tough go, better off doing something else, like starting a business-see below).

Lesson 1: Africans are buying things-- and not just scratch cards.

It might be a stretch to think of the current investing milieu as PWM-- Post-Walmart, and the deal wasn't as prominently discussed as the Penn Wharton Africa Business Forum in November, which occurred not long after the deal was announced, and Walmart did not come up in the PE session. However, throughout the day speakers, panelists and students were discussing the emerging middle class, and African consumers.

There is unquestionably a rising attention on manufacturing for, marketing to African consumers. Growing demand and incomes are there now to be captured. The reigning trifecta of African investment: Telecoms, Banking, and Extractive Industries-- are not yet deposed, but they are now discussed alongside talk of consumer products, both in general terms and with reference to specific transactions: the day saw mention of a toothpaste company in Dar Es Salaam, a plastics company in Accra, a food processor in Kampala. There was a sense that the low-hanging and near-ripened fruit of telecoms and banking have been picked at this point. There was some talk about agriculture and mining, and power and other infrastructure was given more emphasis (more on this in a later post on the afternoon's infrastructure session). The connectivity conversation was seen throughout the day's panels to be expanding beyond mobile phones to address the wide-open field of fixed-line broadband access, presumably pushed by the coming undersea cables (see also my next post).

Lesson 2: Get on the ground and start a business. Don't look for a job in PE.

As mentioned before, this new focus to the consumer has in turn shifted attention towards local, indigenous entrepreneurship, and the PE panelists put far more emphasis on encouraging entrepreneurship than in recruiting to their own field.

To some degree, this is of course natural. Mr. Doddy of ECP underscored that his firm, with US$1.8billion put to work across six funds over the past decade, employs only 35 full-time investment professionals across the continent, with a full-time global staff of around 50 people. His fellow panelists joked that they didn't need any more competition from any more PE funds, but there is an objective truth in their repeated assertion that what Africa can most use are quality, investment-grade enterprises--and MBA-quality management to run them. All three panelists underscored that one of their biggest challenges was--cue a classic line about working in Africa--a lack of capacity.

The three PE panelists concurred that they'd be happy to invest in a top-tier MBA's venture on the continent, and that the students stood a better chance as enterprises ripe for funding rather than knocking at the doors of low-turnover the dozen or so Africa-focused PE offices, which, as Mr. Doddy reminded the audience, are still boutique by global standards. Mr. Doddy pointed out that ECP's US$600m fund is big for Africa, but small by global standards.There simply isn't enough turn-over to absorb new classes of graduates.

Lesson 3: If PE is not easy, then African PE is really, really not easy.

Beyond the shortage of quality management and entrepreneurs, all three panelists mentioned a wide range of skills and bona fides that they and their colleagues have needed to cultivate for success in such a challenging milieu. On the ground knowledge is key-- as paraphrasing Mr. Lalude, "compared to the due-diligence we conduct in Africa, we do almost no due-diligence in the United States." Feasibility and research are long, complex, and expensive (just consider the airfare bills compared to deals on other continents) Skepticism is the norm here, where trust is more the norm with counterparts elsewhere. All of this takes more time, and costs more money, meaning the team has to be even more efficient than in other markets.

Everyone knows that "You have to have a good team, who gets along together and knows a lot." --but there was some real insight behind this bromide here. Mr. Kavuma made an interesting comment that the most sought-after investment management recruits now possess technical skills and experience in various sectors (emphasizing both in-country experience and work in sectors and enterprises) which helps in evaluating, managing and exiting deals. They report that there is a shift in opinion; its not enough to have a Wall Street internship and blue-chip MBA to be ready for this kind of endeavor.

Deal exists are always an art, and all three panelists concurred with Ms. Sene that exit planning and investor skittishness over liquidity remain challenges, especially at the smaller end of the scale. Mr. Doddy commented that regional expansion is key to getting companies to an appropriate size. Mr. Kavuma underscored that, post-2008, the big-buyout, debt-leveraging model was on ice, with a shift toward sector attractiveness and solid fundamentals--working harder for the pay-off.

Lesson 4: "Pitching Africa"-- its still "one country"

The veteran panelists dealt out other insightful epigrams worthy of passing along, particularly as the conversation turned to, as Mr. Doddy put it, "pitching Africa" to global investors. It was remarkable to hear Mr. Kavuma comment that, despite the high sophistication of his own investors, "most investors continue to think of Africa as one country." Anyone with experience in African knows that has long been the case, of course, but it was interesting to hear that this (mis)conception pervades at the highest-quality levels of investors, and a real shift away from this viewpoint isn't evident.

Its important to view the recent, high profile media spotlights-- the McKinsey report, Walmart, GDP growth, new oil frontiers--all talking about the continent as a whole, perpetuating the bias that it is a single market and investor space-- and introducing new audiences the continent through this prism. There is a truth to this notion, too, as underscored by the common difficult of lack of capacity and infrastructure, human resource talent, the need for regional strategies given the tiny sizes of domestic markets, the not least the still-ubiquitous challenges of corruption and instability. Yet there are more than 50 countries, each demanding its own attention and requiring local knowledge.

Lesson 5: What PE guys really think about "Impact" investing and ESG.

The session's discussion touched briefly on the twin issues of ESG (Environment, Social, and Governance Accountability) issues and Impact investing--and in so doing, showed how the conversation was evolving, and how wide the gap between mainstream investors and so-called patient capital can be.

None of the panelists' firms are specifically mandated to foreground such issues, so their views were especially interesting. While ECP's Doddy was adamant that "anyone looking to attract capital in Africa better have ESG compliance plans in place." --this was framed in the context of attracting a wider pool of capital into funds. In response to an audience question about the nature of ESG marketing to potential Limited Partners, Doddy was rather dismissive of presenting a strategy that profiled charitable aspects over investment returns. As he put it, you don't discuss poverty reduction when you are talking to people about maximizing returns on investment. This got some laughs from the audience.

Then, paraphrasing Mr. Kavuma:

Impact investing is one of my 'pet herrings'. I believe it has good aspirations, but could have negative implications: for Impact investors, if the track record is just a 2% return, or even just a return of principal capital, than [Equity Investors focused on Africa] are not going to have a business; we need to be able to make risk-adjusted, commercially-competitive returns, or else [African investments] will be stuck getting the crumbs off other people's plates. In coming to markets, there is a place for social good, but we need to remain focused on financial returns, if we are going to track capital.

Afterwards, in the typical post-panel student mob, Mr. Kavuma affably expounded upon his viewpoint. He has great respect for the concepts behind impact and socially-responsible investments, but is absolutely adamant that the fundamentals of transactions have to be competitive on the open market. He reports that he has been invited to speak soon at the Aspen Institute on a panel about Impact investing--he presumes he will be the contrarian in the debate. Aside from watching the fascinating evolution of this still-young field of investing, by both its own players and its detractors-- it is very telling that three successful Private Equity CEOs, focussed solely on Africa, closing funds and arranging deals with ESG fundamentals in place, but not adjusting their numbers or marketing their opportunities as "Impact." Another sign that there are multiple "business in Africa" storylines, which are changing rapidly.

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