Private Equity’s African Time




Conversations about Africa typically focus on growth rates and the pace of emergence of the middle class. Meanwhile, African entrepreneurs have evolved in their sophistication and approach to business, far outpacing, in fact, the growth and market opportunity that even optimistic macroeconomic numbers may suggest. For that reason, when considering African private equity, it is critical to focus not only on topline, top-down analyses of opportunities, but to focus more on the evolution and needs of African entrepreneurs.

African entrepreneurs are increasingly embracing globalisation, as they strive to stay globally competitive, but locally relevant. These entrepreneurs continue to tailor their strategies to the realities of today’s Africa, instead of simply “cutting and pasting” foreign methods.

Driven by the desire to become even more competitive, African businesses have increasingly shifted, over the past decade, from simply trading, to local production of goods and services of comparable or even better quality than their imported peers. The African entrepreneur is progressively coming of age. There are indeed still many opportunities for import substitution in Africa, which if tapped, could serve as an engine for the next level of growth on the continent.

Today, when one speaks to a Ugandan or Rwandan businessperson whose business is gaining market share locally, her ambition is to quickly serve the Kenyan market, and increasingly the Ethiopian market. This was not the case over a decade over.

On the back of the progress made with regional integration in the past decade, and the opening of new frontiers, entrepreneurs now see regional expansion as a necessity, and not a luxury. This partly explains the rapid regional deployment of banks such as Equity Bank in East Africa, BGFI in Central Africa, and most notably Ecobank throughout the continent. A growing trend is also one of cross-regional integration, where regional champions in East Africa look to move west or south towards ECOWAS and SADC, and vice versa. We are already seeing Moroccan groups moving from the Maghreb into West and Central Africa.

The difficulties faced by entrepreneurs in accessing debt financing have made them obsess more about getting funding, than thinking about their business. This limits the time they spend on crucial needs of the business, including good governance – which cannot be narrowed down to just corruption – proper financial controls, increasingly solid and adapted technology, and good quality and well-managed human resources, which is fundamental to their business growth.

Research and development is also rapidly joining this list of success factors, as African entrepreneurs have to go beyond “cut-and-paste” from other markets, and enter the regional market. So do governance, which has become increasingly pertinent for successful African entrepreneurs to avail themselves to thoughts and contributions from well-selected boards of directors to supplement any shortcomings a brave entrepreneur is likely to have.

In their initial years, African entrepreneurs tend to see financial management as an annoying impediment to running a company, and getting access to new markets. With limited human resources, entrepreneurs tend to focus on everything except this.

We all know this tends to turn any success into a nightmare, because by the time the entrepreneur decides to address this issue, the company’s DNA has already been set, and it takes more work to undo the DNA than to establish it from the start. In this context, private equity funds, if not properly managed could actually be part of the problem, as they provide the entrepreneur with what could likely be the largest amount of unsecured capital he would had received in the company’s young life, and this can therefore lead to high levels of wastage, as they are more accustomed to getting funds with often unfairly strict covenants.

Technology is today’s most delicate and unused source of potential competitive advantage for most African entrepreneurs who see this as a luxury for more sophisticated businesses. On one hand, it is true that understanding technological trends does require a fair amount of sophistication; on the other, positive and rapid changes in technology can be harnessed by African entrepreneurs to enter other continents, as seen in the case of mobile money and the proliferation of prepaid GSM platforms.

This process is being aided by African governments investing in basic infrastructure, working with the private sector to increase reliability of power and Internet bandwidth, which are great enablers in the development of local technology hubs. We have seen the emergence of a vibrant technology space in Kenya since the landing of the Seacom fibre in 2009, and in Senegal, following Orange fibre optic. We expect sustained momentum in this area, with the expansion of fibre companies such as Main One.

Most African entrepreneurs will tell you that their people are their greatest assets. This statement in many ways contradicts what is witnessed when one visits some companies, sees how people are treated, and the human resource policies in place (or not!). Entrepreneurs or teams with a deep understanding of local context – either through family ties, deep roots and local education – have a greater chance of success than those that do not.

The topic of growing African entrepreneurs is vast, and a few paragraphs cannot do it justice. This is a topic we cannot afford to ignore, as it will be the linchpin of any sustainable growth in Africa. We all know that improved economic prospects are the best way to enhance social cohesion that ultimately will lead to political stability and better-entrenched democracy.

The challenges of African entrepreneurship are multidimensional. It will therefore be unrealistic for private equity funds to view themselves as the only solution. As a result, it is critical for private equity funds to stop operating in what some see as a bubble, and integrate into the fiber of the economies that it serves.

This involves joining business groups to lobby for a better business environment, including keeping an eye on local politics without being an active participant; effectively joining forces to affect change in the environment in which we invest. That is why organizations such as the Africa Venture Capital Association (AVCA) and other more local emanations are faced with the challenge, but at the same time should enjoy the opportunity to spread the word. We are now doing just that in Addis Abeba this week, bringing hundreds of investors composed of local and regional players who represent AVCA membership with combined assets of approximately 1.5 trillion dollars.

Ethiopia is one of the largest countries in Africa, with the highest economic growth rate and the most dramatic transformation over the last decade. As such, it cannot be ignored. Even more, it has to be courted.

 



By Papa Ndiaye
Papa Ndiaye is founder and Chief Executive Officer of Advanced Finance & Investment Group.

Published on Apr 26,2016 [ Vol 16 ,No 834]


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