Category Archives: African Capital Markets

Private Equity Investors Boost Value and Liquidity in Africa, Making Investments More Attractive

An important consideration in evaluating any class of investments is the ability to easily cash out of a position and lock in a healthy return. Among the elements required are liquid capital markets and a vibrant private secondary market for African equity and debt. The growing role of private equity in African finance has influenced the process of creating value and realizing attractive returns on African investments.

Now that private equity has been active in Africa for several years we are seeing more and better data on the performance of their portfolios. From this data we can draw conclusions about the experience of firms exiting their portfolio investments.

Some of the most respected work on African private equity exits has been done by Ernst and Young in partnership with the African Private Equity and Venture Capital Association. The 6th and most recent report—PE Exits in Africa 2017 covers the industry in 2016.

In summary, the report tells us that 2016 was a record year for the number of exits. The largest number were in South Africa but there were also several in Nigeria, Egypt, Kenya, and Ghana. We saw significant increases in the number of exits in West Africa and North Africa.

African stock market regulators are working hard to set the stage for greater liquidity in the markets, however, at present, most exits consist of sales to strategic buyers and an increasing number of financial buyers. The financial buyers are largely private equity firms buying out the previous financing round.

Stock Markets as an Exit Option

The good news is that African stock markets have been quite strong, largely due to stronger commodity markets which have spawned economic recovery in many countries. (See table below) The consensus is that the recovery will continue in the near term. Liquidity is still a challenge. All else being equal the expectation of strong stock markets could make listing more of an exit option than it has been.

STOCK MARKET RETURNS IN LOCAL CURRENCY

12 12 MONTHS ENDING JANUARY 2018

GHANA

70.00%

KENYA

44.00%

NIGERIA

66.26%

SOUTH AFRICA

16.28%

MSCI AFRICA

22.56%

Implications for US Financial Investors

  • The activity in African private equity and venture capital have in many ways contributed to an improved investment climate for American capital.
  • A PE firm’s value creation process often calls for partners or suppliers to join with their portfolio companies. This is an opportunity for US companies to enter African markets by engaging with those portfolio companies.
  • The US investor could buy out a PE firms equity position. This requires strong local knowledge that is often easier for a local firm.
  • The PE firm or another financial investor could be an exit for a current investor. The growing number of PE firms allocating funds to Africa makes the financial buyer an increasingly likely exit option.

With these possibilities in mind it behooves US investors to build relationships with key players on the ground in Africa including the financial community and government officials tasked with promoting and regulating portfolio and direct investment. US investors may find opportunities across all sectors, of the various economies and markets in Africa.

Darnley Howard is a partner at PAN Diaspora Capital Management. PAN Diaspora Capital Management  is an organizational partner with the Initiative for Global Development for the Africa Investment Rising campaign. A highlight of the campaign is the US Roadshow from April 18 through 28. IGD will visit four cities—Washington, New York, Des Moines and Houston in order to showcase opportunities in Africa and create a forum for American and African businesses to connect. For more inform, visit https://aircampaign.org/

 

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Risk Management for African Private Equity

PE investments in Africa generally fall into the alternative investments group. As such they compete for a share of investors’ allocation to the alternative investments category along with frontier market regions. Our challenge as Africa-focused fund managers, consultants, and advisors is to attract more of this capital to Africa, thereby contributing to Africa’s development, and the success of our enterprises. Ultimately we would like to see African deals shed the “alternative” label.

One topic we constantly confront is the risk—both real and perceived of deals associated with Africa. It is therefore important for us to provide sound risk analysis and risk mitigation strategies to aid clients, LPs and other investors in their capital deployment decisions. Risk can be classified as political, economic (e.g. currency), and operational (e.g. supply chain).

What is the best approach for risk analysis?

Several well known rankings of world economies are a starting point for risk analysis. (see table) These include:

  • World Bank Doing Business ranking,
  • World Economic Forum Global Competitiveness Index,
  • Transparency International’s Corruption Perceptions Index,
  • JLL Global Real Estate Transparency Index.

The highest ranked African countries are usually in the middle of these rankings.

While these rankings and the data within them are a good preliminary indicator, do they tell the whole story? How do we find the growing business based in a less attractive country, but positioned to expand into other markets? Is political risk really a deal killer or are there circumstances in which business will get done anyway? Are there industries investors should avoid even when macro indicators look promising? Our ability to address these issues should lead to more nuanced assessments of risk and guide investors to better results.

How do we mitigate risk to make deals bankable?

Can PE firms take a leadership role in risk management using a holistic approach that recognizes the link between legal, political and financial risks?

Can management teams be “coached up “ to make a deal bankable? There are a number of ways PE firms and consultants can add value to make deals more attractive. For example:

  • Improving accounting and financial management, process improvements
  • Access to training such as online compliance

Probably the most important risk mitigation tool Africa-focused PE firms have is their knowledge and experience in African markets. This local knowledge is obtained in a variety of ways. Obviously Africa based firms have local knowledge built in at least for their home country and usually for their region as well. Other firms can rely on African professional staff and on local partners on the ground who can provide useful market intelligence.

Some conclusions to share with prospective LPs and other investors:

  1. Several African markets compare favorably with other emerging/frontier markets in Latin America and Asia according to the rankings:
  • Transparency of Kenya’s real estate sector exceeds that of Chile and Ukraine.

  • Cape Verde and Liberia are less corrupt than Brazil or the Czech Republic

      2. PE firms and advisors are highly knowledgeable about the African business                    environment and have access to excellent market intelligence. This                              enables them to educate and guide the investor community in                                      making realistic assessments of risk. 

I would encourage practitioners to continue the discussion on how to improve          investors’ understanding of risk management in Africa. We welcome your                insights on this blog and elsewhere.

Your firms’ local knowledge, both in-house as well as in your networks on the ground make you the right people to guide LPs toward profitable deals.

GLOBAL RANKINGS OF KEY AFRICAN MARKETS

WEF GCI

WORLD BANK DOING BUSINESS

TRANSPARENCY INTERNATIONAL

JLL REAL ESTATE TRANSPARENCY

ALGERIA

87

156

108

ANGOLA

182

BENIN

124

155

95

BOTSWANA

64

71

35

41

BURKINA FASO

146

72

CAPE VERDE

110

129

38

COTE D’IVOIRE

99

142

108

104

ETHIOPIA

109

159

108

GABON

108

164

101

GHANA

114

108

70

85

KENYA

96

92

145

61

LESOTHO

120

100

83

LIBERIA

131

174

37

MAURITIUS

45

49

54

58

MOROCCO

70

68

90

71

MOZAMBIQUE

133

137

132

101

NAMIBIA

84

108

53

NIGERIA

127

169

136

83

RWANDA

52

56

54

80

SENEGAL

112

147

64

SOUTH AFRICA

47

74

54

SWAZILAND

111

TANZANIA

116

132

116

99

UGANDA

113

115

151

90

ZAMBIA

118

98

87

57

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Strengthening Private Investment in Africa

AAII1

Norton Rose Fulbright law firm was the scene last Tuesday for the Africa Alternative Investment Intensive. The forum was part of a series of conferences on the African investment landscape organized by Africonomie.

Investors such as Abraaj, Capri Africa, and Sarona Asset Management were represented. In addition, several important players in the African financial ecosystem were in attendance. These include PWC’s Mauritius office, IGD Leaders and PAN Diaspora Capital Management.

The AAII was a gathering of practitioners bringing their real world experience. It was an opportunity to share ideas and insights aimed at fostering a healthier African investment climate. Here are some of the topics:

 

Attracting American Capital to Africa

Obi McKenzie of Black Rock had constructive recommendations for fund managers. A fund’s track record is a big selling point. New funds without much of a record are encouraged to pursue funds of funds. A useful sources of leads is the National Association of Investment Companies.

Encouraging US pension fund managers to consider African investments

Donna Sims Wilson, president of the National Association of Securities Professionals gave a presentation on the NASP Africa Initiative. It is a USAID funded initiative known as Mobilizing Institutional Investors to Develop Africa’s Infrastructure, or MiDA. The goal is to expose US public pension plan sponsors to co-invest with African fund managers in Africa’s infrastructure.

Risk mitigation

Several times during the conference presenters pointed out various risks that must be managed either with insurance products or deal structuring. Currency risk was a topic of particular concern. Risk management in African investments will be address in more detail shortly in a subsequent post.

Startups & smaller deals

This is a segment of the market that the financial community has not really addressed. There were audience questions during the day about funding the “missing middle” deals of roughly $500k to $1 million. A panel on Smart Capital and the future Innovative Technologies in Africa identified several themes such as mobile technology.

Impact investing and ESG issues

Panels on ESG related risks and delivering sustainable energy addressed social an developmental impacts of investing. The very definition of ESG and how it is measured were among the topics discussed.

Last week’s Africa Alternative Investment Intensive continues the conversation and sets the stage for the next AAII gathering next month in London.

AAII2

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Major Africa Stock Market and Exchange Rate Changes in Q4-2014

Advansa International follows exchange rates and stock market indexes for several emerging and frontier markets. Exchange rates and stock indexes are recorded on the last trading day of the week. The tables below show changes from the last trading day of the last full week of the quarter for several key markets in Africa.

Table 1 

 STOCK MARKET INDEX TRACKER 4TH QUARTER 2014

AFRICA

COUNTRY

4TH QUARTER PCT CHANGE

GHANA-Local Currency

1.42%

GHANA-US$

2.83%

KENYA-Local Currency

-4.70%

KENYA-US$

-6.19%

NIGERIA-Local Currency

-15.66%

NIGERIA-US$

-27.06%

SOUTH AFRICA-Local Currency

-0.37%

SOUTH AFRICA-US$

-3.42%

WEST AFR. BOURSE-Local Currency

-1.91%

WEST AFR. BOURSE-US$

-6.05%

MSCI AFRICA-Local Currency

0.89%

MSCI AFRICA-US$

-2.52%

MSCI EMERGING MARKETS-Local Currency

-2.10%

MSCI EMERGING MARKETS-US$

-6.97%

Sources: Stock exchange websites, Financial Times, Advansa International data

Table 2

4TH QUARTER 2014 EXCHANGE RATE TRACKER

AFRICA

COUNTRY

4TH QTR PCT CHG

YTD

DEC PCT CHANGE

CFA AREA*

-4.14%

-11.66%

GHANA

1.41%

-25.86%

KENYA

-1.49%

-5.08%

NIGERIA

-11.40%

-13.27%

SOUTH AFRICA

-3.05%

-9.56%

TANZANIA

-2.07%

-7.42%

UGANDA

-3.88%

-9.18%

Sources: Financial Times, Advansa International data

*Includes most French speaking countries such as Benin, Cameroon, Cote D’ivoire, Guinea, Senegal, Togo and others

It was a rough year for emerging market stocks with the MSCI Emerging Markets Index losing 2.1% in the fourth quarter and 0.69% the full year 2014. African stock markets did better than emerging markets in Q4, though for the year the MSCI Africa index trailed emerging markets. Nigeria was the worst performer largely due to the fall in the price of oil. Its downward momentum continued into the first week of 2015 with the Global MSCI Nigeria ETF falling another 9%. Ghana was the strongest performer, up 1.42% in the 4th quarter, and 2.83% for the year.

All currencies in our table fell against the dollar in 2014, which diminishes returns (and increases losses) for foreign investors. This is partly a function of dollar strength rather than weakness of African currencies. The US economy finished the year strong and the dollar index was up from 99.1 at the end of 2013 to 102.8 at the end of 2014’s 3rd quarter. The currency depreciation also reflects the challenges to resource based emerging and frontier market economies that has persisted all year. A couple of currencies were especially weak. Ghana for example was down almost 26% in 2014. Aggressive action by the central bank, with the assistance of the IMF reversed the slide and the cedi has recovered, showing a slight gain in the fourth quarter. Nigeria’s naira showed the biggest loss of the quarter again influenced by the drop in the price of oil.

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Major African Stock Market and Exchange Rate Changes in Q3-2014

Advansa International follows exchange rates and stock market indexes for several emerging and frontier markets. Exchange rates and stock indexes are recorded on the last trading day of the week. The tables below show changes from the last trading day of the last full week of the quarter for several key markets in Africa.

Table 1 

 STOCK MARKET INDEX TRACKER 3RD QUARTER 2014

AFRICA

COUNTRY

3RD QUARTER PCT CHANGE

GHANA-Local Currency

-4.18%

GHANA-US$

-3.87%

KENYA-Local Currency

7.92%

KENYA-US$

6.18%

NIGERIA-Local Currency

-3.24%

NIGERIA-US$

-3.86%

SOUTH AFRICA-Local Currency

-1.90%

SOUTH AFRICA-US$

-7.28%

WEST AFR. BOURSE-Local Currency

9.21%

WEST AFR. BOURSE-US$

2.28%

MSCI AFRICA-Local Currency

0.52%

MSCI AFRICA-US$

-4.41%

MSCI EMERGING MARKETS-Local Currency

1.44%

MSCI EMERGING MARKETS-US$

-2.13%

Sources: Stock exchange websites, Financial Times, Advansa International data

Table 2

3RD QUARTER 2014 EXCHANGE RATE TRACKER

AFRICA

COUNTRY

3RD QTR PCT CHG

YTD

SEP PCT CHANGE

CFA AREA*

-6.92%

-7.85%

GHANA

0.31%

-26.89%

KENYA

-1.74%

-3.64%

NIGERIA

-0.62%

-2.10%

SOUTH AFRICA

-5.38%

-6.72%

TANZANIA

-1.16%

-5.46%

UGANDA

-1.89%

-5.51%

Sources: Financial Times, Advansa International data

*Includes most French speaking countries such as Benin, Cameroon, Cote D’ivoire, Guinea, Senegal, Togo and others

Emerging and frontier market stocks showed mixed results as the MSCI Emerging Markets Index rose 1.44%, and the MSCI Africa Index was up 0.52%. Choppy commodities prices, and mixed economic performance lead to losses in some countries like South Africa and gains in others. The Nairobi Exchange in Kenya and the West Africa Bourse were the strong performers in Q3.

Currencies that were weak in the first half of the year—notably Ghana—have largely stabilized. Though most currencies are lower against the dollar, this is due more to a strong dollar than weakness elsewhere. The US Dollar index rose from 99.316 in Q2 to 100.342 in Q3.

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Africa 8 and 3 Cities to Watch

Two recent stories caught my attention for their deeper analysis of African economic growth:

A post in LinkedIn’s African Financial Professionals group links to an article about the Africa 8. The Africa 8 are 8 countries highlighted in a study by Ecobank, a pan African bank based in Togo. Ecobank predicts Angola, Republic of the Congo, Cote d’Ivoire, Ghana, Kenya, Mozambique, Nigeria, and Rwanda to be the drivers of growth on the the continent. Ghana, Nigeria and Kenya are known to be attractive due to their political stability (Ghana), size (Nigeria) and tech driven dynamism (Kenya). Cote d’Ivoire has put its civil conflict in the past and in some ways is like a francophone version of Ghana. Congo and Angola are all about oil. Mozambique shows high rates of growth but one wonders if its influence is felt beyond its borders.

The question for all these countries is whether they will evolve into more than just natural resource plays which are vulnerable to market swings and technological and social trends such as the global imperative to move away from fossil fuels. Many of these economies are also carrying large amounts of public debt which could become a problem if US interest rates rise or commodity prices fall.

The second story identifies three African cities that are at the beginning of their growth curve: 1) Abidjan, Cote d’Ivoire, 2) Dakar, Senegal, 3) Ouagadougou, Burkina Faso. http://www.emia.org/news/story/978 This is another way of acknowledging the growth prospects of the countries for which these are the major cities.

In addition to Cote d’Ivoire’s positive outlook, Abidjan is considered one of the most attractive cities in West Africa and is an important center for meetings, tourism and commerce. Dakar, the capital of Senegal is a port at the westernmost location on the African continent, giving it easy access to Europe, North and South America. If West Africa is serious about regional integration then Dakar will become even more attractive as a gateway city. Ouagadougou stands out in this group in that although it is a national capital it is not one of the region’s most important cities. It is included largely because of growth in Burkina Faso’s gold mines.

Investors and entrepreneurs considering entry into Africa should start by investigating the locations cited above. Each is brimming with opportunities and fraught with challenges—all for different reasons. Knowledgeable advisors both at home and on the ground can help point the way.

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Major African Stock Index and Exchange Rate Changes in Q2-2014

Advansa International follows exchange rates and stock market indexes for several emerging and frontier markets. Exchange rates and stock indexes are recorded on the last trading day of the week. The tables below show changes from the last trading day of the last full week of the quarter for several key markets in Africa.

Table 1 

 STOCK MARKET INDEX TRACKER 2ND QUARTER 2014

AFRICA

COUNTRY

2ND QUARTER PCT CHANGE

GHANA-Local Currency

-1.42%

GHANA-US$

-18.45%

KENYA-Local Currency

-2.78%

KENYA-US$

-3.86%

NIGERIA-Local Currency

10.06%

NIGERIA-US$

11.33%

SOUTH AFRICA-Local Currency

5.62%

SOUTH AFRICA-US$

5.32%

WEST AFR. BOURSE-Local Currency

-2.17%

WEST AFR. BOURSE-US$

-2.99%

MSCI AFRICA-Local Currency

4.25%

MSCI AFRICA-US$

3.94%

MSCI EMERGING MARKETS-Local Currency

4.44%

MSCI EMERGING MARKETS-US$

6.22%

Sources: Stock exchangewebsites, Financial Times, Advansa International data

 

Table 2

2ND QUARTER 2014 EXCHANGE RATE TRACKER

AFRICA

COUNTRY

2ND QTR PCT CHG 

 

YTD JUN PCT CHANGE 

CFA AREA*

-0.81%

-0.99%

GHANA

-17.03%

-27.12%

KENYA

-1.07%

-1.94%

NIGERIA

1.27%

-1.49%

SOUTH AFRICA

-0.30%

-1.42%

TANZANIA

-1.09%

-4.35%

UGANDA

-1.85%

-3.70%

Sources: Financial Times, Advansa International data

*Includes most French speaking countries such as Benin, Cameroon, Cote D’ivoire, Guinea, Senegal, Togo and others

The big markets–Nigeria and South Africa performed well. Both markets were up in local currency and in dollars.It appears that the long term story–the demographic boom, the growing middle class, the improved political environment in some countries–are causing investors to look past current bumps in the road.

Despite lackluster growth, South African stocks have been strong. The country remains an attractive investment destination, its stock market being the largest and most liquid in Africa.

Nigerian stocks have proven attractive to investors and Boko Haram attacks and new competition from North American shale oil have not changed anyone’s thinking so far. Most of the market activity is in the financial services sector lead by such firms as Access Capital and Guaranty Bank. Consumer goods companies such as Nigerian Brew have also showed strength. The naira actually gained a little during the quarter and remains within the narrow range that has prevailed all year.

In Ghana, currency weakness continues as the nation has sought IMF assistance to help get its accounts back toward balance. Trading activity is as usual dominated by the large consumer and financial service companies such as Fan Milk, UT Bank, and EcoBank. The stock market has weakened, reflecting caution among investors even though the economy is still growing. Could be a chance to get in the market cheap.

In fact, the current period is a possible second chance for international investors to invest in African assets at favorable prices when exchange rates make deals affordable and much of the bad news is already priced in.

 

 

 

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Major African Stock Index and Exchange Rate Changes in Q1-2014

 

 

 

Advansa International follows exchange rates and stock market indexes for several emerging and frontier markets. Exchange rates and stock indexes are recorded on the last trading day of the week. The tables below show changes from the last trading day of the last full week of the quarter for several key markets in Africa.

Table 1 

 STOCK MARKET INDEX TRACKER 1ST QUARTER 2014

AFRICA

COUNTRY

1ST QUARTER PCT CHANGE

GHANA-Local Currency

11.37%

GHANA-US$

-0.80%

KENYA-Local Currency

1.76%

KENYA-US$

0.88%

NIGERIA-Local Currency

-4.72%

NIGERIA-US$

-7.45%

SOUTH AFRICA-Local Currency

0.48%

SOUTH AFRICA-US$

3.68%

WEST AFR. BOURSE-Local Currency

5.07%

WEST AFR. BOURSE-US$

4.88%

MSCI AFRICA-Local Currency

3.80%

MSCI AFRICA-US$

0.33%

MSCI EMERGING MARKETS-Local Currency

0.79%

MSCI EMERGING MARKETS-US$

-0.23%

Sources: Stock exchangewebsites, Financial Times, Advansa International data

 

Table 2

1ST QUARTER 2014 EXCHANGE RATE TRACKER

AFRICA

COUNTRY

1ST QTR PCT CHG

YTD

MAR PCT CHANGE

CFA AREA*

-0.18%

-0.18%

GHANA

-12.16%

-12.16%

KENYA

-0.88%

-0.88%

NIGERIA

-2.73%

-2.73%

SOUTH AFRICA

-1.12%

-1.12%

TANZANIA

-3.30%

-3.30%

UGANDA

-1.88%

-1.88%

Sources: Financial Times, Advansa International data

*Includes most French speaking countries such as Benin, Cameroon, Cote D’ivoire, Guinea, Senegal, Togo and others

2014 marks a change in investor sentiment towards the emerging and frontier markets. We see a shift from the mad rush into EMs of the past 3-4 years to people wondering if all the emerging market hype is a bit overblown. The announcement of tapering by the US Fed in 2013 was the trigger. In Africa the new outlook is manifest in continued currency weakness and retrenchment in several key stock indexes.

Every currency in our table lost ground in the first quarter. This is in spite of monetary tightening and rising interest rates across the board. Indeed, monetary policy in most of these markets has been fairly rational. On the fiscal side, however governments are finding it difficult to control spending. These are countries with young populations climbing out of poverty. They are at a developmental stage that demands rapid growth and are under tremendous political pressure to deliver social services and better infrastructure, all of which leads to deficits in the trade and fiscal accounts.

Ghana is a conspicuous example among this group. We see from the tables that Ghanaian stocks performed quite well while the currency was the weakest among prominent African economies. Many companies are performing well and investors anticipate future growth so stock prices are rising. However the trade benefits of the nascent oil sector have not materialized and have in fact generated additional imports as production ramps up. Thus the trade balance deteriorates. The resulting inflation on top of politically driven spending increases puts downward pressure on the cedi.

Yet it is these same characteristics that make the emerging markets such as Ghana attractive to investors. Among the larger markets that attract most of the trading volume, the currency issue is not as urgent. If this is a short term correction and if governments and investors don’t panic, then the long term trends will continue to imply growth and favorable investment outcomes.

 

 

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EMERGING MARKET INVESTING PART III – 5 KEY TAKEAWAYS FOR THE ENTERPRISE

For managers and entrepreneurs seeking private investment to fund an enterprise, the current environment is challenging, though still an improvement compared to prior decades. In Part III of our series, we offer 5 takeaways from 2013. These are concepts that are particularly appropriate to current market conditions and sensible in any period in the cycle.

1. Be mindful of the investing environment. We recall from Part I that private equity activity was down somewhat in 2013. Deals were down 7% and fundraising down 19% from the previous year. We know that the BRICS and other emerging economies have slowed down. So for the time being at least the emerging markets have lost some of their luster. All this has affected investor’s attitudes. Yet the long term outlook still looks good which is the message we stick to and the reason emerging economies still attract investor interest.

2. Owners and management should have a realistic understanding of the value of their enterprise, and where it fits into the spectrum of potential investments. They should also have thought through carefully their mission and objectives for the enterprise, for themselves, and for their communities.

3. Demonstrate the strength of the business model including evidence that the business or project can provide consistent cash flow. Examples include:

  • Signed contracts for current and future sales
  • For housing developments, a significant proportion of homes pre-sold either to residents or a large employer buying for its staff.
  • Offtake agreements for energy and power projects
  • Infrastructure projects that can collect tolls or user fees

4. Government support never hurts. Although most developing countries have improved business and political climates, they are still relatively difficult places to do business. It is therefore desirable to be on good terms with the relevant government bodies so. When everyone’s interests are aligned the red tape can be minimized.

The extent to which government backing is needed varies with the type of deal. For small startups it may not be necessary at all. In some cases the government is the customer then of course the company must be in a position to win a contract. In lieu of a contract, an MOU or government guarantee may be sufficient.

It should be noted that while government support is crucial, companies should avoid any activity that can be construed as corrupt as it will be an immediate turnoff to the investor. US investors are especially wary of running afoul of the Foreign Corrupt Practices Act. Any investor not appropriately concerned is probably one to avoid.

5. Strength of the management team. Investors look for relevant experience, a level of professionalism and an understanding of international performance standards. Most important, management and founders/owners should be prepared to act in the interest of building the value of the enterprise.

Current market conditions in emerging market PE investing indicate a plateau in deal growth. In this environment founders/owners should pay special attention to those factors that attract good investors. We think this is a short term phenomenon—a sensible pullback from the emerging market fever of the past few years. However the broader demographic, economic and geopolitical trends will continue to favor emerging markets in the long run. We believe capital will flow towards companies that have strengthened their foundations during the current slowdown.

 

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EMERGING MARKET INVESTING PART II – 3 VALUE ENHANCEMENT STRATEGIES

 

This 2nd installment of our private equity series looks at how investors have succeeded this past year. While these tactics are well known by major private equity institutions we also consider the smaller investor and those investors new to emerging market investing. This investor could be a family office, or an accredited individual investor or investor group that prefers direct investing over the limited partner role. [We will use the term “small investor” to encompass all of thee groups realizing that they are not always small in dollar terms] The approach we advocate comes under the general heading of value enhancement or value creation.

Successful emerging market investors contribute more than money to the success of their portfolio companies. With their own resources and by marshaling expertise in their networks they can enhance the value of these companies leading to a more favorable outcome at exit. This is typical of the large PE firms whose senior staff often have operating as well as financial experience.

Although not all investors will have this kind of expertise on staff, those with strong networks can mimic the kind of value enhancement that is standard procedure at the large institutions. There are professionals with region or sector specific expertise that can deliver on an outsourced basis what they cannot do in house.

Here are three value enhancement strategies:

1. Upgrading business processes

 

The investors’ due diligence should include an assessment of the company’s strengths as well as any challenges that would impede its ability to implement its business strategy. Process improvements can occur in any of several areas:

 

  • Distribution

  • Strengthening the management team

  • accounting/finance/risk management

  • ESG (Environmental, Social, and Governance) upgrades such as social impact measurement using IRIS, implementing a diversity strategy, or improving environmental sustainability

 

Small investor’s approach: Engage advisors with background in: the portfolio company’s industry, accounting and/or finance, ESG reporting & measurement.

 

 

2. Help portfolio companies open new markets

 

Within their region – especially important in African countries where it makes sense to combine several small country markets into larger regional ones.

 

In investor’s home market. There are companies that assist international firms in entering and selling in the US.

 

Essential for companies with small domestic markets. Opening new markets is key for Caribbean companies who need to go outside their small markets in order to scale.

 

Small investor’s approach:

 

Use investor’s network to link portfolio company to export opportunities.

 

Engage business development & marketing firms that specialize in helping foreign firms enter the US market

 

 

3. Provide constructive influence to portfolio companies even with a minority share

 

Small investor’s approach:

 

Work with companies where entrepreneurs’ managers’ and investor’s interest are aligned. Use the due diligence period to assess the mindset and culture of management. Look for:

 

  • Management teams and shareholders with a long term outlook

  • Shareholders with skin in the game, cash or mortgageable real estate for example.

  • In some cases it is feasible and desirable to have a level of decision making authority written into the deal.

 

Create alliances with like minded shareholders.

 

These are some of the ways in which a small PE investor can be helpful to emerging market portfolio companies to the benefit of all stakeholders.

 

 

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