Africa’s Energy Transition

The world is wrestling with the question of how to most effectively manage a transition from a fossil fuel driven economy to one based on low or zero carbon usage. The debate over how and how fast to bring about the transition is happening in the rich countries of the Global North and the developing countries in the South. In Africa the debate has taken on a special character. Depending on their role in the industry, there are two schools of thought regarding the transition to a low/no carbon African energy mix. This week’s COP-26 meeting is a great time to think about to implement the transition.

FOSSIL FUELS – THE SELL SIDE

Governments of oil producing countries, and oil and gas companies both upstream and downstream are of course eager to continue exploring for, drilling, and/or selling fossil fuels.

For major producing countries such as Nigeria, Angola and Algeria oil and gas are the source of the majority of export earnings. Another group of countries, mostly on the west coast of Africa and some In East Africa are relatively new producers and have looked forward to reducing or eliminating what was once a massive import bill.

Amid all the understandable self interest the oil producers make the strong point that renewables are not meeting Africa’s energy needs and are nowhere near closing Africa’s energy gap. Nigeria’s vice president gives a full throated defense of his and other African countries’ need to maintain their oil and gas industries.

https://www.foreignaffairs.com/articles/africa/2021-08-31/divestment-delusion?utm_source=pocket_mylist

Some of Africa’s supporters also favor a measured approach to the energy transition.

https://african.business/2021/10/energy-resources/africa-must-not-be-the-wests-sacrificial-lamb-for-net-zero-at-cop26/?utm_medium=Social&utm_source=Twitter#Echobox=1635328441

AFRICAN ENERGY FINANCE

Environmentalists and much of the development finance community are ready to leave oil in the ground and cease all production and exploration.

Many development finance institutions are reluctant to finance natural gas ventures or any energy project not using solar, wind or hydro power. We have built relationships with several energy investors most of which have multilateral or bilateral development finance institutions as major investors. These investors explicitly state their intention to finance renewable energy.

The African Development Bank describes its Energy & Power initiative as “Accelerating Africa’s Green Energy Transition.” and “supporting access to clean and affordable energy across the African continent.”

Each of these viewpoints has a valid argument. Africa is blessed which considerable energy resources and should be able to use them, just as the West has since the start of the industrial revolution. Also unlike in the west, where the transition debate is about whether to replace a dirty power source with a clean one, in Africa most people have no power at all and it is not clear that in the near term renewable energy can supply more than a fraction of the continent’s power needs.

Yet we are faced with the stark reality of climate change. The most recent IPCC report shows we are already feeling the effects of a higher global temperature and the greatest impacts are in the developing world. Many expect Africa, like it did in telecom to leapfrog the old technology and quickly adopt sustainable energy. The bottom line is we cannot continue business as usual, but it is far from clear that Africa can meet its energy needs without some mix of old and new forms of energy. The transition has to happen, but how and how quickly? What is the plan?

NO CONSENSUS, NO PLAN

As far as we can tell there is no plan. Neither companies nor importing or exporting countries have made plans that recognize Africa’s energy goals which are different from those of the West. Is there coordination from the African Union? One attempt is at a coordinated global effort is Sustainable Energy for All, an organization funded by a mix of foundations and bilateral development agencies in partnership with the United Nations. Some broad thinking has been done by McKinsey but a lot of details are left unaddressed like how to deal with the inevitable stale assets that will result from the transition to renewable energy.

We urge the decision makers in the public and private sector to think comprehensively and realistically about universal access to energy and a plausible route to zero carbon as well as the consequences of winding down the production and distribution of fossil fuels.

International Tech Opportunities from ITA

The bulletin below from the US International Trade Administration outlines some of the agency’s technology transfer activities around the world. These activities could be an opportunity for IT and technology firms interested in getting a foothold in these markets.

Technology Resource Guide on Central America and the Caribbean

• Press Release: https://ustda.gov/ustda-releases-ict-resource-guide-for-central-america-and-the-caribbean/

Resource Guide: https://ustda.gov/wp-content/uploads/LAC-ICT-Resource-Guide-Central-America-Caribbean-Final-Report.pdf

Contact: Maria.Rivera@trade.gov

Digital Transformation Business Development Mission to the GCC -January 23-27

• The Gulf Mission has moved to January 23 – 27, 2022 and now includes Saudi, Kuwait and Qatar. The optional stop to UAE had to be dropped. https://www.trade.gov/gulf-digital-mission
  Contact: Ludwika.Alvarez@trade.gov

Secretary Blinken Outlines the State Department’s Six Technology Policy Pillars at the National Security Commission on Artificial Intelligence’s (NSCAI) Global Emerging Technology Summit

1) reduce the risk to the American people from cyber activities and the malicious use of new technologies;

2) ensure U.S. technology leadership in the strategic technology competition;

3) defend an open, secure, reliable, and interoperable Internet;

4) set standards and norms for emerging technologies;

5) make technology work for democracy; and

6) promote cooperation among like-minded countries.

Contact: Jimmy.Church@trade.gov

Trade Lead

• Serbia: A technical cooperation and grant financing opportunity in Serbia. The European Bank for Reconstruction and Development has listed a EUR 100 million sovereign loan facility to finance the construction of mid-mile and last mile fiber broadband infrastructure connecting up to 1,600 rural schools/ public institutions in Serbia to the existing fiber backbone network. Company Contact Information: Milan Dobrijevic, milan.dobrijevic@mtt.gov.rs, + 381 11 2020 072, 7 Pariska St. 11000 Belgrade, Serbia, https://www.ebrd.com/work-with-us/projects/psd/52793.html
  Contact: Evan.Schlosser@trade.gov

CFIUS Releases Annual Report to Congress for CY2020

• Continued decline in the number of notices filed by Chinese investors. The number of notices filed by Chinese investors continued to decrease in 2020 as in recent years, likely reflecting a decrease in Chinese investment in the United States overall. Only 17 notices were submitted by Chinese investors in 2020, a decline from the 25 notices submitted in 2019. Investors from Japan, Canada, and France submitted the second, third, and fourth most notices respectively over the 2018-2020 period. In 2020, investors from Japan submitted highest number of notice (19), followed by China (17) and the UK (14). As expected, given the high level of scrutiny applied to Chinese investment in the United States and the recent trends in China outbound investment, the number of filings made by Chinese investors continued to decline. However, the Annual Report’s data also demonstrates that Chinese investments in US businesses continue to be approved by CFIUS. Full overview and report here.

China Passes New Data Privacy and Security Laws

• On June 10, 2021, The National People’s Congress Standing Committee of the People’s Republic of China passed the Data Security Law (DSL). The key focus of the DSL is the protection and security of critical data relating to national security and the public interest. The most significant element of the law is the so-called data classification system whereby the government will classify different types of data based on its level of importance and then publish a protection/security standard for each class of data. DSL also sets out certain general security obligations for data processors at large. Given the law is broad in nature, the immediate impact for companies may be limited. We expect to see implementing guidelines and standards to follow. The DSL will take effect from September 1, 2021. More here.

Anyone interested in following up with the ITA contacts above should copy Ms. Hilary Sadler. Here is her contact information:

cell 202.384.6226; desk 202.482.4340; Room 11022

Hilary.Sadler@trade.gov

Advansa International can provide assistance when needed to work with ITA. Contact, Darnley Howard, President at advansa@yahoo.com

AFCFTA and Africa’s Economic Future

Part Two if the Corporate Council on Africa’s Africa Economic Outlook series took place last February 16. The main topic of discussion was implementation of the African Continental Free Tree Agreement.

Speakers:

• H.E. Wamkele Mene, AFCFTA Secretary General
• Stephen Lande, President, Manchester Trade, Ltd.
• Witney Schneidman, Sr. International Advisor, Africa, Covington & Burling, LLP (Moderator)

Here are some highlights from the conversation:

The AFCFTA Secretariat is working with Afreximbank to create a blockchain based payment settlement system to facilitate currency conversion. The new system gets around the macroeconomic mismatch problem in which foreign currency payables subject African companies go exchange rate risk

Bilateral trade deals are a typical complication according to Secretary General Mene, He encourages heads of state to manage their trade relations with US so they are compatible with the AFCFTA.

Environmental factors are covered in the industrial sections of the agreement. Monitoring Paris Accords to ensure African interests are considered.

AFCFTA will form an advisory committee which will include private sector corporations and SMEs.

The final speaker, Stephen Lande of Manchester Trade had these recommendations for American business:

• US firms should include African input into their supply chains.
• Direct investment in African companies would enable transfer of technology and management expertise and help US companies to understand African markets and appreciate African innovations.
• Use Africa as a base for exports to other regions.
• US government should allow space for implementation of African trade agreements. Everyone benefits when we orient trade relationships based on an operational AFCFTA, including bilateral and company to company dealings.

Experts are available in both Africa and the US to assist with risk assessment, market entry, deal sourcing, and finance.

Investing in Africa During the COVID-19 Era – the DFI Perspective

Africonomie’s Digital Dialogue series continues with a look at how development finance institutions (DFIs) are assisting Africa’s adaptation to and recovery from the COVID-19 crisis.

A panel of market participants with real world experience convened to discuss the challenges and opportunities they live with every day.

• Admassu Tadesse, CEO, TDB Group.
• Naana Winful Fynn, Regional Director, Norfund.
• Kevin Njiraini, Director for Southern Africa and Nigeria, IFC.
• Vibhuti Jain, Regional Director for Africa, US International Development Finance Corporation
• Greg Cohen, Co-founder and COO, Asoko Insight
• Moderator—Enitan Obasanjo-Adeleye, Head of Research, African Private Equity and Venture Capital Association

Asoko Insights’ Presentation

Greg Cohen of Asoko Insights gave a presentation describing his firm and its services with emphasis on its Digital Origination product. The aim is to connect African companies to financing. Data is fed to DFIs and other financing sources to facilitate due diligence. Asoko Insights employs a top down method that gathers data from institutional and government sources, and a bottom up method that encourages companies to submit their data in order to gain visibility to investors.

Status of DFI’s support initiatives during the pandemic

According to jiraini, multilateral organizations have committed $240m IFC has committed $8bn to support existing clients; 2bn for trade finance, $2bn for liquidity, $2bn for working capital and $2bn for the realty sector. Starting with existing clients especially for IFC’s supply chain and working capital solutions, the supports mostly who use the funding to support their clients.

Norfund, part of the DFI alliance is also focused on its existing portfolio. Their work includes providing direct support to the agribusiness and manufacturing enterprises. $2bn has been allocated to banks to lend to SMEs. Credit risk sharing is one tactic used to encourage bank lending. Norfund welcomes co-investors and is part of the DFI Alliance comprised of 16 DFIs from Europe and North America. The common theme is a willingness to collaborate with other organizations to magnify the resources available to companies in the region.

TDB has emphasized supporting supply chains and trade. The firm does a lot of work with commodities. Trade finance volumes are down as trade has contracted but food and agribusiness remain strong. TDB is opening letters of credit for key inputs to the supply chain. Business continuity in the portfolio is always a concern. TDB still offers corporate finance, project finance, and SME lending. Pandemic-specific initiatives include funding medical supply firms textile maker who can convert their facilities to manufacture PPEs. Though small, these financings supporting industrial parks and continued industrialization. Unlike the typical DFI, TDB does not offer concessional financial instruments. Consequently it does not receive donor funding. The firm does partnering with other DFIs such and the African Development Bank and the World Bank.

USIDFC in its current form is a new entrant to the DFI community. Health care is DFC’s global priority and has been even prior to the pandemic. Goal to support health care supply chains. More flexible. As an example of improved flexibility, 25% US shareholding is no longer required. USIDFC invites proposals for private sector health care projects. DFC’s goal is to fund $2bn and catalyze $5bn.

Operating in the new reality of the COVID-19 pandemic.

Norfund finds challenges at all phases of the investment process. Most deals are in clean energy In person meetings are preferable to build trust with sponsors Norfund based in Ghana is adjusting to working virtually. The preferred approach is to front end due diligence, using virtual data rooms when possible. The hope is to push back in-person meetings until travel is more feasible than it is at present. It is easier for Norfund in their home base in Ghana where the lock down has been lifted.

IFC has more staff on the ground, about 300 in total plus hubs in Nairobi, Joburg and Dakar. Focused on existing clients accelerates due diligence. They know the clients and their products. The transactions are often simpler—topping up existing financing. Local banks are also helpful for due diligence since they have also analyzed the clients. Uses other local resources such as law firms to handle documentation

Tadesse of TDB was asked about regionalization of supply chains given the constraints imposed by the pandemic. TDB like most of the industry utilizes local financial firms and legal firms. The firm is also experimenting with blockchain to conduct trade finance transactions in place of DHL using a blockchain based trading platform in a deal to ship fertilizer from Morocco to Ethiopia.

For the USIDFC the pandemic highlights vulnerabilities in health care and critical infrastructure. Connect Africa is DFC’s effort to fund infrastructure and connectivity. It sees businesses adapting to the pandemic, innovating and finding new ways to do business and pivot to seize new opportunities

Ashoka has not seen as much use of block chain but Cohen notes the importance of information technologies in the current environment. Fast tracking due diligence is a common theme, making Zoom and electronic data rooms essential tools. The firm continues to maximize technology to support DFIs and PEL,

IFC is conducting webinars for portfolio companies and helping them learn to stress test. They are developing better ways to assess their condition. Speed is of the essence and the feel the urge to identify and address urgent needs quickly

TDB sees larger companies lending workers for tech assistance to SMEs. Rather than work directly with SMEs, TDB works through banks so that they can better service their SME clients.

Blockchain facilitates document movement. TDB has not seen it used outside of trade finance but they can envision greater efficiency from block chain in the property sector especially where English law applies and electronic documentation and signatures are accepted.

Ashoka Insight – Trade finance ledger is specific use case for block chain. Oversold generally. Broad adoption is a long time away from widespread adoption in Africa.

Norfund sees its role as capitalizing other forms of capital. Helping funds to build capacity.

Other structures?

Norfund – Nofund is open to alternatives investment styles and longer terms. (Some of the private equity professionals from recent webinars have expressed a similar sentiment.) Tougher macro situation due to COVID requires more flexibility. The standard private equity model is coming under question.

An audience member asked for elaboration on risk sharing. For Norfund risk sharing means bringing in additional partners, particularly from their Norwegian network. TDB is also open to risk sharing to scale up and expand outreach. Working with banks and microfinance institutions, they guarantee part of a portfolio’s risk. The strategy enables financial institutions to stay within risk management guidelines using such risk participation agreements.

The DFC’s approach is to work to strengthen local institutions by working with local institutional investors. They have not used block chain but are promoting innovative financing structures involving non-bank financial institutions and using insurance companies for risk sharing.

Pension funds say they do not have the capability to evaluate funds so Norfund shares their experience and best practices to aid the capacity building effort. Other DFIs such as CDC and IFC also have capacity building efforts. TDB is working with pension funds who seek to collaborate with DFIs. Their business development, due diligence and other skills fill gaps in the capabilities of local institutional investors. TDB also offers diversification via local bonds as a collaboration vehicle. TDB issues local currency bonds that are higher rated than most local investments. The firm also invites local institutional investors to invest in TDB’s own shares which pay hard currency dividends and provide a form of diversification for the investor.

DFC leverages other US government agencies to help co-invest with private investors and collaborate with local institutional investors. MIDA, a partnership between USAID and the National Association of Securities Professionals facilitates this collaboration by introducing US pension funds to African deals and institutions.

Desired outcomes for a post-COVID Africa:

Tadesse of TDB – Self sufficiency e.g. in food and agribusiness sector; transformation to a net food exporter. Opportunities to regionalize the agricultural value chain. Strategic partner to regions such as the gulf states, Kenya, Tanzania and other African countries can be breadbaskets to the Persian Gulf.

Fynn of Norfund also would like to see Africa as a net exporter of food. There are many efforts around the continent to improve value chains and support companies in agribusiness. The pandemic induced pause is an opportunity to coordinate these efforts for better results

Cohen of Ashoka Insight – innovation to localize value addition along with easing of capital constraints and digital adoption for resilience and growth after crisis passes.

Jain of DFC – More resilient supply chain; private sector innovation in Africa.

Our takeways from the conversation:

• Like their private equity counterparts, the theme for DFIs during the COVID-19 crisis is to focus on their portfolio and not take on a lot of new business.
• Each in their own way DFIs are supporting greater participation by local institutional investors in private sector investing.
• Digitization and technology adoption is an important tool for value creation. This is the first of these webinars in which we heard real world examples of Blockchain use.
• The panelist see greater economic self sufficiency as a most favorable outcome for Africa. Agribusiness is a key sector where Africa could become a net exporter, feeding itself and other parts of the world.

As lock downs and quarantines ease in various countries, investors and financial institutions should consider DFIs as potential partners in bringing capital to Africa.

 

African Private Equity in the Year of Covid-19, Part II

Africonomie, on May 6 2020, convened a second Digital Dialogue to discuss How Africa Focused Private Equity Firms Respond to COVID-19.

A second panel of market participants with real world experience shared their assessment of the impact of the COVID-19 pandemic on the African investing business and their outlook for the near future.

• Colin Rezek, Executive Chairman, Vantage Capital. The firm has launched three mezzanine funds, in South Africa, and Africa-wide, and three renewable debt funds, which invest mostly in S. Afr. Raising 4^th fund later in 2020. Rezek expects a slow recovery from the COVID-19 pandemic in which not all firms will survive.
• Brian Frimpong, Managing Partner, Zebu Investment Partners. Deal size ranges from $2-10m in food value chain including agribusiness and processing. Zebu prefers consumer facing firms. LPs are 60-70% Europe and US, the rest in Africa. Frimpong points out that the economic impact could be worst than the disease itself. As an impact investor, business continuity, and sustaining the workforce are among current priorities.
• Geeta Tharmaratnam, Founder & Managing Partner, Aequalitas Capital Partners. Advisory services for impact investors. After 12 years working at several GPs she launched the firm during the COVID-19 pandemic. Aequalitas provides advisory services in impact investing and ESG. Partnering with EU to launch a fund of funds to support African female GPs.
• Lexi Novitske, Managing Partner, Acuity Ventures—spun out of Singularity investments of Lagos—has invested in soft infrastructure, payment solutions, fintech, digital identity, enterprise software solutions, Acuity enables cross border trade & informal domestic markets, soft infrastructure solutions, microfinance, payment solutions, import substitution and supply chain management. Novitske thinks technology will be the first sector to recover from the COVID pandemic—especially in the payment space. Companies in this sector should benefit from move to digital solutions accelerated by COVID-19.
• Abele Okeke, Managing Partner, Altica Partners, Dubai—Atica is credit focused serving Africa’s mid market companies. Altica invests growth capital in six sectors: energy, agribusiness, health care, import substitution i.e. manufacturing, media technology, and financial services. Altica also provides technical assistance to accelerate growth and make companies attractive to larger institutional investors for possible equity investment. Altica is supporting pandemic response in Africa, e.g. providing PPEs to governments.
• Moderator—Franklin Amoo, Partner, Baylis Emerging Markets

Investment Process, Portfolio Management, Due Diligence

According to Rezek, commitment by portfolio companies is important. They must understand impact of COVID on revenue and balance sheets, applying the same business fundamentals they always have, but with greater intensity. Rezek believes pandemic will weed out the weaker, and over leveraged companies. Thus close contact with portfolio companies is required to maintain the health of these companies. The COVID era also puts the spotlight on best GPs, those doing the best job helping their portfolio companies to adjust to the new post COVID environment. Closer engagement is required to encourage portfolio companies to make the necessary adjustments. Due diligence also becomes more intense. Companies will find themselves redoing budgets and strategic plans, acknowledging the difficult environment while recognizing inherent value in the company and not throwing out everything that make company attractive.

Zebu as an impact fund takes an ESG approach to supporting its portfolio, seeking local networks and advisors to assist value creation and compensate for the inability to travel. Top concerns include business continuity and safety of companies’ employees which influences capital structure. Zebu has a technical assistance facility to further assist companies in achieving their growth an impact targets. Funds have been raised by Africa PEs making dry powder available to further support companies. Zebu talks to other PE’s on co-investing opportunities to support expansion of portfolio companies. Liquidity is a priority in due diligence. Companies are expected to build a 6 month cash flow runway. Zebu seeks to support its portfolio and minimize business interruption.

Fundraising

Several panelists’ firms are currently raising funds including Acuity and Altica.

Acuity is updating LPs on the state of their portfolio and pipeline. The firm has balance sheet capacity to do small seed deals. Most capital for larger deals come from private sources and not big institutions. However these institutions are not investing in first time funds or funds without a prior relationship.

Abele of Altica sees LPs in a holding pattern. Due diligence continues at a slower pace. He is overhauling his pipeline to favor exporters with hard currency revenue. He sees tourism, airlines and aviation being challenged. Fast moving consumer goods for basic needs should do well. FMCGs for luxury goods and higher end goods could struggle. At present the focus is on cash flow and risk mitigation. Depressed oil prices effect several sectors such as pharmaceuticals and health care. Soft hedges are employed to handle volatile currencies, oil and commodities.

Aequalitas is focused on focused addressing risks. The firm is advising investors in health care and education. Clients, including a large proportion of corporate investors see their investments threatened by shutdowns and uncertainty of COVID’S impact in Africa. Aequalitas is advising them on how best to support investees. Given the lack of venture funding and difficulty finding co-investors, corporate investors feel the need to step in when liquidity is needed. Tharmaratnam sees the IFC ESG Performance Standards as a way to attract LPs looking to achieve impact and ESG goals. She is concerned about lack of in-country personnel given inability to travel. Close engagement with portfolio is needed to meet comply with ESG commitments. Looking ahead, the availability of local capital must increase. SSNIT, Ghana and institutions in S. Afr and Kenya have invested but more is needed.

Abele is concerned with supply chain effects. These include the impact of trade with China during and after the pandemic, a possible second round of disruption possible due to slowdown in raw material delivery from Africa and imports from China. These disruptions will require companies to adapt by rebuilding supply chains with alternate suppliers.

According to Frimpong, health care, food, and other essential services for domestic markets will become more attractive. Financial services and technologies that enable cash avoidance will see greater demand. In Q1, Ghana has seen 285% growth in mobile money payments suggesting an attractive market for investors. Zebu supports SMEs to the point where they are attractive to PE investors. Avg VC/PE fund is $136m. Sees need for more support from public sector funds, i.e. pension funds for PEs and Vcs. Consider support for companies to grow to a scale attractive to PE firms. Then PE can then on-board companies and bring their value creations skills.

Colin Rezek says firms may need support in their recovery. The process will take time so some funds will want to extend as exits are delayed. He is optimistic that business will be better managed post-pandemic, becoming more efficient, making better use of technology and paying more attention to ESG management.

Audience Questions

Talk about the health of the supply chain–Abele: Supply chain challenges—Nigerians hold large warehouse inventories—up to 3 months worth, due to difficulty moving through ports. Inability to implement just-in-time inventories has actually helped African exporters. Large inventories help during COVID. because exporters can still supply US coffee buyers stockpiling due to low commodity prices, thus keeping African coffee exports healthy. Late arrival of the virus to Africa  has enabled planning.

Rezek notes that lower currencies may encourage more local manufacturing.

How do GPs meet local pension fund requirements? Many funds cannot meet the regulatory requirements of local pension funds in Nigeria and probably other countries. Frimpong notes regulatory reform in Nigeria and increased involvement of the sovereign fund. Restrictions will relax as track records improve. Funds need to show evidence of strong performance. Tharmaratnam disagrees, saying 10 years of lobbying pension funds is long enough. Pension funds are making a few allocations but not enough to develop healthy, liquid capital markets. Firms should create vehicles pension funds can invest in. She cites the example of a local currency fund in Nigeria. LPs should break from traditional GP relationships to look at some African funds.

These two Digital Dialogues illuminate the state of play in private investing in Africa during and possibly after the COVID-19 crisis. Investors, entrepreneurs, and executives seeking to support Africa’s post COVID-19 recovery should seek out advisers with strong market knowledge to help create value, realize healthy returns, and promote prosperity in Africa.

 

African Private Equity in the Year of COVID-19

I was fortunate to catch Thursday morning’s Digital Dialogue organized by Africonomie of London. The topic: How Africa focused Private Equity Firms Respond to COVID-19.

Africonomie convened a panel of market participants with real world experience well positioned to speak about the challenges and opportunities they live with every day.

• Cathy Goddard-Edwards, CEO & Founding Partner, Fyrefem Fund Managers, Johannesburg. Fyrefem has a focus on gender, employment & SME growth; Recently launched a COVID Fund for Distressed businesses (this is the first fund I have heard of that works with distressed companies).
• Papa Ndiaye, Founder & CEO, Afig Funds, Dakar; currently deploying capital.
• Adesuwa Okumbo Rhodes, Founder & Managing Partner, Aruwa Capital, Lagos; currently deploying and raising capital; Aruwa invests only companies that impact and benefit women.
• Marc Stoneham, Portfolio Manager, Development Partners International, London. Head of the Value Add team.
• Zin Bekkali, Fouder & CEO, Silk Invest, London. Launch of its Africa Food & Beverage Fund now on hold. Focused on minding the current portfolio
• Moderator–James Brice, CEO, EBS Advisory

Brice kicked off the discussion by framing COVID-19 as an ESG issue. He cited the IFC Performance Standards – particularly Performance Standard 4—Community Health, Safety & Security. The standard includes disease management and working conditions, informed in part by International Labor Organization Standards. The ESG approach can help indemnify GPs and mitigate business liabilities.

ESG Mgmt

An effective ESG strategy for PE firms would include the following:

• Encourage portfolio companies to build a cash reserve. Even 2 month’s working capital can help companies withstand COVID-19 related business reduction.
• Risk management strategies, should be driven down to local level.
• Show impact of ESG management on NAVs. How does it add value? How to recognize warning signs early based on evidence?
• How do GPs improve stakeholder engagement to build resilience.

The panel also noted that allocations to Africa will increase but with higher social support requirements

General Partners’ priorities: Maintaining a strong team is a priority. Helping management and staffstay healthy and productive helps the firm maintain strong information flow. The firm’s investee portfolio is also a source of market information.

Information & guidance for portfolio companies: 1) Cut cost, set aside cash 2) Encourage firms to put major initiatives on hold, 3) Inform management of the new normal, mobility restrictions, supply shortages etc.

African leadership During the COVID-19 Crisis: Africa outperforming the world in COVID management so far by reacting earlier with decisive lock down and distancing policies. Several countries are experience greater solidarity and national pride and the popularity of some leaders has increased—implying that they are more effective in crisis than in normal times. At the same time African countries are dealing with the economic impacts without the safety nets and access to capital enjoyed by the rich countries. Bekkali notes African sovereign bond yields have jumped from 6% to 12% in COVID era indicating that Africa’s cost of capital is much higher than that of the west.

Role of Local African GPs:their proximity & on the ground perspective adds extra value when GPs when travel is restricted and GPs outside Africa have less access. They benefit from a global turn inward and are better positioned to assist their portfolio in cost control, alternative revenue streams; managing risk perception

Supporting Portfolio Companies: More emphasis on stress testing and cash control

He sees resilience in portfolio companies, demonstrated by innovation and a willingness to pivot and find alternative revenue sources.

Perspective of a Turnaround Expert: Portfolio companies say they haven’t time to consider ESG and gender issues. One panelist suggests possible unconscious biases against women owned SMEs and calls for a different approach from usual cost cutting & asset stripping of distressed companies.

Generating Deal Flow in the COVID Era:

GPs are delaying site visits till the later stages. They are doing early due diligence that considers infectious disease risk. According to one panelist most GPs put responsible investing above opportunity, e.g. job preservation. There is of course less travel and more online meeting. The reduced travel costs are the bright side of COVID related restrictions. In-country operating consultants have become more valuable. More than just eyes on the ground, consultants are asked to assist with due diligence and other interactions.

Fund Raising: Uncertainty about the COVID-19 crisis has caused risk perceptions of African assets to rise. It has become harder for first time funds to attract investors. Some African GPs are turning to local pools of capital such as pension funds and family offices.

Additional Topics: Are LPs funding TA facilities? The panel says yes. Effort is there but technical assistance is needed because local resources are limited. Governments are themselves constrained and thus are not a reliable source of funding PE therefore has greater role in bringing resources to economies. Ultimately many on the panel are looking for ways to change the system to bring more capital to the continent so more companies can survive. There needs to be more flexibility in financing terms, non-cash as well as non-cash solutions—rethink the fee structure, seek partial guarantees from DFIs, consider private placements for local LPs.

Currency risk is a problem with or without a global pandemic. The panelists suggest structuring the business for currency resilience by building local supply chains and buying capex forward.

One GP on the panel described an investing style that is business model driven. He is a great believer in localization and is interested in the quality of local consumers, local products and the strength of local management. The firm spends a lot of time headhunting for talented entrepreneurs and managers. Demand is constant. The fundamentals are constant. Talent is variable.

The moderator posed an interesting question: Given the role of women as nurturers of local economies and businesses, can women led businesses be more successful post COVID because of their? Africa has higher percentage of women entrepreneurs than most parts of the world but they have the hardest time raising capital. Aruwa Capital sees gender as a driver of superior returns. Still, it will be harder for women—many SMEs will not survive. Women have had success at the seed stage but are underfunded especially in the later rounds.

Final moderator questions for the panel:

When can we travel again? Consensus: 6-12 months.

Will fund lengths be extended beyond 10 yrs? Not likely says the panel—unless by necessity. LPs may demand shorter funds. It appears African PEs not meeting LP demand.

Will greater tax and other fiscal incentives from African governments happen? Consensus: Not likely. Such tools are not available to all governments. Furthermore, many governments are not in a position to decide and must seek IMF or DFI approval.

A second edition of the Digital Dialogue takes place Wednesday May 6. Register here. It will feature another panel of African private equity practitioners sharing their insights on the impact of COVID-19 in Africa’s investing landscape.

 

Battling the Corona Virus’ Effect on African Economies

Last week we looked at the economic impact in Africa and the Caribbean of the the Coronavirus from various perspectives, This week we consider recommendations for addressing the crisis.

Starting as we left off with the McKinsey team:

https://www.mckinsey.com/featured-insights/middle-east-and-africa/tackling-covid-19-in-africa?cid=other-eml-alt-mip-mck&hlkid=dd8ee2152f6e4c03bb15471c64908131&hctky=3025099&hdpid=6829a0ca-8c45-4d8b-a90c-bb1d31105171

 

Consulting firm Bain & Company has released its COVID-19 PE Risk Assessment Tool. It is designed to help private equity firms determine what actions their portfolio companies should take in response to the Coronavirus.

Bain COVID-19 RISK Assessment Tool

 

Here is the Global Impact Investing Network and its members’ response: https://thegiin.org/covid19

 

AfDB launches a $3 billion Social Bond intended to help Africa’s economies counteract the economic impact of the pandemic.

“Fight COVID-19” Social Bond

 

African Business has a live blog which provides a running account of the pandemic fighting efforts of African companies and governments

African Business Live Blog

 

The International Monetary Fund is suggesting debt relief for the poorest countries and 20 countries have already requested IMF assistance to combat what could be an economic and humanitarian crisis caused by the pandemic.

IMF Blog

 

 

Corona Virus Impact in Africa and the Developing World

Our last post provided an assessment of the economic impact of the Coronavirus pandemic on emerging markets, primarily in Africa. What follows is a sampling of viewpoints from several other sources:

We’ll start with the perspective of a major development finance institution:

IMF Sees Significant Cuts in Sub-Saharan African Growth Due to Virus

The pandemic has arrived at the same time as the oil production squabble between Russia and Saudi Arabia for a one-two punch that has severely depressed oil and gas markets.

COVID-19 and Oil Price Slump set to Hit African Oil & Gas Projects

The Caribbean, like the rest of the world has to find appropriate way s to tackle the COVID-19 crisis.

5 ways COVID-19 has changed food insecurity in the Caribbean

Impact Alpha provides the perspective of the impact investing community:

Emerging market fund managers scramble to keep enterprises and entrepreneurs afloat

McKinsey provides a broad perspective that looks at the pandemic in the context of Africa’s ongoing growth and development efforts.

https://www.mckinsey.com/featured-insights/middle-east-and-africa/tackling-covid-19-in-africa?cid=other-eml-alt-mip-mck&hlkid=57cc6b7b77184508bccb56c04f3760ff&hctky=3025099&hdpid=6829a0ca-8c45-4d8b-a90c-bb1d31105171

 

Africa, Coronavirus, and the Global Supply Chain

Recently I was asked by an international development professional what the impact of the corona virus might be on investment in Africa. That of course brings to mind the question of the economic impact of the virus in Africa as other emerging regions.

Confirmed cases have reached 3000 on the continent. Fatalities have been reported in Kenya, Nigeria, and South Africa. Nearly 20 countries have requested emergency financing from the IMF. Like the rest of the world, governments are beginning to impose lock downs, curfews and other restrictions to contain the spread of the virus.

Generally speaking travel restrictions and factory closings are a threat to the entire global supply chain. That plus the obvious reduction in economic activity as much of the world goes into some form of isolation has caused raw material demand to plummet, as reflected in much lower prices for oil, copper, and other African commodity exports.

Import bottlenecks for capital equipment could hinder Africa’s industrialization. Many countries are working hard to improve their capabilities in manufacturing and various high value industries. These industries often require the import of capital equipment which could be disrupted by supply chain issues. It does not seem to have happened yet. Ports remain open to cargo.

Because of its emergence as Africa’s largest trading partner Africa’s economic fortunes are heavily influenced by those of China. Michael Greenstone of the Becker Friedman Institute at the University of Chicago puts it this way:

“China is facing a daunting challenge to its economic recovery at this point, especially because the deteriorating situation across the globe is bringing an almost complete halt to the export sector in China, and could make it difficult for Chinese firms to access critical inputs provided by firms outside of China.”

In other words reduced demand for Chinese manufactured goods means reduced demand for the inputs they import from Africa, Latin America and other developing regions. In one sense, this is just an acceleration of a trend already underway where China is itself moving up the value chain, starting to leave the low cost manufacturing to others.

We will also observe China’s interaction particularly with Africa over the next few years. Will they continue to spread largess across the continent in the form of infrastructure projects, soft loans and other forms of assistance?

The first priority is of course to contain the virus and minimize the loss of life on every continent. The case load is starting to rise in several African countries and we are concerned about the burden that their public health infrastructures will have to bear. We must also consider the implications for the economic development of emerging nations in Africa, Latin America, and Asia. Growth forecasts will no doubt be revised downward. It is up to governments, businesses, their friends and partners to support the recovery and put the continent back on track towards economic freedom and prosperity.

 

Financing High Value Industry in Africa

02The most recent data from the UNCTAD World Investment Report shows that foreign direct investment (FDI) into Africa was down 21 percent in 2017 compared to the prior year. The decline is attributed primarily to lower commodity prices. More diversified exporters such as Ethiopia and Morocco fared better than those countries that are more dependent on commodity exports. Recently, commodity markets, particularly oil, have rebounded suggesting better macroeconomics for many countries which should improve the FDI numbers. We will know things have changed for the better when more economies look like Ethiopia and Morocco and the ability to attract investment is not tied to commodity prices.

In a recent post on emergingmktstories we addressed the need to encourage high value trade and investment in Africa and to discourage unnecessary imports such as used clothing. It is especially important to finance the growth of the African private sector. This includes startups, established companies, and greenfield projects. These companies have the greatest potential for wealth generation and job creation. Companies in high value-added sectors like manufacturing and agro-processing import tools and machinery—items in which US companies are competitive. In other words by investing in African high value industries we create customers for US exports and strengthen trade relationships. In addition, the better jobs these businesses create would result in potential customers for American companies.

HOW AFRICA CREATES VALUE

Examples of high-value industries include:

Agribusiness. Investment opportunities exist at all stages of the agricultural value chain. Investors looking for some combination of growth, impact and disruption tend to prefer downstream businesses such as processing, as well as those inputs that support agribusiness such as equipment finance and cold storage.

Possible investors: DFIs, Private equity, Impact investors.

Manufacturing. Investors look for large and growing markets, either for export or FMCGs (Fast Moving Consumer Goods) in the domestic market. They also seek reliable, cost efficient processes that meet international quality standards.

Possible investors: Private equity, off takers in the supply chain with government DFI support.

Minerals Refining. Most African countries recognize the need to develop refining capacity in order to make the most out of their mineral resources.

Possible investors: Multinational refiners. Private equity

Startups. Successful startups bring innovation and increased competitiveness to African economies. In addition, their rapid growth creates wealth and jobs. Such companies also have the potential for social impact by addressing some of Africa’s most urgent problems. We have previously discussed startup financing issues in this blog. We can now include impact investors as part of the African startup ecosystem.

Possible Investors: Venture capitalists, Angel investors, Impact investors

PROMOTING VALUE CREATION IN AFRICA

Those of us in what we’ll call business support organizations—advisors, development finance institutions, international development agencies and others in the business of stimulating Africa’s private sector should promote the conditions that make African companies attractive to investors. For now, let us consider two key factors where we can make a difference:

I. Reliable cash flow.

It is the most obvious requirement but often overlooked in presentations to investors. Investors want a clear demonstration of the source of cash. This is often accomplished by integrating into the supply chain of a large customer. A contractual commitment from such a customer enables the company to obtain not only long term investment capital but also lines of credit and other forms of working capital that fuel day to day operations.

For an agribusiness deal the commitment might be an off taker agreement from a wholesale buyer of the output of a processing plant. Such a commitment not only provides cash flow, but also validates the business model, giving evidence of a growing market for the product.

Similarly, African manufacturers or refiners would look to supply parts or other inputs to a manufacturer. Such companies might also ship finished goods to a large retailer like Walmart or Movenpick.

Depending on the needs of the business, support organizations can help African companies succeed in the supply chain in several ways:

1. International Exposure – Connecting the company with global companies who could be potential customers. Providing exposure in their industry via conferences, exhibitions and trade shows.
2. Technical Assistance/Quality Management – Making resources available to ensure that the company is operating at international standards.
3. Financial Management – The ability to provide sound financial information is critical to not only keep investors happy but also give management the data they need to effectively guide the company.
4. Impact measurement – Many African companies are capable of significant social impact whether or not they explicitly brand themselves as social enterprises. Many investors have their own proprietary impact measurement methods, often based on the UN Millennium Development Goals or the Global Impact Investor Network’s IRIS methodology.

In addition to steps noted above, business support organizations can also support startups:

1. Business model refinement – Helping management understand their strengths in the market and how to achieve scale.
2. Business planning – Telling the story in a clear and concise manner that shows the source of investors’ returns.
3. Impact measurement – Many of today’s startups consider themselves social enterprises and therefore impact measurement is an even bigger priority than for most other companies.

II. People

Everyone wants a great business model in a large and growing market, but people are necessary to turn that business model into financial and social results.

• Professional Management.

Investors are always interested in the capability of the people running the business. They want to feel comfortable that there is a management team to execute the plan they’ve come to believe in. Their capabilities are developed through a combination of training and experience.

• Sound governance.

Strong managers and directors help the company establish a clear set of rules and procedures that give investors and other stakeholders confidence that the firm will deliver on its promises.

• Competent staffing.

Well trained personnel in engineering, accounting, marketing and other functions are critical to the performance of the company.

Business support organizations can partner with workforce training firms academic institutions and professional organizations to help enhance management and staff quality in African companies.

BUILDING BANKABLE STARTUPS

Startups and early stage companies are something of an exception since venture capitalists are often more interested in the disruptive characteristics of the company. Investors in these companies understand they have accepted a higher level of risk and therefore expect higher returns as well. That said, there is nothing like a signed purchase agreement to validate the business model and increase equity valuations.

We urge American business and policy makers to be present on the African continent to work with DFIs and with African business to build long term partnership to benefit American and African citizens, businesses, and governments.

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 Advanced Executive Management Program. The Roadshow will provide high level training for senior executives and create a forum for American and African businesses to connect. For more information, visit https://igdleaders.org/