Category Archives: Finance

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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5 KEYS TO INFRASTRUCTURE INVESTING IN AFRICA

US investors can find good deals in Africa and not leave all the action to the Chinese. How? By taking the long view, and aligning their investment strategy with countries’ development priorities.

photo-1443827423664-eac70d49dd0d

For example, Ghana has launched an initiative that links the obvious need for better infrastructure with the goal of industrializing the economy, with a sovereign wealth funds to back it up. Implementation requires billions in investment and technical assistance, largely from the private sector. Here’s how US companies can win business:

  1. Adopt a long term perspective. These are long term projects intended to transform Ghana’s economy and enable high value industry to thrive. The benefits to investors and operators are also long term in the form of offtakes that will continue well into the future. These benefits easily overwhelm concerns about currency fluctuation, or bureaucratic challenges.
  2. Make your presence known on the ground. Brazilian and Chinese investors send teams to explore the market even before any bid announcement or call for investors. Email and social media have their limits. You have to go there!
  3. Identify a local partner. Successful teams almost always include a local private sector player as a joint venture partner. There are consultants based in the US and abroad who can provide leads for good JV partners.
  4. Bring a complete solution. A complete solution brings financial and operational capabilities—someone to finance, build and operate. It also includes service, maintenance and training. Infrastructure giants like GE often have such capabilities in-house. Asian and European operating companies often have government backing. US investors should think in terms of assembling a consortium that includes these elements. A private equity shop or investor group, needs an operating partner. A builder or contractor, needs a financial investor able to provide capital. Agencies like OPIC and EXIMBANK can help manage risk.
  5. Identify skilled, knowledgeable advisors. There needs to be someone who understands the local environment, but also understands the priorities of a US-based investor.

In cases like Ghana, the projects are structured with offtake and other cash flow sources clearly identified. The Ghanaian government is prepared to help with advice and seed money via the sovereign wealth fund. Lots of guidance and support are also available in the US from government and private sources. This should be a win for US investors, and for the emerging world once we get in the game in a serious way.

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