Perceived Risks of Private Equity Investing in Africa

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Perceived Risks of Private Equity Investing in
Africa

• Thomas C. Barry

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Contents

• Political Risks
• Macro Economic Risks
• Capital Markets, Valuation and Corporate
  Governance Risks
  
• Exit Risks
• Zephyr Managements Experiences and Strategy for
  Mitigating Risks
  
• Summary Remarks

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Political Risks

• Perception
• The media portrays Africa as unstable,
  highlighting turmoil in Zimbabwe, Congo, Cote
  dIvoire, etc. Africa is discussed generically,
  not as a series of individual countries.
  Corruption is a problem.
• Reality
• At least five countries have changed leaders
  democratically in the past five years (South
  Africa, Kenya, Zambia, Ghana, Nigeria, Senegal).
  This trend is growing and making a new era in
  post-colonial Africa. Democracy is taking root.
  Democracy leads to accountability, transparency,
  etc., which will reduce corruption.

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Macro Economic Risks

• Perception
• The media portrays Africa governments as
  economically.
  
• Reality
• African countries have reduced inflation
  substantially privatizations are the accepted
  norm in many countries the private sector has
  increased its share of GNP, versus government in
  most major African economies.

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Capital Markets, Valuation and Corporate
Governance Risks

• Perception
• African capital markets are weak valuation low
  and corporate governance is below global
  standards.
  
• Reality
• African debt markets are growing and,
  increasingly, part of the global markets (note
  debt panel in this conference). Africas equity
  markets have not grown substantially, per se,
  however, African equities are finding markets
  outside Africa in London and New York (note
  Ashanti Goldfields) as well as ADR, GDRs (note
  panel at this conference). Corporate governance
  has not been institutionalized, except in South
  Africa (King report). Standards are improving in
  other countries.

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Exit Risks

• Perception
• Direct investors in Africa have been standard
  in investments for which there are few viable
  exits.
  
• Reality
• The IPO markets in Africa are small and
  irregular. There is an active MA trade both
  within Africa and from non-African buyers.

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Zephyr Managements Experiences and Strategy for
Mitigating Risks

• Political Risks and Macro-Economic Risks
• Invest in businesses which
• Have limited government economic influence
• Sell products/services partially in hard
  currency
  
• Export or operate in multiple countries to spread
  risk
  
• Capital Markets, Valuation and Corporate
  Governance Risks
  
• Finance investee companies mostly with equity
  low debt
  
• Assemble strong shareholder groups with majority
  control
  
• Buy at African valuation, plan to sell at African
  valuation
  
• Strong governance agreements with investee
  companies shareholders and government
  
• Make agreements in jurisdictions and format which
  maximizes probability of success

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Zephyr Managements Experiences and Strategy for
Mitigating Risks Contd.

• Exit Risks
• Investment strategies, at inception, must
  identify generic or specific acquirers
  
• Assume investments are purchased by another
  business (trade sale) do not invest unless
  underlying business is attractive for
  pre-identified acquisition
• Invite strategic co-investors who can be exit
  vehicle for private equity investors
  
• Do not rely on listed markets in Africa build
  absolute size of the business to quality for
  listing on London Stock Exchange

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