Lots of time to think in Sri Lanka's tea plantations. Mostly... Has the "where's all the money going" story been fully told?
Basically,
there's a lot of money coming into SSA private equity (and public ones
too, I imagine, but there's some fact checking to be done there). It's
coming from established forces that are raising larger commitments
(Helios, EMP), big funds new to the market (Carlyle amongst others),
local funders (PIC)
and increasingly also private sources (Allen Gray is rumored to be
starting something). This means a) that there's a lot more cash and b)
it's coming from new sources.
But I'm beginning to doubt if they can spend it. Yes, some
democratization is driving business climate improvement and yes, some
valuations may be on the low side. But continued structural issues
(strife, infrastructure and corruption) remain largely unchanged. Even
if there are young hopefuls such as FHN or IHS they are still a) facing
the same barriers as before (I'm sure Will can name one or two examples
to add to the ones that spring to mind) and are b) still few and far
between. Just look at Anders, who went from looking for pipeline to
making it.
Can this change? Yes, of course. But it's likely to take far longer
than a PE fund and its investors have the stomach for. Don't get me
wrong - these investments can still do an immense amount of good.
However, they're likely to have far more VC characteristics than
investors seem to think, with all the risk, timeline, work, cost, and
other challenges that go with them. Hopefully more money will bring a)
(short term) valuation inflation that will benefit a few golden nuggets
b) enforcement of higher management and corp gov standards c) give rise
to a new entrepreneurial gold rush that can really help foster a deeper
pipeline. But all that might not necessarily translate into profits now.
I hate to tell a bearish tale, especially in a bullish time for
Africa during which international investors have little else to be
bullish about. However, I've seen first hand how too much enthusiasm can
backfire (haven't wee all in some way or another). Microfinance for
instance was for a long time (over)-heralded as a saving force only to
fall flat on it's face when empirical studies showed that it's output
didnt match those lofty expectations. That's not to say that it does not
do any good at all though that's another discussion. Fortunately the
sector is still largely backed by public institutionals who move slowly
and have longer term/non-financial objectives. The sector therefore has
time to build a new brand or prove it's critics wrong. Given the 'new'
funding base of African PE it's questionable whether the sector will
have that luxury.
Wednesday 7 September 2011
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1 comment:
From a Friend:
I for one concur 100% on your analysis below. I think the corporates in Africa worthy of an investment are few and far between and that there are too many PE funds scrambling to place investments in too few investment worthy companies. I do however feel that valuations are on the steep end in Africa (on the back of too much cash chasing too few companies and am particularly not convinced of the ever ending ‘growth’ premium placed on equity). With strong execution capabilities, I would rather push for ‘greenfields’ as the preferred investment route (particularly given the troublesome tax exposures one often inherit in PE deals). In my view, corporate governance in Africa is worse than in Russia/Eastern bloc/Asia. Not to mention the fact that most of the big African corporate are often run by family groups where interco transactions are showing a level of complexity I have never seen before (not being a positive). Then there’s the point of ownership..the truly successful African companies do not want PE funding as they manage perfectly well not having it, without the corporate governance bureaucracy often arising from a PE investment. There are always exceptions to my ramblings above but your arguments below have its supportersJ
In my view, venture capital must be more the model but here’s where the gap is in terms of funding. There are few serious VC guys out there covering Africa that has the ability to build true businesses from scratch.
You starting one? J
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