Private Equity and Venture Capital in Africa

For Private Equity (PE) and Venture Capital (VC) investors in technology, Africa seems to be fertile ground. A recent event by Private Equity Africa1, in London, which sought to explore the increased interest for investing in the Sub-Saharan region, reflects this. It is, perhaps, the combination of increased macroeconomic stability, improved macroeconomic conditions, technological capabilities, human capital, and more stable political conditions that has caused a surge in consumerism and new ventures to explode onto the continent’s developing markets. A recent McKinsey Global Institute (MGI) analysis posits that governments in Africa are much more forthcoming in ending armed conflicts, and are more financially prudent having reduced the average rate of inflation from 22 percent in the 1990s to 8 percent after 2000. The fresh stability has created an emerging middle-class, inevitably giving rise to greater consumerism. With a population of just over one billion together with an estimated growth in Africa’s real gross domestic product (GDP) of 7 percent in 20112, the continent seems set to be a growth story. In the past, technological delivery and thus PE in Africa was stunted by weak IT and Telecom infrastructures, according to Integr8’s Lance Fanaroff3, which are the foundations of business investments and transactions.

Evidence that the widely-exploited mobile market in Africa is far from saturated include a recent deal struck between Yahoo and Nokia to penetrate Nokia's email and messaging services in Emerging Markets as well as Google's aim to encourage African consumers to take up its search, mapping and other mobile services. Other industries seem similarly lucrative, as The Corporate Council of Africa’s CEO, an American quango, cites energy, power, and technology amongst other areas that show promising signs of growth and are identified as investment opportunities4. Actis, a PE investor in EM, has covered much ground in this matter5. As the telecommunications sector was becoming deregulated in Africa, Celtel saw an opportunity to develop a pan-African mobile network, but required capital and long-term planning. Actis committed USD 22.5 million as a start-up fund for development in 1998, as well as three further bouts of expansion capital before exiting by a trade sale in 2005, to support Celtel's growth and business strategy in return for becoming the largest shareholder other than Celtel's founder, Dr. Mohamed Ibrahim. As a result, Celtel's revenue grew in excess of 115 percent annually, and now provides coverage for 30% of Africa's population establishing the company as the largest mobile operator outside South Africa. A more recent PE investment of Actis in Africa is that of Umeme in Uganda6, distributing electricity. Following investment in 2005, twenty thousand new customers are being connected annually as a result of the PE capital resolving the backlog of neglected maintenance.

However, not all African ventures have been fruitful. As with any region, the technology market in Africa has risks. Yet a meticulous approach of identifying risks through due diligence, assessing the likelihood of risks to materialise, and addressing them through means such as Political Risk Insurance or finding if they are covered by one of the 2,500 Bilateral Investment Treaties, will mitigate against this. This argument was presented by Kem Ihenacho, a partner at Clifford Chance, lead partner in the firm's Africa Group, and advisor on transactions with an aggregate value in excess of USD 50 billion. Consumer willingness can also be difficult to assess as in Uganda, where Google partnered with MTN - the South African carrier - and the Grameen Foundation to launch Search, Tips, and Trader text-based programmes for mobile phones. User rates sharply declined, according to the Wall Street Journal, from the initial 2.7 million texts in the first 6 months after MTN began charging for the service. Such volatility is far from prevalent though and Paresh Shah, Managing Director of StarGate Capital Investment Group, asserts that new technology is the driving force of VC in Africa. One may argue that PE finance is a relatively new model in Africa and has little support in contrast to international state financiers. This is echoed by Luca Del Conte, Executive Director at MediCapital Bank, who cites a tough 2009 and a challenging 2010 ahead, with a majority of African corporations (size below top 5% in the continent) still sceptical about the PE / VC model.

Whilst schemes such as One Laptop per Child7 attempt to finance grass-roots technology in Africa through charities and government funding, Hugh Naylor8 – a corporate partner at Denton Wilde Sapte – suggests that the African market’s potential can only be ultimately unlocked by PE. As the “super-returns” made by investors in recent years in Western markets are unlikely to recur due to saturation, Naylor argues that this realisation coupled with the sentiment that aid has not exactly been good for Africa and better growth could be achieved by direct investment, is good reason for technology PE and VC investors to broaden their horizons onto the continent. In the same vein, the Shell Foundation, a charity tackling global challenges, has embraced an enterprise model for Africa, recognising the fruits of PE and philanthropic investment by filling the gap between micro-finance and PE. Jim O’Neil, head of global economic research at Goldman Sachs9, reiterates the EM potential for economic growth and investment particularly in Egypt and Nigeria as part of the ‘Next Eleven’ countries to look out for after the development of Brazil, Russia, India and China (BRIC). As such, the next super-cities of the 21st century are projected to be Cairo, Lagos, and Kinshasa – promising hotbeds for budding investors.

~Ridwan Ibrahim, Research & Sales Analyst, Amoo Venture Capital Advisory