There have been some success stories in terms of funds and companies but the standard private equity model is not structurally sound for the African ecosystem evidenced by:
• continuing over supply of dry powder chasing too few deals
• limited human capital to run portfolio companies
• constrained levers for liquidity events.
New approaches are emerging including:
• search funds are embedding management talent into businesses backed by smart investors
• holding companies are focusing on long-term, enduringly profitable businesses in ignored and undervalued sectors such as agri-business and FMCGs
• investment/advisory firms are aligning their interest with clients by putting fees at risk
• patient capital structures are investing earlier in smaller amounts from a smaller fund size targeting SMEs in ignored sectors / the missing middle.
New investment routes are also being explored:
• accelerant capital through mezzanine / preferred equity / pic
• multiplying cash equity with “sweat equity” from operating companies; aligning operating company’s interests for long-term value.
The companies best served by these innovations are in the “Missing Middle”; they need help addressing the “Management Gap; and they must want to grow the company, to create financial value for themselves and for investors, and to create new jobs and up-skilled workers. Many mid-cap companies in Africa (turnover between US$ 10 million and US$ 25 million) are run by the original families, with the usual succession issues. Active fund managers can bridge the gap through a hands-on advisory role in marketing and production; building routes to market; attracting and retaining professional management teams through appropriate incentives; skills transfer; guiding the company’s board; and improving overall efficiencies through focused interventions.
On a continent where lack of skills and education remain problematic, and in a world where the unexpected seems to be the norm rather than the exception, the approach to African investing has to change to unlock its full growth potential. African managers need to turn their attention to undervalued investment sectors, engineer and launch new purpose-built, non-traditional investment vehicles and strategies, with portfolio management playing a larger role than ever before. Ultimately more value needs to be left on the table for the continuing development of Africa. Private equity is not fulfilling that promise.