Issue 12 - Can private equity boost African development?

Issue 12 - October 2011

Editorial

By Étienne Viard, Chief executive officer of PROPARCO

In just the last decade or so, private equity has carved out a new territory for itself in sub-Saharan Africa. For the region this is a fantastic opportunity to attract new investors whose funds are entrusted to specialist professional management teams. For many companies – from major corporations to start-ups – it is an opportunity to access not only the long-term funding vital for their growth but also close support in terms of defining their strategy, improving their governance and accessing international professional networks.
To date private equity has remained over-focused on a few sectors and geographic areas – yet increasingly it is venturing into new terrain, via specialist funds, and developing innovative strategies.

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The Next Chapter for Private Equity in Africa

Private equity is well suited to the continent and is attracting an increasingly diverse spectrum of investors. It is true that its activities remain focused on a few markets, and that concerns remain regarding the reliability of local teams and that exit conditions are inadequate. Yet the process of diversification is under way, the region’s image is improving and the prices are genuinely competitive.

► Download Jennifer Choi's paper  

Profitability and development hand in hand

A question frequently asked is whether profitability is the only criterion to be taken into consideration when private equity is evaluated. By itself, profitability is not an adequate basis on which to assess the effectiveness of private equity. The questions surrounding investment funds go beyond merely securing the required profitability: private equity can also mobilise additional investments and play a part in developing local economies. But alongside this tangible and quantitative impact, private equity also has a qualitative impact, and while it is not yet systematically measured, it represents an opportunity to make private equity a tool for development in Africa.

► Download Jeanne Hénin and Aglaé Touchard's paper  

PE Funds Improving Corporate Governance and Investor Climate

While fund managers may influence public policy geared towards improving the investing environment, they make a more significant impact by improving portfolio companies’ governance standards. This is because the resulting improved performance is transmitted to other corporate entities and entrepreneurs emulating them to replicate success. With increasing acceptance of private equity capital, the probability of best practices being adopted greatly increases. 

► Download Davinder Sikand and Kiriga Kunyiha's paper

Living with an investment fund - The company perspective

From the decision to open up its equity capital to the withdrawal of the private equity fund four years later, step by step SOMDIAA reveals the four stages of this marriage of two worlds, and shows how a family business operating in Africa for more than 40 years changed its culture and adopted a more professional approach at the instigation of a financial investor. A report by the company’s chairman.

► Download Alexandre Vilgrain's paper 

The transparency challenge facing private equity

When hedge funds are set up in offshore centers, they benefit from favorable conditions when investing in Africa. Their investments may spur economies, but short-term profit targets, the lack of transparency and tax evasion do not contribute to the development of the continent. Enhanced tax controls, transparency and traceability of funds will help private equity investment become a full-fledged player in Africa’s development. 

► Download François d'Aubert's paper

Private equity and SMEs: an instrument for growth

Stabilising growth in Africa – growth which is real but fragile – depends partly on the dynamism of SMEs, which receive little in the way of private equity support. Funds’ profitability can be enhanced, in particular by developing local teams. The levels of funding invested need to be scaled up and the full spectrum of technical support resources should be utilised. Finally there needs to be considerable emphasis on additional investments targeting social objectives.

► Download Jean-Michel Severino's paper   

Pioneer role of DFIs in sub-Saharan Africa

Growth in emerging markets is currently leading the financial development institutions (FDIs) to re-focus their efforts on low-income countries – bringing sub-Saharan Africa to the fore once again. FDIs can play a driving role here by facilitating access to the private equity market, particularly as private operators are turning away from SMEs – assessing them as too risky. How to turn theory into practice.

  ► Download Yvonne Bakkum and Jeroen Horsten's paper  

Lessons learned from this issue

By Benjamin Neumann, Editor in Chief

Sub-Saharan Africa, long perceived as terra incognita, is now recognised as fertile territory for private equity. A few figures illustrate this trend: fund-raising between 2006 and 2008 totalled US$6 billion, compared with USD 2 billion between 2000 and 2005. Although Africa remains, nonetheless, a relatively minor market in this respect – accounting for less than 4% of funds leveraged across all emerging markets between 2006 and 2008 – the continent now constitutes a “new frontier” for private equity.