KKR, the global investment firm, has given a masterclass on how not to do private equity (PE) in Africa, at least in the Wall Street Journal’s telling of it.
Unlike Carlyle and others, the company did not set up a dedicated Africa fund. The $200 million it invested in a Holland-based Ethiopian rose business — its one Africa deal — came from funds raised to invest chiefly in European companies.
X KKR’s Africa specialists were competing for the same pot of capital as their colleagues who were pitching German, French and other European deals to KKR’s investment committee. It’s no wonder many of them left, some to launch their own Africa private-equity funds using more appropriate models.
Clearly, KKR and Africa were not a good fit. KKR likes to do deals valued at $200 million and up, and at this point there are just not a lot of those to be had in Africa.
What’s worrying is that KKR’s misreading of the African deal environment will be blamed on the lack of real opportunities, not KKR’s reluctance to adapt its preferred business model to the opportunities that exist. I am already hearing skeptics citing the Wall Street Journal report to back their contention that the Africa Rising narrative was an artifact of the commodity super-cycle, nothing more.
The Wall Street Journal’s reporters naturally went looking for examples of other big U.S. private-equity firms that were, as they put it, “struggling to make their African investments pay off.”
Among those they identified was Bain Capital, whose leveraged buyout of South African retail chain Edcon ended badly with Bain having to surrender equity to lenders. The problem in this instance was that Bain borrowed way too much and too expensively to be able to invest in growing Edcon’s value.
Again, Bain’s largely self-inflicted wounds are not a fair reflection of the African PE experience.
A better gauge is to be found in the annual surveys of limited partners (LPs) by the African Private Equity and Venture Capital Association (AVCA). In private equity parlance, limited partners are the sources of capital which general partners (GPs) invest in ventures that meet their criteria and objectives.
Limited partners include pension funds, insurance companies, endowments, asset managers, sovereign wealth funds and development finance institutions like the World Bank’s International Finance Corporation.
AVCA’s latest survey, released in October and covering all those classes of limited partners, found fully 88% planning to increase their allocations to private equity in Africa over the coming three years. 63% see Africa as a more attractive destination than all other emerging and frontier markets over the next decade.
In the nearer term, 64% do acknowledge that general partners’ greatest challenge may be the current fundraising climate, even if those surveyed don’t see themselves reducing their allocations to Africa.
The signs of waning appetite are undeniable. Africa private equity funds raised $2.3 billion in 2016, down from $4.3 billion in 2015.
But as one general partner who specializes in African housing construction put it, the issue is less the unattractiveness of Africa than the fact that “everywhere else is rocking and rolling at the moment so emerging markets in general are out of favor.”
If fundraising has slowed, deal flow has not. The total value of private equity deals in Africa in 2016 rose to $3.8 billion by AVCA’s count from $2.5 billion a year earlier. Limited partners say they are particularly interested in businesses that leverage Africa’s rising disposable incomes, including consumer goods and financial services.
I am very encouraged that investors are starting to appreciate Africa’s capacity to generate growth internally without having to depend on global commodity cycles.
Private equity, using the appropriate models, has a critically important role to play in Africa’s march to prosperity. Much is made of the continent’s risk profile, with political and currency risks presently the kinds most often cited. One of private equity’s strengths lies in managing and navigating risks.
Shrewd, experienced general partners who have good networks and know the terrain intimately can identify promising businesses the market is undervaluing because of perceived risks and can turn currency fluctuations to their advantage by timing acquisitions and exits appropriately.
Effective partners identify value and then build it between entry and exit. Unlike the managements of public-traded firms, they are spared from pressure to post gains every quarter and can adopt longer-term strategies in building the businesses in which they have invested.
Successful businesses tend to have a positive impact on the environments in which they operate, reducing perceived risks and improving valuations for their investors upon exit.
This is the kind of virtuous cycle that private equity, at its best, can generate in Africa while earning handsome profits for partners. Not every deal will be a success, of course, but failure, if learnt from, can often be as healthy as success. Let us hope the KKR experience teaches the right lessons.
- Whitaker is president and CEO of the Whitaker Group and former assistant U.S. Trade Representative for Africa in the administrations of Presidents Bill Clinton and George W. Bush.
Source: Investor’s Business Daily