Private Equity in SSA – Investor vs Entrepreneur Perspectives

One Airport Square, an investment by Laurus Development Partners, a subsidiary of Actis

One Airport Square, an investment by Laurus Development Partners, a subsidiary of Actis

It's finally going up

It’s finally going up

Lately, I’ve been thinking about how to apply developed world financing structures to companies in Ghana. Now, I’m not oblivious to existence of private equity and venture capital funds active in Sub-Saharan Africa.  Here is a short-list of some very large ones:

All of those funds manage billions of dollars.  They would be small by comparison to established ones in the the US, e.g. Blackstone, KKR, Apollo.

From the perspective of the entrepreneur

I’m aware of handful of companies who have good, existing business models and three years of operating results.  They are becoming increasingly profitable but they don’t want to share equity.  All of them came from the US or the UK to start afresh in Ghana.

“I’m putting in 12-16 hour days, 6 days a week,” one friend mentioned to me.   He is very private so I am reluctant to even mention what sector he operates in.  His point is that for an outside fund to drop off some needed capital then wait for their returns is uninviting because the investor is not sharing in the pains of running that business.  I figure he knows he will eventually get to his business goal even without the money.  The investor will be on his back every quarter and thinking about how he will exit the investment.

Having started my own company in Ghana, I can empathize.  Coming from the US, I took a big risk to come here.  What I didn’t anticipate was how hard living here would be on my family and the social costs of not being in the US.  It’s one thing to be working on the next Facebook from the comforts of a cramped apartment in Mountain View;  it’s quite another to have to deal with constant power issues, local people’s attitudes, and labor issues in a Lagos or an Accra.

From the investors perspective

Investing in SSA seems wholly foreign for several reasons.  First, it’s psychologically distant from the confines of New York, London, Sao Paolo, or Hong Kong.  Second, the legal structures in Africa are not as developed and the people don’t have the same respect for the law as those outside.  Third, most people don’t know anyone who lives in this corner of the world and wouldn’t know where to start when they do their due diligence, market studies, and background checks.

For all that certainty, I, as an investor, would expect a hefty return.  Never mind how growth opportunities in the US seem flat and increasingly unfavorable.  I’m a bit worried about how equities, bonds, and real estate will do when the Fed starts to raise interest rates some day.  And that day is coming.  For instance, the Wall Street Journal reported a few days ago that high-yield bonds have started to fall due to fears of an impending Fed rate hike.  Since 2008, the Fed has been propping up asset prices with its easy money policy.

Debt or equity

For a small investment, I would expect equity because the risk seems substantial.   If I’m going to invest my money in a micro-cap growth company in SSA (market cap less than $50 million), a promise to pay interest on debt is similar to the promise that the company will become a winner over my investment horizon of 5-10 years.  For instance, say you had a $20 million fund where you invested $1 million in 20 different ventures.  I’d expect some to tank and hope that the remaining investment take care of the losers.

Small Market 

Except for Nigeria (est. 177 million people) and Ethiopia (est. 87 million people), very few countries in SSA seem to offer the chance to scale up for small companies.  Scaling small companies only seems attractive if the business model can be applied to neighboring countries at similar stages of development.  Thus, Ghana-Cote D’Ivoire-Burkina Faso-Togo could be attractive with 73 million.  Of course, your company must be able to serve both Anglophone and Francophone populations.

Conclusion

If a investment fund can provide additional benefits, e.g. expertise, leadership, access to capital markets, and is willing to provide assistance in the SSA country, then I think these entrepreneurs should consider accepting investments for equity stakes.  If they are willing to get their hands dirty and bring their money, then the investments could be win-win for both parties.

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One comment

  1. What a great post! I just followed you to stay updated on your future posts and I look forward to them. I recently started my own personal blog, so feel free to check out my profile where you’ll find my blog and social media sites.

    Have a great day 😀

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