The key to private equity performance in Africa in 2011 will be the consumer

FinanceWealth-Building

  • Author Will Jimerson
  • Published March 5, 2011
  • Word count 738

Volumes in 2011 are poised to be higher than 2010 but the general trends in private equity in Africa will remain consistent with those seen in the past several years – and be focused primarily on consumer-facing sectors.

Retail, housing, and financial services will continue to be growth sectors as consumers emerge from their recession-based debt burden and their purchasing power recuperates. The evolving middle class in markets like South Africa will provide the engine for the growth in these sectors.

The demand curve of unwavering consumer appetite will be a further stimulus for global investors to take note of Africa’s position as the last great frontier of private equity opportunity.

We’re also expecting unabated eastern demand for commodities to result in infrastructure development and beneficiation plants as local governments provide incentives to encourage value added processing of Africa’s rich basic resources further up the value chain.

While Africa is becoming a hot investment destination, it is also being acknowledged as the world’s bread basket. This has come about as the costs of staple foods and vegetables, for instance, have reached their highest levels in two years. Sugar and rice are at record prices and meat prices are at 20-year highs – causing countries to look for new sources of staples.

Africa is the only continent in which there is still a great deal of arable land that remains undeveloped. As a comparison, the world’s largest country, China, has 1.3 billion people to feed and less than 15% of its land is arable. By contrast, Nigeria, has about 160 million people to feed, 40% arable land, and enough water to irrigate that land.

Agri businesses in Africa, therefore, hold tremendous opportunities for investors. There are two challenges, however: identifying or training the skills to run such businesses and getting goods from the farmlands to the populations needing them, either in-country or around the world. In many African countries, infrastructure, whether in terms of road, rail, shipping or telecommunications, is woeful. This, in itself, creates an enormous investment opportunity, provided investors will accept a 15 to 20-year return horizon. Private equity firms, however, may need to develop new models of investment to adapt to a potentially longer investment payback period.

New market opportunities in places like Zimbabwe will provide new deal flow in 2011. Zimbabwe has had a full year of dollarisation and the coalition government seems to be holding. The United States has participated in two diamond auctions in the country and investors are renewing their interest in the country’s natural resources.

In South Africa, although it’s not a private equity transaction, Walmart’s acquisition of one of the country’s largest retail chains, Makro, will contribute to the continuing evolution of Africa being perceived as an investment destination.

In that context, we believe that the true opportunity lies in the middle market, where organisations are too big to qualify for donor funds and too small to interest traditional institutional investors – but, nonetheless, provide phenomenal returns. During the past fifteen years we’ve seen the middle market consistently repay investment in double figures and 2011 should be no exception.

Why? Because all the middle market entrepreneur wants is help to take his firm to the proverbial "next level". Part of that help is financial. But some of it is about supporting management in shifting mindset from being a small player to fitting smoothly into a larger supply chain, adjusting to increased human capital challenges, or entering international markets. It is also about helping to put in place systems and corporate governance to execute on the mindset change. Rapid growth is then an inevitable consequence, with ripe rewards for investors.

For example, one of our investees, who bought three supermarkets in rural KwaZulu-Natal, generated same-store sales growth of 35% during the recession. Strategic planning, stock management, and systems integration allowed the company to efficiently supply the basics of life to people who really needed them while generating solid returns for investors.

Africa in 2011 will see a resurgence of private equity investment. There’s money waiting to be made, lives waiting to be enhanced, and economies waiting to flourish. There’s never a shortage of investment projects, only of availability of funds – and the will to roll up your sleeves, get on the ground, and add value. Consumer facing industries will continue to drive investment opportunities on the continent while infrastructure investment will be necessary to fully realise Africa’s potential as an investment destination.

William Jimerson, founder and executive director of Musa Capital, was born in Mississippi in the United States, studied at MIT, and worked on Wall Street as a financial analyst, before forming Musa Capital with college friends from Harvard and Boston University. Musa has a fifteen-year track record of growing small to medium sized businesses that want to expand but are too big for donor organisations and too small to interest large investment firms. www.musacapital.com

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