When Paul Kavuma began approaching private companies in Africa a decade ago to suggest investing in their businesses and improving the way they were run, he was often shown the door. “They were offended, asking if I thought they were broke,” says the founder of Catalyst Principal Partners, an east Africa-focused fund manager. Even when, after hours of explaining the merits of private equity, Mr Kavuma changed business owners’ minds, many still struggled with the idea that within a few years he would sell the stake he had bought. “When we exited, some people thought we had lost confidence in them, rather than that we’d finished what we’d come to do,” he says.
Today, much has changed. African entrepreneurs now boast about being approached by one of the many private-equity investors scouring the continent for opportunities. And it is the financiers, or at least those from beyond Africa, who are having to adapt. Money managers on Wall Street and in the City of London are taking crash courses in Swahili and learning to find Ouagadougou on a map.
A decade ago, African countries were among the beneficiaries of a broader boom in investment in emerging markets worldwide. The financial crisis of 2007-08 put paid to that. Now, many private-equity funds are making Africa a primary target, and record amounts are being raised to invest in businesses there (see chart 1). On January 12th Helios Partners, a London-based firm, said it had raised the first Africa fund worth more than $1 billion. Abraaj, a rival, is expected to follow suit soon.
In some respects it is no surprise that Africa has become such a popular destination for business investment. It certainly needs more capital—an extra $90 billion a year for infrastructure alone, the World Bank reckons. Consumer demand is growing, and industries are being liberalised. A few years ago people would ask “Why the hell are you in Africa?” says Robert van Zwieten of EMPEA, an industry body. Now they ask “Why the hell aren’t you?”
Such signs of groupthink are worrying enough in themselves. And there are plenty of other reasons to be sceptical about the current enthusiasm for Africa. Beside the “frontier market” risks private-equity investors will face–bullets, corruption, disease–they often struggle to find deals big enough to interest them. Large funds usually want to buy businesses worth more than $100m, but last year there were only seven such deals, and about half the firms bought were worth less than $10m.
Even when a potential deal is identified, family owners are often unwilling to relinquish control and incumbent managers are reluctant to make room for newcomers. Since banks still see Africa as full of risks, it is also difficult for private-equity firms to load a newly acquired business with debt, their usual technique for magnifying their returns. Another of their customary practices—selling a company after about five years of expanding it and improving its performance—is also hard. Local partners are often unwilling to sell, and undeveloped or non-existent local stockmarkets make it hard to unload a stake by means of a listing.
The private-equity managers who have done well so far have had to put boots on the ground and exercise more care and patience than is typical in their industry. “There are not many $100m deals for sale, but plenty of $100m opportunities to bolt together,” says Hurley Doddy of ECP, a pan-African investor. Tope Lawani of Helios agrees that investors who complain about a paucity of big deals lack imagination. His fund pieced together Helios Towers, a big pan-African operator of mobile-telecoms masts, from smaller businesses.
One thing successful managers agree on is that investors should not expect to fly in, do a deal and fly out again. The funds that are doing well are those with a strong understanding of local conditions and good business connections in their target countries, such as Catalyst. It looks for midsized companies (worth $5m-20m) that cater to the emerging consumer in east Africa, such as ChemiCotex, a maker of toothpaste and other toiletries it bought in 2011.