Private equity investment in Africa: The Art of managing expectations

LAGOS (Capital Markets in Africa) – In most private equity gatherings one conclusion is always drawn: Investors and entrepreneurs are not finding each other in sufficient numbers, and I think the facts do speak for themselves. 

According to the latest EAVCA survey of the PE industry in 2018 only 47 deals were done in East Africa. Looking at the number of entrepreneurs and investment funds, I would think we should have done better!

Entrepreneurs say: “Access to capital is the biggest constraint in my business”, Investors and lenders say: “There are not enough deals in the market”. My message is: Neither can’t be true.

I think Private equity is not about accessing capital; nor is it about the closing of deals. In my view, Private Equity is about the art of managing expectations.

What do I mean by the art of managing expectations?
There are many well-capitalized funds; at least 80 invest in East Africa.

There are many businesses in EAC. However, there are a few transactions.

So why is the left-hand side not reaching the right-hand side?

Let me look at the expectations of each group.

What do investors expect?

1. Firstly, that of 5 – 10 years is enough to make investments, grow them and exit these investments in order to have their money returned. I think these investment cycles are too short and we should try to open the discussion on perpetual funds. Evergreen funds allow fund managers to enter into the capital when both the entrepreneur and the fund feel it is the right time and we can decide when it is the right time to divorce.

It would be great if investors leave it to the fund manager to decide through their understanding of the business and the market it operates in, when to invest and when to exit.

2. Secondly, investors expect unrealistic returns for funds. I think we should focus the discussion on the return generated by each investment, instead of discussing the return of funds. We can manage expectations between investors and entrepreneurs on how profitable we expect the company to be. But PE fund managers cannot expect entrepreneurs to understand that the return of their company should compensate for failures of other investments in the fund. So funds can decide to only discuss mutual expectations on returns to be made by individual investee companies.
3. Thirdly I think that investors have high expectations on how low management fees can be. The PE sector in the EAC as it is today is still underdeveloped, it lacks a lot of data and the costs of travelling to all corners of the EAC requires operational expenses. So to make investments is a lot of work which should be fairly compensated. If funds want to invest in all corners of the EAC and to employ professionals that understand both investors and entrepreneurs so that they can manage expectations well, that requires professional people that reach out to all corners of the EAC and those people are not cheap. So investors should become more realistic in their management fee expectations.

An extract from the INTO AFRICA May 2019 Edition: Private Equity: Nurturing Africa. The article is written by Hedwig Siewertsen (Head of Inclusive Finance, Alliance for a Green Revolution in Africa (AGRA)) and to read the full article, please download by clicking: INTO AFRICA PUBLICATION: MAY 2019 EDITION.