Africa: The Final Investment Frontier? A presentation by Hemen Shah, Partner, 8 Miles LLP, UK
Hemen Shah, Partner with 8 Miles LLP, focuses exclusively on Africa for growth opportunities in the private equity market.
by Pascal Christian, MBA '15
On April 15, 2015, the Emerging Market Institute fellows had
the opportunity to have a chat via videoconference with Hemen Shah—a partner at
8 Miles LLP, a London-based private equity firm focused exclusively on making
private equity investments in Africa. Hemen had over 15 years of senior
management experiences primarily in financial services in Africa. Hemen participated
in a lively discussion on the state of private equity investments in Africa.
Africa at a glance
There are 54 countries in Africa spanning 30 million square
kilometers; more than China, Russia, and India combined. On aggregate, the
continent generated US$1.5tn in GDP. Yet, private equity investments in
sub-saharan Africa only comprise of 0.09% GDP, compared to 0.16% for China and
0.33% in India.
equity landscape in Africa
Early last year, McKinsey published an excerpt on the mismatch
between supply and demand of private equity financing in Africa.
Just a couple months later KKR announced its first-ever foray into the
continent with a debut US$200mn investment in Afriflora—an Ethiophian flower grower
which produced 700 million stems annually.
The KKR transaction is only one of many investments
capitalizing the massive growth of Africa. Ethiopian economy grew by 10.6% in
2014—far outpacing any of the BRIC economies. The country’s finance ministry
states that economic growth is projected to continue at 11 per cent per annum
as the country seeks to maintain this rapid growth.
According to The Economist, African entrepreneurs now boast about being
approached by one of the many private-equity investors, and money managers from
Wall Street to London are taking crash courses in Swahili.
Today, improved economic environment with stronger regional
integration, improved governance and accountability, private sector reforms,
and emerging middle class and urbanization are driving the fundamental changes
Most African funds are pan-continent, multi-sector, and
target SMEs. Although early investments were for minority stakes, investors are
now taking larger stakes with 4/5 new investments for majority stakes. As a
result, these foreign investors are taking more active role in the company and
are able to drive value creation, mainly through operational improvements.
Yet, investing in Africa is not for the faint-hearted, with
unexpected challenges including the fall in the oil price and big currency
swings, such as the 21 per cent decline in the Nigerian naira. There remains
challenges for private equities in Africa, such as entrepreneurship acceptance
of PE, corporate governance, competition, valuation, and exit strategies.
That being said, those that come to invest can be handsomely
rewarded. Although data on private equity returns in Africa is sparse,
disclosed IRR from CDC and IFC investments is consistent at 20-25%,
significantly above listed equities.
With a fast changing industrial landscape, demographics
tailwinds, and more precedent private equity transactions, Africa is surely
turning into a very attractive investment opportunity.