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

Africa: The Final Investment Frontier? A presentation by Hemen Shah, Partner, 8 Miles LLP, UK

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.

Changing private equity landscape in Africa

Early last year, McKinsey published an excerpt on the mismatch between supply and demand of private equity financing in Africa[1]. 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[2]. 

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[3]. 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[4].

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 in Africa.

Private equity landscape 

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.

[1] http://www.mckinsey.com/insights/africa/uncovering_hidden_investment_opportunities_in_ africa

[2] http://www.wsj.com/articles/kkr-co-investing-about-200-million-for-stake-in-afriflora-1401908629

[3] http://www.cnbcafrica.com/177111.aspx

[4] http://www.economist.com/news/business/21640327-private-equity-investors-are-getting-hot-africa-businesses-there-need-all-capital

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