Loud and Clear – April 2018

Africa R(a)ising – How to secure commitments for Africa strategies from non-African investors (Part II)

 

Concluding our two part series on securing capital for Africa funds from non-African investors, Matthew Craig-Greene and Ross Manton provide a number of additional nuggets of advice.

Data1 from AVCA (the African Private Equity and Venture Capital Association) shows that fundraising for Africa slowed significantly from $3.4bn in 2016 to $2.3bn in 2017, not much more than half of the $4.3bn raised in 2015. However, the Africa fundraising market is relatively small and annual figures are distorted by the fundraising timetables of the larger players. For example, the amount raised in 2017 was higher than the amount raised in 2014 ($2,0bn) and in 2012 ($1.9bn); there remains significant appetite for Africa funds and we consider how a fund manager can best position itself to attract it.

1. First the worst, second the best…

Demonstrating a lengthy track record for investors into markets where private equity financing is relatively new to the table is challenging. Being the first money into a frontier market is a clear differentiator, but this strategy is risky. Offering a fund in a country or region where predecessors have proven the ability to make profitable investments is a safer proposition. Given the relatively small number of Africa GPs, in general, there is little to lose by choosing investment markets with established private equity brands already on the ground.

2. Three-ex

Investors from the developed world will expect a returns premium for the perceived additional risk of investing in Africa, whether that additional risk is real, or imagined. As a result, Africa funds competing for capital against US or European buyout funds (which tend to be perceived as “less risky”), will often need to show that they can achieve a higher IRR and money multiple than might be expected of their developed market peers. Data2 from AVCA shows that 54% of non-African investors in Africa funds expect an average return of 2.1x-3x from their fund investments, so targeting a return towards the lower end of that range is unlikely to be a winning strategy.

3. Forex

Many existing fund managers in Africa have successfully raised (and deployed) capital from local investors and DFIs and are now starting to raise money from further afield, as they target a wider international investor base. Africa funds are typically raised in US dollars and the effect of exchange rate movements needs to be considered when assessing future returns.

4. 2+2=5

European and American investors in Africa funds are a relatively well-defined community and will often self-identify through their attendance at focused Africa events or their membership of related organisations. Members of small communities talk to each other: This community effect means that it may be possible to generate significant interest and momentum, by attracting a relatively small number of investors.

5. Knock ‘em for six

As with any fundraising process, the importance of eliciting an emotional response from investors can’t be underestimated. In contrast to more mature markets, Africa has the ability to awake a sense of adventure (all within a tightly–managed governance structure) and Africa funds ignore this at their peril. Many first-time fundraisers make the mistake of attempting to “de-risk” the Africa proposition; the risks are there, but so are potentially high rewards. The fund managers that paint a picture of the “Africa Story” and their credentials to operate in this unique and fast moving region stand a better chance of grabbing the attention of investors and, ultimately, securing a commitment.

 

[1] 2017 Annual Africa Private Equity Data Tracker, February 2018, AVCA
[2] 2017 Annual Limited Partner Survey, October 2017, AVCA


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