By Troy Dyer, Program Leader – Private Equity and Venture Capital Executive Program (PEVC)
A recent lecturing assignment as the course leader on an executive education program in private equity (PE), organised by the Strathmore Business School (SBS) in Nairobi, Kenya, was an educational journey in more ways than one. The impact of economic and political factors on business strategy in Africa was a theme in many of the lessons learnt.
Firstly the assignment highlighted the improving relative attractiveness of Africa as a business and investment opportunity for PE industry players. As developed western economies have endured a prolonged period of low growth, PE investors have increasingly turned to emerging markets in search of growth opportunities. This is well illustrated in PE investment trends in sub-Saharan Africa in recent years.
Although the global financial crisis had a negative impact in the 2009 to 2010 period relative to the highs of 2007 and 2008 (in terms of funds raised from investors and investments made in investee companies), the general trend is that PE fund managers in sub-Saharan Africa are still achieving their business objectives. They are managing to raise funds from both their local and global investors, find suitable investment opportunities in line with their investment objectives, add value to their portfolio of investee companies through various strategic interventions, and exit from investments after earning target returns. But this success is achieved in the face of significant challenges in their business environment.
According to surveys conducted by Emerging Markets Private Equity Association (EMPEA) in 2010 and 2011, the perception of sub-Saharan Africa as having a high exposure to political risk is a key deterrent to PE investors. Political risk is cited as one of the key factors that deter PE investors from the region. Other factors include the limited number of established PE fund managers, the below-optimal scale of investment opportunity, the challenging tax and regulatory environment, and poorly developed exit markets. In some way or another these other factors are all related to the political environment. The lesson is that greater political stability and support in each country, and in the region as whole, would be a major driver for increased foreign direct investment and improved economic development. The economic growth in East Africa is a positive example of this relationship.
Secondly, the interaction with the SBS delegates and guest speakers highlighted concerns that PE fund managers in East Africa expressed in investing in companies whose success may be due to their reliance on politically exposed persons or PEPs, a term in common use by business professionals in the region. In this respect, PE fund managers in East Africa may be ahead of their South African counterparts in their astute perception of the negative impact of reliance on political connections by their investee companies.
In SA the emphasis may still be on favouring politically connected individuals and relying on their assumed ability to convert influence into affluence. There is limited consideration of the risks they may pose to a business, for example, due to a tendency towards corruption by exerting undue influence, or due to the transient nature of any legitimate influence they may have anyway. On a positive note, the SA business landscape is showing signs of maturing as a democracy. Corporate governance and public scrutiny of business decisions are key drivers of change.
Finally, in consulting with SA companies on their business and corporate strategies, there has been a clear trend in this last decade in the perception of business opportunities in Africa. Ten years ago, few developed SA companies considered the rest of Africa as a signficant source of business expansion and investment opportunity. Five years ago, many SA companies were starting to formulate an Africa strategy as a potential source of growth. Today, almost every SA company with major growth aspirations is actively developing business expansion and investment opportunities across various parts of Africa.
There are positive and negative drivers of this trend. A positive driver is that many African economies are becoming more attractive in their own right, for example, due to improvements in urban centres, in the availability of information and communications technologies, and in education and skills levels. A negative driver cited by clients is the perception that SA is becoming less attractive due to declining political and government policy support for business growth. Being keen observers of strategic developments in their business environment, PE investors, fund managers and investee companies map the way in their search for business opportunities across Africa. The question is whether SA will benefit or lose from this trend.
Source: ASA Accountancy, SA
The link between economic growth and strong private investment is becoming very clear. However, the changes in the global economy and capital constraints pose a grim challenge to local investors and their investment strategies. Investors need to be ready and able to apply relevant and innovative investment approaches to survive in a rapidly growing and changing market. Private equity and venture capital firms are well positioned to pursue the opportunities that arise as a result of these challenges facing private investors.
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