Investing Africa: 'Huge Opportunity' for Private Equity Deals, Lawani Says

Key Concepts

• Push and Pull Factors: Reasons driving investors away from traditional markets (push) and towards new ones (pull).
• Uncorrelated Markets: Investment markets whose performance is not closely tied to major global markets like the US and Europe.
• Demographics: The statistical data relating to the population and particular groups within it, serving as a driver of underlying growth.
• Urbanization: The movement of people from rural areas to cities, leading to increased productivity.
• Technology Overlay: The application of technology to existing demographic and urbanization trends, creating new opportunities.
• Secondary Markets: Markets where existing securities are traded between investors, distinct from the primary market where new securities are issued.
• Strategic Buyers: Companies that acquire other businesses for strategic reasons, such as market expansion or integration.
• Energy Transition: The shift from fossil fuels to renewable energy sources.
• Comparative Advantage: The ability of an individual, firm, or country to produce a particular good or service at a lower cost than its competitors.

Private Equity Investing in Africa: A Growing Opportunity

The current period is described as an "exciting time for private equity investing in Africa." This increased interest stems from both "push factors" and "pull factors."

Push Factors: Shifting Global Investment Landscape

• Past Outperformance Driven by Low Interest Rates: Between 2010 and a few years ago, US and European private equity experienced significant outperformance. This was largely attributed to falling interest rates, which made debt cheaper and more accessible, and declining discount rates, which inflated valuation multiples.
• End of the Era of Cheap Debt and High Multiples: With this era now "somewhat behind us," investors are seeking markets that are:
  • Uncorrelated to the US and Western Europe: Their performance is not directly tied to these major markets.
  • Exhibit Stronger Underlying Growth Rates: Markets with inherent economic expansion potential.
• Diversion from India: As the relationship between India and the United States shows signs of "fraying," investor interest is increasingly being diverted towards the African market.

Pull Factors: Attractiveness of the African Market

• Demographics: Africa possesses "extremely interesting and exciting demographics" that provide a "good baseload of underlying growth."
• Urbanization: The ongoing trend of urbanization drives "productivity increases."
• Technology Overlay: While demographics and urbanization are not new trends, the "overlay of technology" on these trends is a significant new development. This technological integration is having a "profound impact across many, many industries in Africa."
  • Lowering Costs: Technology is reducing the cost of doing business.
  • Financial Services Example: In financial services, transactions and savings can be conducted via mobile phones, eliminating the need for physical bank branches and reducing costs.
  • Expanding Addressable Markets: This leads to growing addressable markets and a dramatic expansion of the "investable universe for private equity."

The speaker's firm invests at the "intersection of demographics and urbanisation trend on the one hand and technology and innovation on the other hand," seeing "huge amounts of opportunity" in this overlapping space.

Role of Private Equity and Exit Strategies

The role of private equity in Africa, as viewed by the speaker's firm (Helios), is to:

1. Identify Opportunities: Find promising investment prospects.
2. Create Businesses: Build strong, well-governed, growing, and cash-generative businesses around these opportunities.
3. Hand Over to Rightful Owners: Exit these businesses to either public markets or strategic investors.

Exit Avenues:

• Strategic Buyers: Approximately 50% of the firm's exits over the past 20 years have been to "global multinationals."
• Public Markets: About 40% of exits have been through public listings on stock exchanges such as the Nigerian Stock Exchange, the Kenyan Stock Exchange (Nairobi), and the Egyptian Stock Exchange.
• London Stock Exchange: Three businesses have also been listed on the London Stock Exchange, typically larger and more geographically diversified companies.

Development of Secondary Markets:

The development of secondary markets is seen as a "sign of a maturing market" but not necessarily a "sign of a healthy market." The firm is "quite happy with the quality of exits" they have achieved, emphasizing their transitional role in providing capital, know-how, and value-add to build high-quality businesses.

Near-Term Exit and Investment Pipeline

• Recent Exit: The firm has recently signed an agreement to sell a "very, very large business" in Nigeria for a "meaningful amount of capital." This investment was in the "energy transition, gas infrastructure space," a sector the firm continues to believe in, though they have opted to no longer invest in it for strategic reasons. They are proud of this investment, which has created a "real champion" with scope for expansion within Nigeria and across West Africa.
• Nigeria Focus: The firm has an "excellent pipeline now, but pretty full pipeline actually of investment opportunities," with Nigeria being a significant part of it.
• Other Investments:
  • Egypt: A recent investment was made in the data center space. Another signed investment is to acquire the "largest exporter of frozen strawberries" from Egypt. Egypt is globally the largest exporter of frozen strawberries, and this company is the leading player. This business is highlighted for its strong "comparative advantage" in a world concerned about tariffs and trade barriers.
  • Morocco: The firm has been "quite busy in Morocco over the last several years," and it remains an "interesting market."
  • Kenya: Kenya is also considered an interesting market, as alluded to earlier.