* Investors pile into Africa for better returns
* Funds need to add value to open up family firms
* Experienced managers in short supply in Africa
By Duncan Miriri
NAIROBI, March 6 Kenyan entrepreneur Ayisi
Makatiani scrapped his first effort to launch a private equity
fund 10 years ago because his pitch
to invest in Africa couldn't raise enough cash to make it work.
Fast forward a decade and he is now managing partner of
Fanisi Capital, a $50 million fund that has investments across
east Africa in agri-business, healthcare, retail and education.
A second $100 million fund is on the way.
"The returns in Europe and the rest of the world have been
low so the only place where you get good risk-adjusted returns
is Africa," U.S.-educated Makatiani, 47, said from a swanky
office block on Nairobi's upmarket Riverside Drive, where other
new financial ventures have set up a regional base.
Their expansion marks a turnaround in attitudes to Africa,
but masks many of the emerging challenges for both new and more
experienced private equity firms on the continent.
Private equity is still a relatively new financial vehicle
on Africa's landscape and challenges include offering enough
added value to encourage family firms to open up to external
financing, finding local managers with the skills to see a
project from investment to exit and winning over African pension
funds and other local funding sources to create a more
"If it is only the money you need, there are other places
you can get that," said Michael Turner, Kenya managing director
for emerging markets specialist Actis Capital. "Private equity
is about value added."
The numbers suggest raising cash is no longer the biggest
challenge in Sub-Saharan Africa - a region with economic growth
rates that are rivalled only by Asia.
Sub-Saharan Africa drew $1.6 billion of private equity
investment in 2013, with east Africa - on the brink of an oil
and gas bonanza - seeing the biggest rise in deal activity, data
from the Emerging Markets Private Equity Association shows.
A bigger objective is how to invest that cash successfully.
That is where global firms like London-based emerging markets
private equity firm Actis, with $6 billion under management, may
have an edge over local, smaller rivals.
They can draw on a broader pool of experience to identify
attractive sectors and steer a target through a turnaround or
INVITING IN A STRANGER
Describing his most recent investment in AutoXpress in
Kenya, Turner points out that it was his South African
colleagues who prompted him to scout for a tyre firm because
they saw growth in that sector in their market. And it was an
Actis specialist from Brazil with experience running a tyre firm
who helped "seal the deal" by explaining the potential to the
AutoXpress had spurned other private equity approaches but
Actis secured a 36 percent stake. Turner now sits on the board,
but said such a move was a big leap for any family firm. "It is
like opening up your house to a stranger," he said.
Many firms that have surfed Africa's fast growth began as a
family trade. They range from retailers that have expanded from
corner stores to supermarket chains, such as Kenya's Naivas or
Nakumatt, to manufacturers that have grown out of workshops such
as Interconsumer Products, which was snapped up by cosmetics
giant L'Oreal last year.
Private equity can bring a fresh perspective to help the
family expand or find an exit. But it doesn't always work out.
Kamal Budhabati, who heads Kenyan software developer Craft
Silicon, sought financing to expand. He secured $3 million from
a local private equity firm. Within three years of that deal, he
had bought back the investor's stake as their views collided.
"For us the visions were not matching. They had a short-term
goal, we had a long-term goal," Budhabati said, speaking at his
Nairobi office complex, which with its green lawns and a
basketball court would look at home in Silicon Valley.
"The venture capitalists who want to put money into software
businesses, they must understand that these are long-term
businesses," he said.
The lack of experience among local private equity firms
means foreign firms continue to dominate the industry in Africa.
"One of the challenges that many (local private equity) fund
managers face is the short supply of management talent," said
Kevin Njiraini, investment officer for private equity at the
International Finance Corporation (IFC), the World Bank's
private sector arm.
A typical cycle in private equity runs over 10 years. The
first three to four years are spent seeking out investments and
the next three to four are spent growing them. The final period
involves finding an exit, such as a strategic buyer.
In fast-growing Africa the kind of experience required over
the cycle can be lacking. The IFC is using its funding to give
new private equity managers an early leg up and accelerate the
Its private equity investments include backing Nairobi-based
and Mauritius-listed Catalyst Principal Partners.
Development institutions, such as the IFC, accounted for
about 70 percent of funds raised for Principal Partners' first
$125 million fund launched in 2012. The rest came from
individuals, insurance firms and other sources. The fund is
being invested across east Africa.
The longer-term objective for African private equity
managers is to draw in more local sources of funding, such as
from pension funds, who might also prefer locally registered
companies operating in the local currency.
For now, such funds are cautious about private equity,
partly because they are unfamiliar with the concept.
"There are challenges of understanding how private equity
works and the risks involved, so that has tended to keep
would-be investors away," said Kenneth Muchina, director of
fundraising at Nairobi-based Fusion Investment Management.