* Rising African middle class should lead to consumer boom
* Risks seen receding as democracy takes root
By Simon Meads
LONDON, Nov 14 Private equity houses are
swapping low-growth buyout deals in Europe and North America for
a slice of booming consumer demand in Africa.
They are drawn by a youthful and booming population that
could almost double to 2 billion by 2050, some of the fastest
growing economies in the world, and an emerging middle class
which wants everything from banks and insurance, to places to
That consumer boom is at the heart of Carlyle's deal on
Wednesday for a minority stake in Tanzania-based agricultural
commodities firm Export Trading Group, one of the world's
largest cashew nut traders, which employs more than 7,000 people
across 30 African countries.
It's also behind Emerging Capital Partners investment in
Nairobi Java House, the largest so-called casual dining
restaurant in Kenya, twice the size of its nearest rival. But
this is no mega-chain. It has just 14 restaurants.
"Africa is an emerging market in a similar fashion to Asia
or Latin America and the story behind it is growth and the
emerging middle classes. And that's what we are focusing on,
ways to tap into that growth," said Marlon Chigwende, managing
director and Co-Head of the Carlyle Sub-Saharan Africa Fund.
Private equity firms and their investors that long shied
away from sub-Saharan Africa, worried about losing money on
deals in countries in the grip of war and corruption, are
changing their views on the risks as democracy takes hold.
And with portfolios focused on Europe and North America
scarred by poor returns from deals that firms paid to much for
and financed with too much cheap debt, they have been under
pressure to find better deals.
But Africa has been slower than some had hoped.
Some $698 million of deals have been done in sub-Saharan
Africa in 2012 so far, compared with more than $49 billion in
the United States, according to data from the Emerging Markets
Private Equity Association (EMPEA) and PitchBook.
It is also far short of deal totals for seven of the last
nine years, EMPEA data shows, reflecting how hard new deals are
to find and concerns that underdeveloped equity markets mean
that, when the time comes, companies will be hard to sell.
"In the last year, we have had rather more talk than
action," said Lord Mark Malloch-Brown, former United Nations
deputy secretary general and now chairman Europe, Middle East
and Africa for FTI Consulting. "Africa has been edged out Asia
and bargain hunting in Europe."
Malloch-Brown is also chairman of private equity-backed
agri-business GADCO, based in Ghana.
But that could change as firms eye long-term growth as
opposed to short term opportunism.
The arrival of groups like Carlyle is seen as a vote of
confidence in the region's development - from political
stability to improving capital markets and increased focus from
large corporations that could ultimately buy many companies.
"For the next 30 years, East Africa is going to be rocking,"
said Ahmed Heikal, Chairman and founder of Citadel Capital.
Deals like Emerging Capital Partners' Nairobi Java House are
small and require more capital to build them up rather than to
acquire them. The returns from such businesses come from fast
growth, at 25 percent a year, rather than financial engineering.
And those long-term returns are now drawing mainstream
Western pension funds and endowments.
International Finance Corporation, a part of the World Bank,
said annualised returns from its Africa private equity portfolio
of 31 funds were 17.8 percent, more than 5 percentage points
higher than the emerging markets index.
"There is a set of about 500 investors who are looking to
make small strategic investments in Africa," said Jonathan Bond,
partner at emerging markets private equity firm Actis.
University of Texas Investment Management Company has two
investments in firms focused on Africa - Actis and Helios - and
based on those results wants to add one or two more, said Lindel
Eakman, managing director, private markets investments.
Others hope to make their first step.
"We have been spending a lot of time thinking about (private
equity in) Africa and we expect to do something very soon," said
John Powers, President and CEO of Stanford Management Company,
which manages $25 billion in assets for the U.S. University.
As a result, fundraising for sub-Saharan private equity
funds could more than double to a record $3 billion next year,
estimates Antoine Drean, chief executive of Palico, a company
that helps private equity firms market their funds to investors.
But it would still lag emerging markets as a whole.
Private equity funds raised for emerging markets, including
China and India, increased about nine-fold between 2003 and 2011
to nearly $40 billion, according to EMPEA.
Africa's industry could grow four times in size before
matching that of Brazil, said Hurley Doddy, founder and co-CEO
of Emerging Capital Partners.
The arrival of large buyout houses like Carlyle that has set
up offices in Johannesburg and Lagos, and KKR which is planning
to set up shop in Africa, gives another potential sale route.
"I don't think anyone likes more competition (but) there is
a lot of Africa and I do have some companies to sell these guys
when they come," Doddy said.