Growing equity market for national development
GLOBAL private equity (PE) fundraising in 2013 amounted to $333 billion, a 51 per cent increase on the total raised in 2012 and the largest amount raised since 2008.
Of the $333billion, $38 billion or 11.5 per cent, was dedicated for emerging markets; and of that $38 billion, $1.2 billion was cordoned off for sub-Saharan Africa.
Nigeria has topped the table for private equity deal value in Africa every year since 2012, attracting almost a third (31.4 per cent) of the total private equity investment on the continent over the past five years to 2014.
Private equity, on its own, is equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.
The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.
Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts, where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out through an IPO.
The private equity firms can be classified into three groups: Domestic African funds (managers that invest only in Africa); Global African funds (firms with Africa-specific funds that also manage funds investing outside the continent); and Global funds (global players managing funds that do not have an Africa-only mandate).
Recently, the National Association of Securities Dealers [NASD] organized a private equity conference where the participants discussed the growing activities of private equity in Africa. They stressed exits as a validation of private equity, examining that successful exits are critical to ensuring attractive returns for investors. They all agreed that catalyst for entrepreneurial activity is the successful exits, which creates an environment that encourages entrepreneurial activity with cascading impact on productivity and economic growth of the country.
Speaking on size dynamism of the private equity industry and valuation issues in Africa, a financial analyst, Bisi Sanda, noted that with a third of African countries growing at more than six per cent yearly, Africa has certainly arrived on the global economic landscape.
She explained that over the last two decades, emerging markets have evolved into a critical pillar of global investors’ strategies.
As growth rates relatively declined across most of the developed world before and in the aftermath of the global economic meltdown and credit crunch.
Sanda explained further that while global investor interest has begun shifting back in favor of the growing developed economies in early 2014 and away from some of the emerging economies that have weaker economic or political environments, Africa’s strong long-term growth fundamentals should continue to drive the development of the private equity industry on the continent.
She said: “The continent has demonstrated economic stamina over the last few years, emerging relatively unscathed from the financial crisis in comparison with most other regions and continue to grow rapidly despite concerns about slowing growth in other emerging markets, such as China and India.
“Today, the continent accounts for many of the world’s fastest-growing economies, driven by an expanding middle class, improved business environments and increasingly stable political democracies.
“Several factors have combined to make the continent more attractive to investors. Africa is becoming more politically stable, with fewer conflicts today than at any point in the last 50 years. It is increasingly integrated into the global economy, and with trade comes more robust regulation.
“Standards of governance are rising and local managers and investment professionals are becoming more sophisticated. Africa’s wealth of natural resources, rising population and its expanding middle class, and the conditions for growth are evident.
“Despite this, a number of risks remain. While most of Africa countries are generally more peaceful than in the past, conflict and terrorism still remain real risks in some parts of the continent. Corruption in some areas is rife, and the global reach of anti-bribery laws demands constant vigilance from investors,’’ she said.
Speaking on challenges of private equity exits, a partner with Synergy Capital Managers, Akintoye Akindele emphasized the need for good and convenience exits as catalyst for investor confidence.
He described exit as an avenue by which private equity investors realize returns on their investment after a period of time (usually between three and seven years)
He explained that potential exit opportunities play an important role in an investor’s decision whether or not to invest in a company.
He highlights increasing pan-African expansion by local players consolidating across continent – that is, Tiger Brands of South Africa bought Deli Foods of Nigeria in 2011; Voltic of Ghana acquired by SABMiller in 2009; Shaduka buyout of ACA’s stake in MTN Nigeria in fourth quarter of 2012
Talking about exits as a validation of private equity, Akindele explained that successful exits are critical to ensuring attractive returns for investors.
According to the partner, fund managers promise LPs hurdle rate plus multiple of the invested capital irrespective of carrying cost/valuation of the company and must exit the company/investment to achieve the return, that is, money-on-money back.
He advised investors to confirm underlying value in the investee company, that is, reflect work that has been done growing revenues, profits, margins. Fund managers dedicate majority of time post-investment to adding value to the company to ensure good exits.
Buying at the right price, the partner stressed that the investor acquires the target company at a reasonable valuation to ensure that maximum value can accrue to the investor.
In his words: “Avoid ‘beauty contest deals’ – avoid overpaying for deals by leveraging local network of contacts and structuring deals with potential exit avenues at the forefront.”
Good documentation, including corporate registrations, fillings, and so on, assures that the potential acquirer has adequate info for decision-making.
“Exit preparation should commence at the outset of the investment – including setting up an optimal investment vehicle & domicile and clear agreements to build trust between shareholders and the PE investors ahead of exit discussions.
“Overpaying for an asset: Overpaying for a company limits the upside that can accrue to the investor irrespective of the exit strategy employed.
“Poor documentation – registrations, financial reporting and corporate fillings – can affect the info available to a potential acquirer for decision making.”
Strong and effective management and board of directors and assurance of management continuity provides a better chance of achieving successful exits. Embedding strong processes including strong financial reporting systems and regulatory compliance are critical to a profitable exit’’, he said.
“Weak management/board capacity, lack of continuity & weak processes/procedures can adversely affect the ability to exit the investment successfully.
“Weak processes include inadequate financial reporting systems and regulatory compliance as it relates to taxes, and so on,” he said.
Akindele also mentioned some challenges: Lack of experienced advisers with requisite skills to navigate the local environment may affect investors’ ability to exit the investment. Advisers are critical to structuring the exit to minimize taxes and other transactional expenses
Talking of legal consideration for exits in Nigerian private equity market, a legal practitioner, Fubara Anga, explained that the Emerging Markets Private Equity Association named the following as the features of the ideal regulatory environment for private equity: Conformity with an international accounting standard; minimal use of regulatory requirements to restrict foreign investment; minimal restrictions on allocations by domestic investors to private equity funds and minimal restrictions on investment strategies.
Other features include: competition and anti-trust rules; minimal barriers to domestic credit markets; efficient, fair and transparent sector level regulations; open and transparent public appeals processes as well as availability of financial information.
Fubara however mentioned challenges of private equity exits in Africa, according to survey: relatively weak financial markets (with the exception of South Africa) suffering largely from pricing, informational and transactional inefficiencies; relative illiquidity capital markets, with the exception of South Africa; low level representation of companies on the capital markets; Exchange controls.
Effect on free profit and dividend repatriation
According to the legal practitioner, on merger controls, Securities and Exchange Commission rules provide requirements for different types of mergers and acquisitions.
He however explained concerning sector specific regulatory consents, saying depending on the sector being invested into, certain regulations may apply in addition to the general rules such as SEC rules. An example of this is the cabotage law which restricts divestments to Nigerians
Other challenges include: complex and inconsistent legal and regulatory frameworks in many jurisdictions in Africa which creates uncertainties about foreign exchange rules, profit and dividend repatriation, investment incentives, capital gains tax, transaction taxes such as withholding and value added taxes and so on.
On tax, Fubara added that exits by equity divestments are generally tax neutral.
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