the africa handbook 2012 - PEI Media

September 2012
privateequityinternational.com
the africa
handbook
2012
A PEI supplement
Africa’s changing risk profile
Addressing LP scepticism
The retreat of DFIs
Alternative routes to exit
The importance of ESG
...and more
Sponsors:
Actis
Ethos Private Equity
Supporters:
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KPMG
Stanwich Advisors
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Crunch time
A PEI supplement
september 2012
Handbook Editor
Fay Sanders
Tel: +44 20 7566 5444
Editor, Private Equity International
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FAY SANDERS
Editor's
letter
I raised the topic of African private equity
with an LP friend of mine I saw in London
recently. The response was disappointingly flat:
“We don’t invest in Africa.” Further probing
prompted the following clarification: “It’s hard
for Western investors to overcome some of
the prejudices presented by the media, that
Africa is backward, corrupt, dictatorial and
violent. Unlike, say, Brazil, which is seen as
being beautiful, with great football and oil and
gas opportunities.”
It’s true that incidents such as the Arab
Spring, Somali piracy, famine and political corruption
have done little to ease the concerns
of risk-adverse investors thinking about trying
their hand at African private equity. Yet the
negative headlines can sometimes obscure the
fact that that the African economy is expanding
by $200 billion, or roughly 10% a year, according
to current estimates – and that Africa’s
growing middle class is expected to be spending
$2.2 trillion per year by 2020.
Brazil is actually an interesting comparison:
whereas Africa’s growth rate has outperformed
the world economy since the financial crisis,
Brazilian growth slumped to less than 3 percent
over 2011–2012. The country ranks a
surprising 126th in the World Bank’s Ease of
Doing Business index – while Botswana stands
proudly in 54th position.
But while Africa’s vast potential offers some
remarkable investment opportunities, many
investors, like the LP I met in London, remain
wary. In ‘Out of Africa’ (p. 21), a selection of
leading LPs talk about some of the misgivings
investors have about committing to African
funds. Some are more receptive to the idea
than others, of course – and one of them is
fairly keen to get his foot in the door now,
before competition hots up and starts taking
its toll on returns.
The role of institutional investors is particularly
important since certain development
finance institutions (DFIs) have begun
to reduce their commitments to African funds.
DFIs have historically been responsible for
seeding the asset class in Africa, but in ‘DFIs:
are they in or out’ (p. 26), we take a look at
why some of the key players are starting to
walk away from fund investing.
This would leave a gap that international
LPs will need to fill. If they don’t step up over
the next few years, it will pose a big challenge,
as one investor told me. But it’s potentially a
huge opportunity too; a senior director at the
IFC went as far as to describe the increase
in non-DFI capital as being one of the “most
exciting developments in Africa”.
Perhaps counter-intuitively, the global macroeconomic
situation might help this process.
Whatever the risks surrounding African private
equity (real or otherwise), investors are
increasingly aware that very few countries are
now risk-free. If Europe’s woes continue to
dominate the headlines in the next few years,
and developed economies struggle to deliver
above-trend growth, the fundamentals of
investing in Africa are going to look increasingly
attractive.
Enjoy the handbook,
Fay Sanders
Handbook Editor
september 2012 the africa handbook 2012
1

contents
the africa
HANDBOOK 2012
1 Editor’s letter
3 News in brief
Recent Africa-related stories from
PrivateEquityInternational.com
9 Overview: Changing times
As Western markets continue to
stutter, the African private equity
market is looking an increasingly
attractive place to invest
16 Out of Africa
Getting to the bottom of why some
institutional investors have been
steering clear of African private
equity
22 DFIs: are they in or out?
Development finance institutions are
responsible for seeding the African
private equity asset class, but what
happens when some of them turn
their backs on fund investments?
28 Heading for the exit
Exits have long been a challenge for
Africa’s private equity firms, but the
continent’s realisation options are
starting to grow
33 ESG – as easy as 1-2-3?
As Africa attracts an increasing wealth
of Western capital, responsible
investment is becoming a buzzword
38 Data room
Macroeconomic and private equityspecific
data from Private Equity
International and other sources
39 Funds file
A total of 52 Africa-focused private
equity funds closed since 2009 have
raised over $9.9 billion
40 Regional hot spots
A look at the key geographies where
buyouts have occurred over the past
year in sub-Saharan Africa
22
28
keynote interview
5 Actis
John van Wyk, head of Africa, explains
his secret to success in rooting out the
most promising companies in Africa
12 Ethos Private Equity
Ngalaah Chuphi, partner at Ethos
Private Equity, explains why South
Africa is proving to be a resilient
market for deals and exits
Expert commentary
19 Business conduct
Abax looks into the importance of
corporate governance when investing
in African countries
25 Taxing issues in South Africa
KPMG gives a comprehensive
overview of salient tax issues for savvy
investors in South African private
equity
30 African investment round-up
Stanwich Advisors casts an eye over
developments in the African private
equity market
35 Don’t mention the “C” word
Webber Wentzel discusses how
international investors are developing
effective strategies for dealing with
corruption issues in Africa
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2 private equity international september 2012

News in brief
NEWS
News in Brief
Recent Africa-related stories from
PrivateEquityInternational.com
CDC Group appoints
new COO amid strategy
overhaul
Buckley: CDC’s new chief operating
officer
CDC Group, the UK development
finance institution, has appointed
former Children’s Investment Fund
Foundation director Colin Buckley
as its chief operating officer, with
a remit to implement its revised
strategy.
Buckley told PEI the new strategy
would involve “expanding our reach
into more difficult geographies and
expanding the type of investments
that we are doing”.
CDC, which has typically operated
as a fund of funds, will make
greater use of direct investment
and also make debt investments in
frontier markets whose financial
infrastructure is under-developed.
In May CDC reported its first
annual loss in three years – swinging
from a £269 million profit in 2010 to
$12bn
was distributed
to limited
partners
in 2011 by
emerging
markets private
equity funds
£72m
losses were
reported by
CDC in 2011
after a £269
million profit
in 2010
a £72 million loss in 2011 – although
it did back a larger number of businesses.
IFC commits $35m to
Convergence
The International Finance Corporation
committed $35 million to
Convergence Partners Communications
Infrastructure Fund, a $500
million vehicle that will target investments
in Africa’s communications
sector, the development institution
announced in June.
The fund is managed by Convergence
Partners Management, a
South African firm that focuses on
investments in the technology, telecommunications
and media sectors.
The vehicle will invest in information
and communication technology
infrastructure in Africa, a
relatively undeveloped sector in the
region, according to IFC documents.
SME-focused Jacana
prepares for fundraising
push
Hurlingham Eye Care Services: Jacana’s
Kenyan investee
Jacana Partners, a private equity
group aiming to deliver social as well
as financial returns, will join a growing
number of firms looking to raise
capital for Africa next year.
The firm, founded in 2008 by ECI
non-executive chairman Stephen
Dawson and chief executive Simon
Merchant, hopes to address the
september 2012 the africa handbook 2012
funding gap that exists between
microfinance or angel investors, and
larger buyouts.
“Larger companies in Africa can
generally raise capital anywhere.
There’s also a thriving microfinance
sector for start-ups. But in
the $500,000 to $5 million range,
there’s virtually nothing. SMEs need
support, and that’s where we come
in,” Dawson told PEI.
Emerging market funds
distribute record amount
Private equity and venture capital
funds investing in emerging markets
distributed $12 billion to limited
partners in 2011, a 17 percent
rise year-on-year and the highest
amount on record, according to new
research from consultant Cambridge
Associates.
“Last year was a great year in
[emerging] markets,” Cambridge
managing director Miriam Schmitter
told Private Equity International.
“IPO markets were quite welcoming
in many of the regions, M&A was
working fine [and] there have been
some secondary sales, so all of that
played into the equation.”
IT investments performed best,
returning 31 percent.
OPIC invests $65m in South
Africa
The Overseas Private Investment
Corporation, the US government’s
development finance institution,
approved a $65 million commitment
in June to Medu Capital’s $300 million
third fund.
The commitment is unusually
small for OPIC, given the fund size.
It usually invests one-third of a fund’s
capital target in debt financing, with
3

News in brief
managers responsible for finding the
remaining two-thirds from other LPs.
Medu Capital III will invest in
small and mid-market companies
in South Africa. The firm’s previous
fund raised R900 million (€85 million;
$107 million) in 2008.
Actis strengthens its West
Africa team
Emerging markets firm Actis bolstered
its West African operations in June
with the appointment of former Kingdom
Zephyr partner Mark Ransford
as a director. Ransford will be based in
London but will work closely with the
Actis team in Lagos, Nigeria.
“I believe demographic trends
drive equity returns. This makes
me pretty excited about identifying
investment opportunities in West
Africa and specifically in Nigeria, the
most populous country on the continent,”
he said.
In May, Actis paid £8 million (€9.8
million; $13.0 million) to acquire the
remaining 40 percent stake in its business
from the UK government.
Cordiant targets $1bn for
emerging markets debt
Montreal-based Cordiant Capital
reported strong interest in its latest
emerging markets-focused debt
fund, which is targeting $1 billion.
That’s more than double the size of
Cordiant’s previous vehicle, which
collected $460 million in 2007.
Cordiant Emerging Loan Fund IV
came to market in late 2011 and has
already secured a “sizeable amount” of
capital from a single anchor investor,
managing director Evan McCordick
told PEI. It will continue the strategy
of the firm’s previous funds by lending
to emerging market companies in a
variety of sectors but with a special
focus on infrastructure assets.
Cordiant is expecting to hold a
first close before the end of the year.
BTG readies African fund
launch
Rio: BTG is looking to expand overseas
BTG Pactual is preparing to launch
a $1 billion African private equity
fund, a source familiar with the
matter told PEI in May.
The Brazilian investment bank
had not released any information
regarding sector or regional focus for
the fund, the source said, but fundraising
is expected to take between
six months and one year.
BTG chief executive Andre Esteves
reportedly mentioned plans of
the fund at a Brazil-Africa trade
seminar in Rio de Janeiro, according
to Dow Jones.
BTG has already established
itself as one of the largest domestic
private equity players in Brazil,
and has shown interest in expanding
beyond its domestic market. In June,
the bank closed on $1.5 billion for
a Latin America-focused fund after
only six months of fundraising.
ADB backs Carlyle for
debut Africa fund
The Carlyle Group won a $50 millioncommitment
from the African
Development Bank as it neared a
first close for its debut sub-Saharan
fund, which is targeting $500 million.
$50m
committed
to Carlyle’s
debut sub-
Saharan fund
by the African
Development
Bank
$1bn
the reported
target size of
Brazilian group
BTG Pactual’s
African private
equity fund
The commitment was significant
because ADB is a major influence
among emerging market LPs. The
ADB manages $104 billion in capital
and maintains a 2.5 percent private
equity allocation, according to PEI’s
data division.
Carlyle’s sub-Saharan fund will
target buyout and growth capital
investments in 15 countries, focusing
on large single-country companies
seeking to expand or vertically integrate
across the region. It will have the
potential to invest up to $1 billion in
the region by co-investing with other
Carlyle funds, according to ADB.
Carlyle expanded into the region
last year, appointing managing directors
Marlon Chigwende and Danie
Jordaan to lead the firm’s effort from
Johannesburg, South Africa.
Abraaj buys African
insurer
Abraaj Capital has continued to build
on the momentum generated by its
acquisition of emerging markets
group Aureos, with a $125 million
investment in Morocco- and West
Africa-based insurer Saham Finance.
Abraaj said the deal would give it
a “substantial” stake in Saham, adding
that the investment will support the
company’s growth and development
plans across Africa, where insurance
penetration rates remain extremely
low.
The deal comes less than a month
after Abraaj agreed to buy emerging
markets-focused private equity
group Aureos Capital. The acquisition
of SME specialist Aureos gave
Abraaj much greater exposure to
emerging markets, including those
in Asia, sub-Saharan Africa and Latin
America. n
4 private equity international september 2012

keynote interview: actis
A world of opportunity
Actis has a unique
perspective on one of the
world’s most intriguing
and complex private
equity markets. Head
of Africa John van Wyk
explains how his firm
leverages its experience,
global network and
operationally-focused
personnel to root out
the most promising
companies in Africa
Van Wyk: increasingly competitive
It’s been a busy year for Actis. The firm
bought back the 40 percent of its share
capital held by the UK government in May
this year, and its Africa-focused operations
in particular have continued to thrive. The
firm made a number of promotions, including
London-based African energy specialist
David Grylls, and Johannesburg-based
Natalie Kolbe, to partner, and bolstered
its West African team with the addition
of former Kingdom Zephyr partner Mark
Ransford. The appointments point to Actis’s
fierce commitment to what some consider
to be the next great frontier for private
equity.
The firm’s involvement in Africa
stretches back for decades. Through its
CDC history, the firm has been active on
the continent for over 60 years, through
successive economic cycles. The current
one is no different, for despite the global
economic malaise, Actis has been busily
transacting in Africa. One recent highlight
was its $434 million acquisition of Tracker,
a South African vehicle tracking business,
in October last year. There have been exits
too, including the sale of its stake in Banque
Commerciale du Rwanda in July this year
to Kenyan lender I&M Bank.
Africa is a remarkably diverse continent;
a fact reflected in the radically different
private equity markets to be found within
it. South Africa, the continent’s most developed
private equity market for example,
bears the closest comparison with Western
Europe characterised as it is by leveraged
buyouts like that of Tracker.
“The Tracker deal was a nice size transaction
for us, as we look to invest anywhere
between $50 million and $250 million in
a deal,” John van Wyk, Actis’s head of Africa,
explains. “It was a proprietary deal, which
september 2012 the africa handbook 2012
we did in partnership with The Mineworkers’
Investment Company, a black empowerment
group, and RMB Ventures. It’s a high
quality business, has a good management
team and is a great cash generator.”
Leveraged buyouts require debt of
course, something which hasn’t been too
easy to source in recent years.
“If you go back to pre-crisis times, there
were some quite aggressive debt packages
that were being raised for deals in South
Africa. A few things have happened since
then. A number of private equity players
availed themselves of the offshore high yield
bond markets, which have to a large extent
gone away post-crisis for a variety of reasons
– people have a different appreciation
of risk now, after a number of transactions
in Europe got into trouble. So that market
isn’t fuelling buyouts in the way it did in
the past.
“Secondly, there was definitely a period
where liquidity amongst South African
banks, and international banks operating
in South Africa, was very low so it became
hard to raise debt for leveraged buyouts.
That’s gradually changing now. For Tracker,
we were able to raise the quantum of debt
we wanted, at terms that were acceptable
to us. For quality credits, leverage is available
in the South African market, no question,”
he argues.
The scope of Actis’s African activities
extends far beyond South Africa. In East
Africa, the firm has been building up its
Nairobi-based office.
“There’s quite a lot happening in the East
African market,” van Wyk says. “Historically,
the deals we’ve seen there have been below
our size threshold, so we [Actis’s private
equity team] haven’t made an acquisition
in the recent past. But it’s definitely a ››
5

keynote interview: actis
›› market which will offer up opportunities
in the near future.
“There have been some oil and gas finds
which will have a real effect on the growth
of local economies in the likes of Kenya,
Tanzania, Zambia and Uganda. We’ll be
looking to invest in the sorts of industries
that will capitalise on the energy sector’s
growth there,” van Wyk says.
To the West, Actis’s long-standing Lagos
office has been the hub for some compelling
deals.
“We’ve had a strong presence in Lagos for
many, many years. We’ve made a number of
investments in that market,” van Wyk says.
“We’ve seen some interesting opportunities
in Nigeria, and with growth rates of five
percent or more, there’s an attractive macro
argument too.”
One of the firm’s standout West African
deals was its $151 million acquisition of
Vlisco Group in late 2010. The company,
which makes high quality fabrics used in
traditional African dress, has responded
well to private equity ownership. Actis has
helped to improve its distribution network,
as well as supporting its development into
neighbouring markets like the DRC and
Angola.
Africa’s consumer sector has fostered
this growth. “African consumers want
better access to financial services, higher
quality goods, quick service restaurants and
so on,” van Wyk says.
Then there’s North Africa. The uprisings
which characterised the region last
year have yielded to a (fragile) peace as
For quality
credits,
leverage
is available
in the South African
market, no question
newly-elected governments seek to rebuild.
That’s a promising sign for the region’s private
equity market too, van Wyk believes.
“The Egyptian situation is becoming a lot
more stable now following the recent election.
After a negative growth rate in 2011
due to the Revolution, we expect that to
rebound this year and present some interesting
opportunities. They’re likely to be in
the consumer space, but we have an existing
financial services investment there [CIB]
too so it’s a broad market.”
North Africa acts as a bridge to Europe,
but Actis also like to widen the horizons
of its portfolio where appropriate. It’s
introduced some of its portfolio companies
to opportunities in Brazil and India,
two markets which are also enjoying stellar
growth. “Those bridges can open up all
sorts of opportunities in terms of technology,
manufacturing expertise, and new
markets,” van Wyk says.
Even within Africa, Actis’s ambition is
often to turn promising one-country businesses
in to pan-African ones.
Actis’s strategy is also to focus on four
main sectors across the emerging markets
in which it invests: consumer (by far
the largest of the four, at least in Africa),
industrials, financial services, and healthcare.
Smaller, local (and country-specific)
firms aren’t able to focus on sectors in the
same way, van Wyk argues, because single
domestic markets simply don’t present
sufficient deal opportunities to make it a
viable strategy. So while smaller firms are
forced into a generalist approach, Actis has
developed expertise and seeks investment
opportunities in a very targeted way.
The firm’s approach to value creation
has changed somewhat over the last few
years, reflecting a shift in the wider private
equity industry towards operational
improvement as a means to create value
rather than financial arbitrage. It has
established a value creation group staffed
by operating partners – individuals who
come from operational, rather than investment
backgrounds – and these partners
play an increasingly important role in the
firm’s day-to-day business.
The market in Africa has grown a lot
more competitive, van Wyk asserts, which
means prices have escalated. As a result, it’s
increasingly important to be able to create
value through operational improvement
rather than financial arbitrage, and the
value creation group personnel play an
integral role on that front.
They’re also on hand if an investment
turns sour. “These guys have massive rolodexes,
and can bring in experts in the event
of a crisis at a portfolio company at very
short notice to help fix the problem,” van
Wyk says.
They work alongside the investment
teams from the due diligence stage – where
they help to devise a strategic plan for the
business – to post-acquisition, where they
focus on helping the company to achieve
the goals set out in that plan. “Most management
teams we back appreciate having
someone like this on hand to provide
advice,” van Wyk says.
Ultimately, a firm is judged on performance,
and Actis believes it has settled on a
winning formula.
“Being a generic private equity investor,
a generalist, isn’t going to deliver you
superior returns. The only way to do that
is through domain knowledge, deep understanding
of sectors that you’re interested
in, and having the ability to bring other
types of value-add to the party. Because of
the scale we have, we’re able to attract the
right sort of talent to those key positions.”
In a continent as diverse and as surprising
as Africa, that scale and depth of talent
will, Actis hopes, differentiate it from the
chasing pack. n
6 private equity international september 2012

keynote interview: actis
company profile: actis
Actis: the only pan-emerging market private equity firm
Actis was established in 2004. This was a new private equity firm with a unique heritage, having spun out of
CDC, the UK’s development arm founded in 1948. These beginnings and history provided an unparalleled
knowledge of the emerging markets and an unrivalled network of contacts and advisors. Since then, Actis has
established a reputation for its innovative deals and excellence in emerging market investing.
Today Actis has $5 billion funds under management in 25 countries and 120 investment professionals at work
in Asia, Africa and Latin America.
It invests across three asset classes: Energy, Private Equity and Real Estate.
Africa lies at the core of the firm’s investment strategy. Today, 45% of Actis’s investments are located in Africa
with over $1.7 billion invested across 17 countries on the continent. Actis is one of the biggest investors in
Africa globally and was there long before it was fashionable.
60+
years of on-the-ground
experience
$5bn
funds under management
142
limited partners
120
investment professionals
10
offices
65
portfolio companies
25
countries
112,900
employees in Actis portfolio
companies
Recent investment highlights:
Garden City: the largest retail mall in East
Africa ($36m, July 2012)
Universidade Cruzeiro do Sul Educacional:
Brazilian university ($102m, January
2012)
Endurance Technologies Ltd: one of
India’s largest privately held auto component
companies ($71m, December 2011)
Tracker: South Africa’s largest vehicle tracking
company ($434m, October 2011)
Visa Jordan Card Services Company
(VJCS): Jordan’s largest merchant acquirer
and national ATM switch ($87m, August
2011)
Energuate: transportation and supply of
electricity in Guatemala ($345m, May 2011)
Super-Max: the second largest razor brand
in the world (February 2011)
Vlisco Group: designer of wax fashion fabrics
in West Africa ($151m, September 2010)
China Post-Secondary Education: the
second biggest chain of colleges in China
(January 2010)
Alexander Forbes: one of South Africa’s
leading diversified financial services companies
($102m, July 2007)
Actis closed its pan-emerging markets private
equity fund, Actis Emerging Markets 3
in November 2008, with commitments totalling
$2.9 billion and its pan-emerging markets
infrastructure fund, Actis Infrastructure 2,
on 30 September 2009 with commitments
totaling $750m.
In 2011, Actis won two awards from AVCJ,
‘Private Equity Firm of the Year’ and ‘Indian
Private Equity Exit of the Year’; also winning
the ‘African Private Equity Firm of the Year’ for
the fourth consecutive year, and Latin America
Private Equity Firm of the Year’, both awarded
by Private Equity International Media.
You can learn more about Actis at
www.act.is
september 2012 the africa handbook 2012
7

We back quality businesses across
Africa, Asia and Latin America,
bringing financial and social
benefits to investors, consumers
and communities. We call this
the positive power of capital.

overview
Changing times
As Western markets continue to stutter, the African private
equity market is looking an increasingly attractive place to
invest, writes Fay Sanders
As some African countries push towards
10 percent GDP growth in 2012, many
of their European counterparts are languishing
at around one percent or below.
This highlights the untapped private equity
potential across the African continent – and
the possibility of market-beating returns.
But although investment opportunities
are myriad, raising the money to compete
is another matter entirely. For the likes of
Helios Investment Partners, which closed
Africa’s largest private equity fund last year
on $900 million, it helped to have one fund
under its belt already. “Institutional investors
will back a manager with a great track
record, as opposed to a first-time fund,”
says Helios’s chief operating officer Henry
Obi. Helios was able to target long term
patient capital rather than the development
finance institutions (DFIs) on which firsttime
funds usually depend. US investors
(mainly funds-of-funds and endowments)
constituted 54 percent of Helios II’s commitments,
while a further 15 percent of
investments were made by African pension
funds and family offices.
Despite the tough fundraising environment
globally, the African private equity
market has seen no shortage of new GPs
entering the fray. Earlier this year, 8 Miles
held a first close of $200 million on its firsttime
Africa-focused fund, after two years in
the market. DFIs played a crucial role, committing
$150 million of that, according to
Hemen Shah, partner at 8 Miles. He says the
group will be targeting family offices, pension
funds, asset managers and endowment
funds in the hope of holding a final close at
around $450 million in March next year.
This is likely to prove even more challenging.
Despite a growing amount of institutional
research about the African continent, Shah
acknowledges that it can take a while for
some LPs to “develop their understanding
of Africa and convert that understanding
into an investment.” Even if an investor has
decided to invest in Africa, it will not necessarily
do so via a private equity fund. “A lot
of institutions are making direct investments,
or are interested in co-investment, which can
represent a challenge for us,” says Shah.
Some funds, like Marlow Capital, prefer to
use a pledge-type fund model, where money
is raised on a deal by deal basis. “We may
eventually move to a closed-end fund structure
when the market is more open, but this
structure certainly works for us now,” notes
Andrew Hunt, managing director of Marlow.
Citadel Capital also began by raising
funds on a deal-by-deal basis, but in Q3
2010 held a first close on its first dedicated
Africa fund, raised entirely from DFI
money. “We always see a good amount of
investors at Africa investment conferences,
but I’m not convinced this interest is ››
It’s not always
clear how to
exit from a
$600 million
investment in Africa
African and Western GDP percentages for 2012
Overall 5-Year Population Growth Estimate
(2012 – 2017) in sub-Saharan Africa
Italy
Spain
UK
Germany
France
Angola
Cote d’Ivoire
Ghana
Nigeria
Mozambique
Zambia
Angola
Democratic
Rep. of Congo
Côte d’Ivoire
Ethiopia
Ghana
Kenya
Nigeria
South Africa
Uganda
Zambia
Source: IMF
Source: IMF
september 2012 the africa handbook 2012
9

overview
›› always translated into writing cheques,”
notes Karim Sadek, managing director at
Citadel Capital.
Shah differentiates between the global
investors that are actively looking at African
private equity and those that still have concerns
(relating to corruption, ease of doing
business or political stability). He admits
that for the latter group, “the chances of
closing are very slim but we still need to
tell the Africa story even if they are not
ready to invest.”
These efforts to educate LPs about
Africa is clearly having some effect. “Over
the last five years, we’ve seen endowment
foundations, pension funds, insurance
groups and sovereign wealth funds proactively
coming to visit us in Africa,” says
Marie-France Mathes, head of investor relations
at Emerging Capital Partners (ECP).
In Africa itself, a growing number of
LPs are expressing a desire to invest in local
private equity. ECP has been giving workshops
to familiarise African pension funds
and insurance firms with private equity,
according to Mathes. Africa-based investors
provided over 30 percent of commitments
for ECP’s third Africa fund, which raised
$613 million in 2010.
Spreading the risk
“The rapidly-changing private equity landscape
in Africa is demonstrated by the
increase in the number of Africa-dedicated
funds – which has now surpassed 50, according
to PEI stats. That’s a far cry from 2006,
when there were a mere handful of funds
present in the market, notes David Creighton,
chief executive of Cordiant Capital.
One of these funds was Cordiant’s Canada
Investment Fund for Africa (CIFA), which is
currently in exit mode. But because of the
subsequent influx of newcomers to African
private equity, Cordiant is less inclined to
raise a follow-on fund. “It’s not as compelling
a market for us anymore. As our primary
line of business is private debt across the
emerging markets, with Africa being a significant
portion of that exposure, it makes
sense to capitalise on our track record and
competitive advantage on the credit side,”
explains Creighton. The group’s next fund
will offer exposure to global emerging markets,
which will include Africa.
Many African GPs prefer to raise pan-
African, rather than country-specific, private
equity funds in order to reduce the
risk on a country-by-country basis. Jacana,
which already focuses on six countries in
East and West Africa, is looking to expand
its investment remit, according to its CEO
Simon Merchant. “The industry is growing
rapidly and we’ll be selecting two to three
new markets from a shortlist including
Nigeria, Ethiopia, Zambia and Zimbabwe,
which will depend on where we are able
to find good-quality people.”
ECP also addresses risk through diversification.
“We invest in companies operating
on a multi-regional basis as it makes
for stronger businesses,” explains Mathes.
“We owned a tuna factory in Côte d’Ivoire
during the conflict there, but part of the
production facilities were in Madagascar,
Announcement
Date
Target Company
19-Feb-11
Royal Dutch Shell plc (Downstream
Businesses In Africa) (80% Stake)
23-Jun-08
Vodacom SA (6.25% Stake)
Bidder Company
Vitol Holding BV; and Helios
Investment Partners LLP
Black Economic Empowerment; and
Thebe Investment Corporation
Deal Value
(US$m)
12-Jul-11 Union Bank of Nigeria Plc (60% Stake) African Capital Alliance 750
05-Aug-08
10-Mar-10
03-Oct-11
24-Apr-08
08-Jul-09
06-Sep-08
25-Jan-08
Source: mergermarket
ACTOM (Pty) Ltd
Foodcorp (Proprietary) Limited
(77% Stake)
Tracker Network (Pty) Limited
Tourism Investment Corporation
Limited
Many GPs want
to raise a $1
billion fund
but questions
remain as to how many
deals are available for
the big funds
Sandeep Khanna
Top 10 buyout deals in Continental Africa from 2008 to present day
Black Economic Empowerment;
Actis LLP; and Old Mutual
Investment Group SA Ltd
Capitau SA; and Bluebay Asset
Management Plc
Actis LLP; Mineworkers Investment
Company (Pty) Ltd; and RMB
Ventures Limited
Union Square Properties 100
Limited; Old Mutual Life Assurance
Company South Africa Limited;
Industrial Development Corporation
of South Africa Limited
1,000
Commercial International Bank (Egypt)
SAE (9.33% Stake)
Actis LLP 244
EnviroServ Waste Management
Black Economic Empowerment; and
Absa Capital Private Equity
238
Lereko Investments Pty Ltd; and
Tsebo Outsourcing Group (Pty) Ltd Absa Capital Private Equity; and
202
Nozala Investments (Pty) Ltd
982
700
453
434
261
10 private equity international september 2012

overview
allowing us to move the business to Madagascar
and continue to process orders.”
In general, the growing number of private
equity funds wanting to move to Africa
is viewed positively by GPs already present
on the ground. “There’s so much need for
capital that we’re not seeing major competition
on deals,” notes Mathes. [And] the more
deals there are, the greater visibility the asset
class will have with institutional investors.”
In fact, Jacana hopes to turn the increased
competition in the small-cap market to its
advantage. “We are looking to work together
and co-invest with other investors, rather than
compete with them,” Merchant says.
Making a big deal
Africa’s rising middle class is a promising
source of growth capital deals for the
small-to mid-cap segment. Many funds have
strong exposure to consumer and financial
services, telecoms, education, and low-cost
housing. “A large proportion of the population
does not yet have these services, which
offers tremendous growth opportunities,”
according to Sandeep Khanna, partner at
Aureos Capital.
Population growth in Africa is also
driving investment in agriculture. There
are over a billion people living in Africa
today and this figure is set to double over
the next 40 years, according to the United
Nations. So food will become increasingly
vital. Private equity has a key role to play in
bringing stability and employment to the
emerging youth. “SMEs need to grow to
drive job creation,” says Merchant.
However, one of the main issues with
investing in Africa is that opportunities for
large transactions are few and far between,
says Sadek. Since January 2008 only six private
equity buyouts have topped the $275
million mark, according to research group
mergermarket.
Khanna alludes to the global phenomenon
of too much money chasing too few
deals. “The excess of dry powder has reached
Africa and it’s driving up valuations. Everyone
wants to raise large funds, but question
marks remain over how many deals are available
for the big funds.” What’s more, exits
are more complicated for larger assets. “It’s
not always clear how to exit from a $600
million investment in Africa,” Sadek notes.
Deal flow in the upper segment of the
African private equity market is largely driven
by corporate divestments, says Obi, referencing
Helios and Vitol Group’s $1bn acquisition
of Royal Dutch Shell’s downstream business
in 14 African countries last year.
Indeed, the oil and gas industry constitutes
a sizeable share of business at the top end of
the African deal spectrum. A number of “large
ticket players” are investing in companies that
service oil and gas businesses, Khanna notes.
Bright sparks
Although private equity is still in its infancy
in Africa – not as concentrated as it is in
India and China, according to Khanna – this
does mean that it has significant potential
to grow and make a meaningful contribution.
“A huge part [of African private equity]
is growth capital; it’s not about financial
engineering,” Khanna says. “It’s important
to be able to dissect and identify which
sectors and countries are doing well. For a
number of countries in Africa, the future
is particularly bright.”
In terms of recruiting talented staff for
local businesses, Mathes is encouraged by the
“enormous amount of interest” from Africans
who travelled to the States to spend a
few years working on Wall Street. “There is
a diaspora of Western-trained managers that
is now looking to return to Africa,” she notes.
Governments and institutions have been
making a conscious effort to improve the
business environment in countries like Kenya,
Nigeria and South Africa through privatisation
processes and strengthening regulatory and
legal frameworks, Mathes adds.
As a result, there is likely to be a substantial
uptick in the amount of investments
september 2012 the africa handbook 2012
The more deals
there are, the
greater visibility
the asset class will
have with institutional
investors
Marie-France Mathes
made in Africa over the next two to three
years, Khanna predicts. “People tend to
emphasise the risk and not the growth
opportunities. Yes, the risks are there, but
they are not higher than elsewhere in the
world. They are simply different risks.”
Return expectations are also higher
than the 10–15 percent IRR generally
predicted in Europe, according to Khanna
– he believes 20–25 percent returns can
be achieved in Africa. “More awarenessbuilding
is needed, as well as analysis on
the returns that people are achieving in
Africa. As more exits happen we’ll have
more insight into returns,” he adds.
One thing is for sure: there is a lot of
interest and research focused on Africa at
the moment. “China and India are welltrodden,
Latin America is in the midst of
a valuation bubble, Russia has governance
issues and Africa is virgin territory,” says
Hunt. It may not be long before Africa is
ready to take centre stage in the world of
private equity. n
11

keynote interview: ETHOS PRIVATE EQUITY
Southern star
With its economy still
growing and stable
banking sector, South
Africa is proving to be a
resilient environment for
deals and exits
A key part of
our strategy for
investments
is to capture
growth not only in
our home market but
also growth across our
borders
Ngalaah Chuphi, Ethos Private Equity
Private equity is back on the rise in South
Africa. In 2011, total private equity investment
activity was up 32 percent year-onyear,
according to KPMG, while early indications
are that it will increase again in
2012. And it’s easy to see why: the country’s
economy continues to grow, has a stable
and well-capitalised banking system, and
is well-positioned to act as a gateway to
other fast growing economies in emerging
markets of sub-Saharan Africa.
South Africa has not been immune to
the effects of the financial crisis. Nor is it
immune to the ongoing financial crisis in
the Eurozone; South Africa’s manufacturing
sector, which accounts for almost a fifth of
GDP, depends on the Eurozone as one of
its biggest customers. But it continues to
enjoy a fruitful export relationship with
the growing economies of India and China
– and unlike most countries in the developed
world, it is benefiting from a growing
middle class, as income levels rise among
the country’s black population.
South Africa’s GDP growth is expected
to be in the range of 2.5 – 3 percent in 2012
and possibly higher still in 2013 (depending
on events in Europe and China). So there is
no shortage of opportunity for savvy investors
– particularly if they have an ability to
originate opportunities in growth sectors.
From good to great
“Some sectors are growing at a much faster
rate,” explains Ngalaah Chuphi, a partner
at South African firm Ethos Private Equity,
which has completed three new deals and
two exits in the last year. “Household
consumption expenditure, for example,
is rising at circa 5 percent [per annum].
We’re seeing a transformation as more black
people come into the mainstream of the
economy. So we try to find sectors that
will benefit from that.” Chuphi cites the
example of Tiger Automotive, a tyre retailer
that Ethos bought in 2008, which is tapping
into the rapid growth in the number
of cars in South Africa.
Other sectors also offer attractive prospects,
says Chuphi: notably education and
healthcare, where the private sector is
playing an ever greater role, and infrastructure,
in which the government continues
to invest heavily. Then there’s energy and
commodities, where South Africa is trying
to position itself as a gateway to the rest of
the continent.
The role South Africa is playing as a gateway
through which companies can access
growth in the rest of the Continent is a
recurring theme for many of the sectors
in which Ethos operates. “More and more
of our companies are exploiting growth
across the borders of South Africa,” Chuphi
says. “A key part of our strategy for investments
is to capture growth not only in
our home market but also growth across
our borders.” (Ethos also has a mandate to
invest a small portion of its fund on a direct
basis elsewhere in sub-Saharan Africa).
There’s also a steady stream of deal flow
in the market. South African corporations
continue to sell off non-core assets; family
businesses are still accessing private equity
to solve founder succession and corporatisation
challenges; and there are still public
companies in need of patient capital to fund
periods of strategic change in an ownership
environment that prioritises cash flow and
long term returns.
12 private equity international september 2012

keynote interview: ETHOS PRIVATE EQUITY
Our model is
to back strong
management
teams and give
them the opportunity to
do even better
According to Chuphi, Ethos is “very
proactive” in its deal sourcing; the firm’s
last three deals have all been uncontested.
But equally, it does not shy away from auction
processes– or from complex publicto-privates
– if the price is right. “We’ve
been around for 27 years – and because of
our reputation in the market with sellers
and management teams, we do get invited
to the dance when somebody is thinking
about selling.” The Ethos view is simple, says
Chuphi: “We pay fair prices for good businesses
that we can take from good to great.”
Operational value creation is crucial
to this. Approximately half of the returns
of Ethos’ last fund were attributable to
EBITDA growth, and it continues to evolve
its capability in this area. It has recently
appointed an operating partner, who is
involved from the earliest stages of a deal
in setting a value creation road map with
the executive management team.
Might this entail new management, too?
“Our model is to back strong management
teams who are doing a good job and give
them the opportunity to do even better,”
explains Chuphi. “So it’s mostly about bolstering
management teams rather than finding
replacements – introducing additional
capacity and capability at different phases of
the company’s growth. This might include
someone to oversee a new product line or
geographical expansion, for instance.”
Changing banks
One of the main strengths of South Africa
as a deal environment is the relative health
and stability of its banks. “There is no stress
in our banking sector – the banks here are
very much open for business,” says Chuphi.
In addition, over the past few years the local
market for high yielding debt instruments
has increased considerably.
A good illustration of this is the fact
that Ethos has recently been able to perform
three positive recapitalisations of
existing portfolio companies, where they
tapped the local capital markets for local
currency -denominated high-yield bonds.
“We’ve done this before, but it’s ratcheting
up in scale and becoming really viable as
a funding option,” says Chuphi. “We like
the flexibility the bonds give us from a
covenant standpoint. If there’s excess cash
in the business, it can either be repaid to
investors or it can be used to grow the
business.” Indeed, the breadth of financing
options in South Africa is far greater than in
other emerging markets like Brazil, Turkey
or India, he suggests.
There has been one big change with the
banks, however, with regulation making it
ever more difficult and expensive for them
to commit capital to private equity, most
are withdrawing from direct equity investment
activity altogether.
The withdrawal of banks from the sector
has had a positive impact for the remaining
players and therefore entry multiples,
Chuphi suggests. “I’d say the competitive
landscape is much more balanced now
september 2012 the africa handbook 2012
–there’s a better balance between supply
and demand of private equity capital. And
this is reflected in deal pricing in South
Africa where entry EBITDA multiples are
at a significant discount to those being paid
in other emerging markets.”
Although a number of the banks and
some local players have withdrawn from
the market, Ethos is seeing some new
entrants in the fray, including some global
players. These funds typically have a pan
African focus – but since South Africa is by
far the biggest market in the region, they
are likely to compete with South African
focused GPs like Ethos, particularly on
the larger deals. “South Africa is such an
important market that you can’t ignore
it; any deals of scale are more than likely
to be here than elsewhere in the region.”
explains Chuphi.
This does have an upside, however, as he
points out: for firms like Ethos that are currently
trying to fundraise in a difficult environment
(it’s hoping to close its sixth fund
towards the end of this year), the interest of
global players provides hesitant LPs with a
ringing endorsement of the region’s prospects
as an investment destination. Given
South Africa’s strong fundamentals, it’s
an investment destination that certainly
shouldn’t be overlooked. n
There is no
stress in our
banking sector
– the banks
here are very much
open for business
13

keynote interview: ETHOS PRIVATE EQUITY
company profile: ETHOS PRIVATE EQUITY
ETHOS PRIVATE EQUITY: Unparalleled history of over 25 years successful investing
Ethos is exclusively in the business of private equity. We have an unparalleled record of successful,
sustainable investing across economic and political cycles.
Ethos represents a unique combination of skill, innovation and stability.
Long-term THINKING
We have played a pivotal role in developing and formalising
the South African private equity industry, establishing it as a
significant and attractive alternative asset class in this region.
Ethos is independently owned and managed. Our highly experienced,
cohesive investment team comprises 19 professionals.
Notably, all our Partners have worked together for ten years
or more.
The breadth of experience and stability of Ethos’ team has
pioneered thought leadership in South African private equity.
Long-term INVESTING
Ethos is a control and growth investor. We make long-term
investments into medium-to-large businesses in South Africa
and selectively in sub-Saharan Africa.
We take an active ownership role in our portfolio companies
and generate value by partnering management teams to improve
strategic, operational and leadership capacity.
Our core premise is that the businesses into which we invest
are stronger, more robust, more sustainable and more valuable
on exit than they were prior to Ethos’ ownership.
Ethos has successfully concluded 102 acquisitions: 89 have been
successfully realised.
In the past year, Ethos has concluded:
• 3 new acquisitions with a total enterprise value of $480
million
• 3 portfolio exits generating proceeds of $710 million
• 1 IPO of a portfolio company to facilitate further access to
growth capital
• 2 high yield long-term refinancings of portfolio companies
amounting to $280 million
• 3 follow-on investments in portfolio companies amounting
to $40 million
Ethos is currently raising and investing Ethos Fund VI.
Long-term VALUE
Responsibility is our ethos.
We embrace the premise of a ‘good corporate citizen’ and firmly
believe that our activities enhance social development and economic
value by:
• Building better businesses which are more robust and sustainable;
• Adopting ‘best in industry’ corporate governance and reporting
practice;
• Facilitating greater ownership and participation of black
people in the mainstream of the South African economy;
and
• Attracting foreign capital to South Africa and the broader
sub-Saharan region.
www.ethos.co.za
@EthosPvtEquity
14 private equity international september 2012

LP APPETITE
Out of Africa
Why are some institutions
still reluctant to invest in
African private equity,
despite the region’s
attractive fundamentals?
Fay Sanders asks four
leading LPs what the key
roadblocks are
We’d be
faced with
the challenge
of how many funds
are worth backing in a
country as big as Nigeria
Adveq
Global fund-of-fund investor Adveq was
a relatively early investor in African funds
when it made its first commitment there
over five years ago. The group has continued
to look at Africa over the years, but views
other regions as being more attractive,
according to Tim Creed, executive director
at Adveq. “The challenge is that the volume
of investment we would want to place does
not match with the number of deal opportunities
we are seeing in Africa,” he notes.
Adveq has around $4.5 billion of assets
under management, but only a relatively
small proportion of this is dedicated to African
investments. “We see massive opportunities
in US venture, in European small buyouts
and turnarounds or in growth investments in
China and India where there is a high volume
of relatively good quality managers,” Creed
explains. “In Africa we’re not yet seeing the
same volume of high quality fund managers
that are able to find good quality deals,
grow the companies rapidly and support that
growth through to exit.”
Corporate governance and responsible
investment play a key role in Adveq’s
fund selection process. “We are a UN PRI
(United Nations Principles of Responsible
Investment) signatory and we take ESG
issues very seriously. On a company level
and on an investment management level
there are issues in a number of countries we
have looked at in both Africa and also Asia,”
Creed says. “Our objective is to find managers
that make the best possible investments
in keeping with the powerful framework
of the UN PRI.”
Adveq created its structured risk return
framework for investing back in 2001,
which it uses to assess managers across all
geographies. These well-established criteria
include a bottom-up stance towards fund
managers, Creed says. “We look at the
returns we can expect the manager to
achieve, as opposed to having a top down
approach and selecting, say, the best ten
managers and then looking at their return
prospects.”
Nevertheless, the recent influx of new
GP talent in Africa bodes well for future
fund investments from Adveq, Creed
acknowledges. “We are likely to make more
commitments over the coming years as
there are more competent players on the
ground.”
PPM Managers
PPM Managers has been making commitments
to private equity funds throughout
Asia, central Europe and Russia for over a
decade. However, the London-based investor
has yet to commit to an Africa-based
fund. Simon Faure, investment director at
PPM Managers, says the sheer scale of the
African continent makes it a tough market
just to dip into. “It’s quite a high hurdle
to take on somewhere as diverse as Africa,
largely because of the amount of countries
that we already cover. We have 26 active
managers for a £1 billion of commitments
so we can’t be everywhere.”
PPM Managers spent quite some time
looking at North Africa, and in particular
Egypt, in 2009 after spying the good returns
made by certain GPs. However, political
unrest and the onset of the Arab Spring put
pay to making any investment in the country.
While currency volatility remains a concern
for South African commitments, the investment
director was upbeat about West and
East Africa. “We’ve heard good things about
Nigeria,” Faure says, “but we’d need to make
sure it was really worth it from a risk-return
16 private equity international september 2012

LP APPETITE
point of view. We’d be faced with the challenge
of how many funds are worth backing
in a country as big as Nigeria and we’d want
to make more than just one investment.”
Repeatability plays a key part in PPM
Managers’ investment decision. “GPs need
to be able to show they can get in and out
of transactions successfully over a period
of time,” explains Faure, who acknowledges
that a few fund managers in Nigeria have
begun to achieve this.
PPM Managers has clearly done its
research. “We’ve looked at the data and
attended AGMs and forums to see if anything
emerges that would shift our position,”
notes Faure. “It boils down to the risks
that we perceive, not just from interviewing
GPS, but also through triangulating the
experiences of emerging markets LPs we
talk to like CDC, which has been investing
in Africa for years.”
When analysing investment opportunities,
Faure recognises that prejudices about
how difficult it is to do business in Africa
owing to crime and corruption, need to be
broken down. “Each market carries its own
risks, but it’s about finding the right team
with a long-term strategy,” he says. “Returns
are nice to look at on quarterly reports, but
it’s about having a consistent strategy that
can be deployed over a ten-year period.” He
remains wary of GPs that dip in and out of
different sectors dependent on market volatility
or those that think buying a company
at 3x EBITDA, then selling it to a foreign
investor at a 10x multiple a year later is
sufficient to become worthy of investment.
It is possible that PPM Managers would
make its initial African investment in a pan-
African rather than a country specific fund
to spread the risk, and, who knows, it might
be sooner than expected. “We are happy to
Creed: the volume of investment we would
want to place doesn’t match the opportunities
Demontis: Africa is on our radar screen and we
continue to spend resources on the region
september 2012 the africa handbook 2012
look at African investment opportunities or
to invest in the early phases of a franchise,
provided the strategy is consistent with the
style of investments we have backed elsewhere
in the world,” Faure notes.
ATP Private Equity Partners
When Danish investor ATP Private Equity
Partners raised its third fund in 2007, it
broadened its investment mandate to markets
outside Western Europe and the US.
Despite not having invested in Africa yet,
the group has now committed to funds
based in Australia, India, Central and Eastern
Europe, Turkey and Latin America.
ATP PEP did a lot of desktop analysis
on Africa five years ago, especially South
Africa, which the group visited several
times. “In 2008 we met with a lot of South
African GPs that had good track records
and interesting teams,” Claudio Demontis,
vice president at ATP PEP says. “Continental
Africa has a number of characteristics
we like such as higher GDP growth, and in
South Africa there are strong legal systems
and good business environment, as well as
some private equity managers with significant
experience and long track records
dating back to the 1980s.”
However, the financial crisis put paid
to any investment in the region. “It added
additional risk to the existing risks already
associated with Africa, amounting to more
risk than we would be comfortable with,”
Demontis explains. “Apart from India, we
had not made any investments outside the
US and Europe at that stage.” The world was
suddenly looking a very different place to a
year previously and this was taking its toll
on Africa, he says.
The Danish private equity fund investor
is still following the region closely. ››
17

LP APPETITE
›› “In general Africa has been doing a lot
better over the last 10 years, compared
with the previous 10 years,” Demontis
says, alluding to various improvements
in the economic and political landscape.
“Africa comprises huge areas of untapped
natural resources and we’ve seen a number
of successful investments being made. The
rising middle class and the growing younger
population is driving consumer spending
and there is increasing investment in sectors
like telecoms, oil and gas, infrastructure and
education. The public sector is improving
and, more importantly, there has been a lot
more focus on political stability and open
systems than previously, which has created
the framework for attracting capital into
countries like Nigeria and Kenya.”
On the flipside, Demontis is all too
aware that in some African countries crime,
corruption, inequality and poverty are still
rife. Moreover, “Africa has a large amount
of youths aged between 15 and 30; if they
can’t find a job it imposes a large burden
on the countries.”
ATP PEP continues to monitor the
region and Demontis is hopeful about
paying Africa another visit in the not too
distant future. “It’s on our radar screen
and we continue to spend resources on
the region and to meet with African GPs”
The fact that private equity penetration
and competition is lower in Africa than in
other less developed markets, is helping to
do away with some of the “crazy pricing”
that is typical of some other high growth
markets, Demontis notes.
That said, ATP PEP remains a conservative
investor that would prefer to see “stable
returns, than jeopardise returns with a
higher risk, unless we can see a clear path
to significantly higher returns.”
Adams Street Partners
Adams Street Partners made its first commitment
to a South African private equity
fund in 2010. Today, it is keen for a bigger
Nairobi: street scene
slice of the action and is looking at committing
to another South African fund. “In
the coming investment period it’s likely we
will have invested in sub-Saharan Africa
too,” says Arnaud de Cremiers, partner
at Adams Street. “We have certainly been
stepping up our research in sub-Saharan
Africa over the last couple of years,” he
adds, explaining that the global investment
firm has already paid several visits to the
African continent.
“African private equity, in terms of its
development as an asset class, is roughly
where Asia was 10-12 years ago, but the
private equity industry is moving a lot faster
now than it was then,” de Cremiers says.
“African private equity has developed rapidly
over the past four years; high calibre
private equity professionals are increasingly
returning to Africa and there has been positive
macroeconomic and political development.”
Although there is a limited number
of African private equity houses with a
well-established track record, de Cremiers
views the next few years as the prime time
to commit to local funds. “There won’t be
a massive influx of capital over this period,
but in three to four years’ time there will
be more funding, more competition and
possibly lower returns.”
In terms of the risks associated with
investing in African private equity, de Cremiers
remains refreshingly unfazed. “The
risks are pretty similar to those in other
emerging markets. People often fail to overcome
the first level of research and focus
on problems that are not so relevant on
the ground; such as corruption or political
risk,” he says. “People often misunderstand
the risks in Africa and therefore expect
unrealistically high returns.”
De Cremiers prefers to talk about challenges,
rather than risks. “It’s more about
finding the right people to execute the
growth plan and the quality of the GP’s
network on the ground is very important
to this end.” n
18 private equity international september 2012

expert commentary: abax
Business conduct
Richard Arlove, chief
executive officer of Abax,
weighs up the whys and
wherefores of corporate
governance when investing
in African countries
Arlove: corporate governance is making rapid
progress in Africa
In the wake of the several major scandals
that have shaken the business world since the
turn of the century, corporate governance
matters have taken a growing importance
across the developed world. The question
of how much progress it has made across
the African Continent ought to be asked.
Applied to this continent, it is through the
angle of ‘how much protection and assurance
does good corporate governance in
African countries give to investors’ that we
are choosing to focus. A survey of international
investors conducted in 2002 by
McKinsey & Co had found that 85 percent
of respondents consider corporate governance
in Africa – and Eastern Europe – to be
at least equally, if not more important than
financial issues in deciding which companies
to invest in. One can reasonably assume
that the current opinion amongst investors
on this crucial question will have at least
remained the same ten years later.
Over and above the four basic principles
of good corporate governance – namely
fairness, accountability, responsibility and
transparency – the definition of corporate
governance is seen to vary from one
country to another. This in turn raises the
question of which definition of corporate
governance to adopt in the case of African
countries in general and to that of investments
on the continent in particular.
For the sake of this commentary we
will adopt one of the definitions encountered
in literature available on the subject
whereby corporate governance is defined
as “the set of mechanisms through which
outside investors are protected against
expropriation by insiders”. Insiders include
managers, major shareholders, as well as
large creditors. Outsiders include equity
investors, providers of debt, minority
shareholders etc.
september 2012 the africa handbook 2012
As per this definition, the key issues in
evaluating a corporate governance system
are therefore: (i) the legal protection of
investor rights, (ii) trustworthy accounting
and disclosure standards, (iii) effective
boards of directors and also preferably (iv)
an active market for corporate control. We
will at this point focus mainly on (i) and
(ii) above in our assessment of investors’
requirements in terms of corporate governance
with a focus on Africa, as those are
mostly relevant to our argumentation.
The fact that African countries have
been attracting no more than 5 percent
of world FDI (foreign direct investment)
while being endowed with so many
resources may point, amongst other things,
to a weakness in standards of corporate
governance. At the same time it is true to
say that corporate governance across the
African continent cannot be studied in a
conventional way, simply because of the
existence of institutional deficiencies at
varying degrees when specific countries
are taken into consideration. Hence, still
to date, many countries on the continent
are seen to fail to provide to investors the
necessary comfort and reassurances they
require. The governance system in many
countries is faulty, there is no clear separation
of powers, respect of property rights
is limited, contracts are not enforced, the
legal system’s ability to prevent political
intervention is weak and the information
environment is opaque.
However, there are ample signs of things
changing for the better: at least at the level
of intentions, as witnessed by the growing
number of countries having developed
national codes of corporate governance (of
which Ghana, Kenya, Malawi, Mauritius,
Nigeria, South Africa, Tanzania, Uganda,
Zimbabwe, Zambia) or those who have ››
19

expert commentary: abax
›› committed to do so. The World Bank and
the Commonwealth Secretariat have been
instrumental in this process, providing training
and technical support to a wide number
of countries. At the level of publicly-listed
companies, there are indications that businesses
listed on African stock markets today
have corporate governance standards that
are at par with those observed on emerging
markets. While in many countries the primary
focus is seen to have been on publicly
listed companies, it is encouraging to note
that the move towards corporate governance
on the continent has of late encompassed
SMEs as well as state-owned enterprises.
Some of the requirements of investors
in terms of corporate governance are
seen to relate to the macro level, namely to
the laws and regulations in place. It is the
case namely of the protection of investor
rights, also a key element measured in the
Doing Business Survey of the World Bank.
In the 2011 report for sub-Saharan Africa,
South Africa ranks 1st for the protection of
investors, followed by Mauritius (2nd) and
Rwanda (3rd). However in terms of world
rankings, while South Africa and Mauritius
are seen to occupy the 10th and 13th position
respectively – which is commendable
– Rwanda is positioned at the 29th place.
This gives a fair indication of the progress
yet to be seen in most sub-Saharan African
countries in terms of protecting investors.
Another factor likely to give comfort to an
investor contemplating investing in Africa
is whether he will be able to avail himself
of an existing Investment Protection
What makes the
African situation
difficult is that
African economies are
very much transition
economies
and Promotion Agreement (IPPA) with
the country concerned. In this respect, a
country’s network of IPPAs may be considered
as an indication of the extent to
which it is committed to protect foreign
investors’ rights.
In terms of accounting, disclosure,
accountability and reporting standards,
there are still quite a lot of challenges
in the implementation of International
Financial Reporting Standards (IFRS)
across the African continent. The situation
with regard to a common form of financial
reporting through IFRS varies widely from
country to country. Francophone countries
tend to retain their French-inspired
domestic accounting rules. South Africa
by contrast has been a financial reporting
powerhouse with a highly regarded stock
exchange and an impetus in implementing
IFRS for small- to medium-sized enterprises
(SMEs) unrivalled around the world.
Similarly, Mauritius has long ago already
adopted and complied with international
norms and standards such as IFRS. Countries
of the Eastern African region are
steadily moving towards the adoption of
IFRS, and to the West, Nigeria has been on
schedule with implementing IFRS starting
January 2012. On the legal front this
time, the Economic and Monetary Union
of West Africa (UEMOA) is planning to
implement IFRS for SMEs as law in its
eight member counties. On the whole,
the World Bank observes that there is no
country resistance to IFRS anymore but
the main hurdle remains a problem of
capacity and namely the number of qualified
accountants. The latter is seen to rise
sharply in Kenya, Uganda and Zambia,
moving steadily towards critical mass. In
many other countries however, this hurdle
can only be overcome with time.
It can be said therefore that, in general,
corporate governance is making rapid
progress in Africa, permeating the way
business is being done and giving assurance
to shareholders and investors that their
interests are being safeguarded. However
hopeful this general situation may be, it
points to the absolute necessity to take a
case by case standpoint when gauging a
specific country on the scale of corporate
governance. What makes the African situation
difficult is the fact that African economies
are very much transition economies.
In many countries of the continent, one
still finds a large number of state-owned
enterprises, a lingering culture of corruption,
an unfriendly business environment
and a low level of financial intermediation,
among other factors present. On a macroeconomic
level, excessive regulation such as
strict exchange control is seen as a severe
impediment to the development of business
through the injection of foreign capital.
In view of the above, and to benefit
from the growing business opportunities
the continent represents, an investor will
often choose the comfort of a well regulated
jurisdiction, or that of an international
financial centre with a proven track record
through which to route its investments to
an African country. Some places are very
well positioned to achieve this role, amongst
which Mauritius.
In addition to being a well regulated and
mature financial centre often acclaimed by
international bodies, the country has strong
political, historical and cultural links with
Africa while at the same time remaining
slightly independent and detached. It is a
member of several regional and continental
organisations such as the AU, SADC and
COMESA and is a signatory to numerous
bilateral agreements with other African
countries. It has long been looked up to by
emerging African countries considering it
as the little brother that has done well and
to which they turn for the example to be
followed. Moreover, the Mauritius international
financial centre which is regulated by
20 private equity international september 2012

expert commentary: abax
the Financial Services Commission makes
it mandatory for the companies registered
there to adhere to a Code of Corporate
Governance, and frequent reviews of the
legal framework enable the jurisdiction to
remain at par with more traditional financial
centres.
Currently, more than 40 percent of
investments being made through the
Mauritius jurisdiction have an African
destination; members of the East African
Community alone have received more than
$50 billion of FDI through the Mauritius
international financial centre over the past
eight years; a testimony if need be of the
pertinence of the Mauritius jurisdiction for
the domiciling of investments destined for
African countries. n
company profile: Abax
An international provider of corporate management and advisory
services, Abax focuses on delivering solutions to businesses and
funds in Africa and Asia. The firm’s offering comprises business structuring,
fund administration, corporate management, outsourcing,
accounting, tax and trust services. Headquartered in Mauritius, Abax
also has offices in Dubai, Cyprus, Singapore and recently opened in
Kenya. Through its international network of partners, the company
also provides services in many other financial centres and markets.
For over 18 years, Abax has built a strong and global client base
including private equity funds, fund managers, collective investment
schemes, institutional investors, trusts and development finance
institutions. Abax currently has over USD 14 billion of client assets
under administration.
september 2012 the africa handbook 2012
21

Development finance
DFIs: are they in or out?
Development finance institutions have played a vital
role in building Africa’s private equity ecosystem,
yet there are signs of strategy shift towards direct
investing among some. Should GPs be nervous?
Vicky Meek reports
Africa’s private equity industry has come
a long way over the last decade, growing
from a handful of funds to the situation
today, where funds are active in almost
every market on the continent. A major
part of the industry’s growth is attributable
to the involvement of development
finance institutions (DFIs), which have
worked with general partners to develop
existing firms and helped seed promising
new managers.
Indeed, funds such as Adlevo Capital,
a technology-focused firm based in Lagos,
Nigeria, would never have got off the
ground had it not been for the support of
DFIs such as CDC Group. For firms such
as Adlevo, the DFIs provide valuable capital
particularly at first-time fund stage when
other, commercial investors would shy away.
And for the DFIs, investment via funds such
as Adlevo allows them to direct capital to
areas that will achieve their development
aims – in Adlevo’s case, the thesis is that
economic progress in sub-Saharan Africa
will be driven by the application of technology
to business processes.
It’s a symbiotic relationship that has
worked for many years. Yet there are signs
that this is starting to break down, with
some DFIs increasingly eschewing fund
commitments for investment directly into
African companies.
“There is a definite trend towards direct
investment among many of our members,”
says Jan Rixen, general manager of the Association
of European Development Finance
Institutions (EDFI). “Many have become
more mature and have gained the experience
required to do more direct investments
and we’ve seen some of our smaller
members re-establish offices in Africa over
the last few years.”
There has also been a move among some
DFIs to pool resources to help them with
direct investing. “We are seeing more cooperation
among DFIs on direct investing as
this takes a significant amount of resource
to get right,” says Rixen. Last year, EDFI
announced a new joint venture between
the European Investment Bank, the Agence
Française de Développement and 11 EDFI
members to make direct investments in
companies that mitigate and prevent climate
change, for example.
Proparco is believed to have withdrawn
from fund investments (although
the organisation did not return requests
for comment) and Norfund has confirmed
that it is scaling back its fund investment
programme. The latter will now only invest
We are seeing
more cooperation
among DFIs on direct
investing as this takes
a significant amount of
resource to get right
22 private equity international september 2012

Development finance
Southey Holding: funded largely through DFI investments in Aureos’ 2008 Africa fund
in funds where it believes it is “clearly
additional”, according to its grant facility
manager and development adviser, Maria
Tsujimoto Frengstad. CDC also caused
consternation last year when it changed
tack: after having been purely a fund of
funds manager following the sale of Actis
and Aureos, it announced it was to “go back
to the roots of CDC on direct investing,
providing both direct equity and debt to
companies”, in the words of Africa portfolio
director Jeremy Cleaver.
The impact of such developments could
be serious for private equity in Africa. Vital
sources of capital could dwindle, affecting
fund managers’ ability to raise new vehicles
as commercial capital remains thin on the
ground. “If DFIs scale back fund investment
in Africa, that will significantly increase the
barrier to entry for new fund managers,”
says David Wilton, chief investment officer
at IFC, which is continuing its fund investment
programme at a level of around $100
million a year in commitments. “Commercial
investors need a full track record before
they invest in emerging markets funds and
most fund managers don’t achieve that until
fund three. And without new fund managers,
the mid-market and SME space would
be starved of capital, as many of the funds
that raise successor funds move up to the
larger end of the market – there is a concentration
of capital at the top.”
“DFI capital remains important funding
for first time funds in Africa,” says
Anne Keppler, in DEG’s Johannesburg
office. “DFIs assist in establishing standards
and help ensure that GPs follow best
september 2012 the africa handbook 2012
international practices. Other investors
sometimes take comfort from the work
completed by DFIs in this regard.”
In addition to creating a fundraising
vacuum, by moving more into the direct
space DFIs may well find themselves in
direct competition with the GPs they have
sought to foster over the years.
So why the shift? It’s not just about
increased experience among DFIs. “Investments
through private equity funds have
proved to be quite expensive,” says Tsujimoto
Frengstad. “And there are challenges
with (lack of) alignment of interest between
GPs and LPs.”
And, given the state-backed nature of
most DFIs, political issues have also come
into play. “Funds have got themselves a bad
name in many political circles,” says Rixen.
“The fact that most are domiciled offshore
has raised concerns among many of the
states running DFIs. The discussions around
tax havens have made it more difficult to
invest in private equity via funds.”
Over the last couple of years, some DFIs
have been prevented from investing in funds
that are domiciled in offshore locations. Yet
that creates a problem if DFIs are attempting
to help funds attract commercial capital.
“Private investors don’t want to invest
in mainland vehicles because of the issues
of double taxation.” Fund managers are
between a rock and a hard place on this:
to attract DFI money they would need to be
onshore, yet to bring in private money they
would have to be domiciled offshore.
However, on this issue at least, there
may start to be some movement in favour
of GPs. Swedfund, for example, had been
directed by the Swedish state not to invest
in private equity funds. “The taxation concerns
about offshore vehicles meant that
our political owners were very sensitive,”
explains Swedfund senior investment manager
Fredrik Torgren. “However, now that
offshore locations are complying more with
European directives, we are now able at ››
23

Development finance
›› least to review fund managers. We don’t
have full clearance yet to invest, but we are
hoping for a positive decision soon.”
CDC is also seeking to reassure fund
managers. “We are much more focused on
the development impact under the current
government,” explains Cleaver. “That
means we are more focused on the frontier
markets – we’ve recently committed to an
Ethiopian fund, for example. We will continue
to be keen to fund teams that we can
work with over a number of years.” And,
even if the proportion of capital dedicated
to funds is set to reduce at CDC to 60
percent by 2015, he adds, the fact that the
organisation has narrowed its geographic
focus and is expecting capital to return
from legacy funds in markets such as China,
South East Asia and China means that the
amount available for fund investment in
Africa will remain steady.
And, even if some DFIs are moving away
from fund investment, they will likely be
replaced by others seeking to deploy capital,
adds EMPEA vice president Jennifer
Choi. “Whether the impact is great on private
equity funds depends on the size of
the programme,” she says. “Some of those
believed to be cutting back don’t have large
programmes. In any case, you have organisations
such as OPIC actively seeking to
increase their fund investments.” Indeed,
OPIC recently announced $500 million
in commitments to private equity funds
focused on renewable energy.
If DFIs scale
back fund
investment
in Africa, that will
significantly increase the
barrier to entry for new
fund managers
Africa funds in which the Development Bank of South Africa (DBSA)
invested over a 15 year period
Source: The 2010 EMPEA report on Africa
1995–2000
$560 million in committed capital
46%
private
sector
54%
from DFIs
70%
foreign LPs
30%
local LPs
But what of concerns that DFIs will compete
against GPs for direct deals? Some say
this has already happened on occasion. Yet
the DFIs claim this should not be an issue
as their target investments are either completed
via co-investment with GPs or are in
areas that private equity investors would not
normally seek to address. “There are some
DFIs that are moving more towards direct
investing and there is potential for a tension
between GPs and DFIs,” says Annette Berendsen,
manager of business development
at FMO, which continues to invest mainly
via funds from the Hague. “But we believe
that if we stick to our mandate this shouldn’t
happen. We take the view that we must not
push private capital out of the market, but
add value. If others take the same view, there
shouldn’t be a problem.”
Tsujimoto Frengstad adds: “Norfund is
mandated to take on high-risk projects –
many of which do not fit with private equity
funds’ (or others’) investment strategies.
Our willingness to take on certain kinds
of risk is one of the main ways Norfund is
additional. I don’t think Norfund competing
against private equity funds is a current
problem, but the issue is something
we take seriously and consider before
investment.”
2005–2009
$1,350 million in committed capital
64%
private
sector
36%
from DFIs
48%
foreign LPs
52%
local LPs
Note: data reflects only funds in which DBSA had invested
In fact, says Tsujimoto Frengstad, direct
deals completed by DFIs may even provide
a new source of deals for GPs. “We strive
to make our portfolio companies attractive
to other investors,” she says. “This enables
us to exit and the company gains access to
the finance it needs in the market. If we sell
to a local fund, for example, once the company
is sufficiently developed or the main
early phase risks are mitigated, it could be a
win-win situation. The company gets early
stage and later stage financing; Norfund can
exit successfully; and funds can find suitable
companies that need further financing.”
The shift among some DFIs is clearly of
some concern to African GPs on a number
of fronts. Yet the picture is more complex
than the wholesale shift to direct investment
that a number currently fear. There
remain many DFIs that continue to invest
in funds, providing the necessary capital
for the industry’s growth, and, where there
is a move towards direct investing, there
appears to be a clear desire among DFIs
to target specific areas that don’t already
receive capital. While competition for
assets may crop up in some deals, it seems
unlikely to be a major bugbear and may
even offer new opportunities for Africa’s
GPs. n
24 private equity international september 2012

expert commentary: kpmg
Taxing issues in South Africa
Michael Rudnicki and Nicola Carr give a comprehensive
overview of salient tax issues for savvy investors in South
African private equity
One of the most significant factors influencing
the success of private equity in any
jurisdiction is the tax, legal and regulatory
environment governing limited partners,
general partners, fund managers and investee
companies. In determining whether a
particular jurisdiction provides a favourable
environment for private equity, the following
factors should be taken into account 1 :
• The tax and legal environment for
limited partners and fund managers
– the ability to set up investment
fund structures that are favourable for
both local and foreign investors (i.e. tax
transparency for investors, the ability
Two-tier limited partnership fund structure
for foreign investors to avoid creating
permanent establishments, and the
availability of fiscal incentives);
• The tax and legal environment
for investee companies – favourable
fiscal business environments (i.e. provision
of incentives or special tax rates
for young and innovative companies,
the ability of the investee companies
to deduct interest expenditure); and
• The tax and legal environment
for retaining talent in the fund
managers and investee companies
– the provision of performance-related
incentives through the use of equity
participation including, inter alia, carried
interest and co-ownership in the
private equity fund.
As illustrated above, one of the most
important considerations that will assist
in promoting and preserving private equity
investments in South Africa is the tax environment
within which the South African
private equity funds must operate. Accordingly,
we proceed to set out below a discussion
on the salient tax considerations and
challenges that currently face the private
equity sector in South Africa.
The fund structure
One of the most common structures for
private equity investments in South Africa
is a two-tier en commandite (or limited)
partnership structure. This structure typically
has the following characteristics:
• A partnership is transparent from a tax
perspective in South Africa, and thus this
provides for the flow through of investment
returns from the investee companies
to the investors on a tax neutral
basis, with the eventual tax liability generally
arising in the hands of the investors
(as opposed to in the partnership itself);
• En commandite partnerships ensure that
investors (as limited partners to the
partnership) have limited liability (to
the amount of their contributions);
• The executives’ interest in the partnership
typically comprises of ownership
of a participatory interest on the same
terms as the other limited partners. The
executives’ interest in the carry may be
in various forms, including the use of a
trust. In this regard, a trust can be set up
to act as a conduit from a tax perspective,
and thus investment returns can be ››
1 Benchmarking European Tax and Legal Environments, published by EVCA and KPMG in October 2008
september 2012 the africa handbook 2012
25

expert commentary: kpmg
››
distributed to executives (as beneficiaries
of the trust) on a tax neutral basis,
with the eventual tax liability arising
only in the hands of the executives (as
opposed to in the trust itself).
Taxation of investment returns
The salient South African tax considerations
of investment returns for the various
partners in a private equity fund (including
local, non-resident and South African tax
exempt investors such as pension funds)
are highlighted hereunder:
Partnership returns
For both capital gains tax (CGT) and
income tax purposes, profits and capital
returns generated by a private equity fund
are allocated to the partners in accordance
with a profit-sharing ratio, usually determined
with regard to a profit participation
waterfall. For example, dividends and
interest are allocated to the partners in
accordance with the profit-sharing ratio.
Similarly, returns of a capital nature (i.e.
arising on the disposal of interests in an
investee company) will also be allocated
in accordance with the profit-sharing ratio.
Expenditure incurred in respect of
the private equity fund will be eligible for
deduction in accordance with the profitsharing
ratio. In this regard, difficulties
generally may arise with the allocation of
capital expenditure between the partners
due to the prescribed rules relating to the
inclusion of expenditure for CGT purposes.
For example, the allocation of management
fees to the cost base of an equity investment
for CGT purposes (in the event that the
management fees are disallowed as a revenue
tax deduction) is questionable under
the current CGT rules, and accordingly, no
tax benefit may potentially arise in respect
of expenditure of this nature.
Dividend Withholding Tax
The taxation of dividends changed with
effect from 1 April 2012. The liability has
shifted from the company declaring the
dividends (i.e. in terms of Secondary Tax
on Companies) to the beneficial owner of
the share (i.e. in terms of the new Dividend
Withholding regime). In terms of the new
regime, dividends declared to South African
resident companies and pension funds will
be exempt from the dividend tax.
Dividends declared by South African
companies to non-resident shareholders
and natural persons will be subject to
Dividend Withholding Tax at a rate of 15
percent. However a reduced rate of tax may
apply to non-residents, to the extent that
there is a double taxation agreement in
place between South Africa and the jurisdiction
of the non-resident investor.
Interest Withholding Tax
Interest paid to non-residents will be subject
to withholding tax with effect from 1
January 2013. As a result, local companies
must withhold a final tax of 15 percent on
interest paid to non-residents, subject to
specific exemptions.
The deduction of interest and
limitations on deductibility in the
investee companies
In terms of recent draft proposed legislation 2 ,
the deduction of interest, which accrues to
entities that do not include the interest as
taxable income for South African tax purposes
(i.e. such as non-residents and pension
funds), will be deferred until such time as
the interest is actually paid. This will have a
significant impact on investee companies as
they will not be entitled to deduct rolled-up
interest accruing to non-resident or pension
funds investors.
Taxation of executives
The critical debate surrounding executive
participation in private equity funds
(in whatever form) is whether the participation
can be linked to the executives’
employment with the fund manager. This
is a difficult matter that has not yet been
addressed in the Income Tax Act No. 58 of
1962 (the Act), from a private equity context,
or tax jurisprudence. Accordingly, the
application of the tax rules associated with
income derived from employment need to
be addressed.
In terms of the Act, the rules associated
with equity participation (either through
the provision of equity, options to acquire
equity, or contractual rights which derive
their value from equity) are centred around
a link to employment, together with the
imposition of specific restrictions associated
with the particular instrument (as
contemplated in section 8C of the Act).
The consequences of providing equity
participation to executives that have an
enduring employment link from inception
to exit of the private equity fund, is that the
realisation value of each executive may be
subject to tax at a maximum marginal rate
of 40 percent. Arguments that defend such a
result are likely to include the causa for which
the instrument was acquired from the outset.
The presence of an employment link
coupled with restrictions applied to relevant
instruments, such as lock-in and goodleaver
/ bad-leaver provisions, may create
adverse tax consequences for employees.
The deductibility of interest on the
acquisition of equity in the investee
companies
Currently, where interest-bearing loan
funding is obtained to purchase equity
shares, the interest incurred will not be
tax deductible. Accordingly, most private
equity transactions in South Africa are
implemented utilising short-term bridge
funding which is used to acquire equity in
the investee company, followed by the sale
of the business of the investee company
into a new company utilising tax-relief
provisions contained in South African tax
legislation. The bridge funding is settled
and long-term interest-bearing funding is
2 The draft Taxation Laws Amendment Bill, 2012 (“draft TLAB”)
26 private equity international september 2012

You know Africa is brimming
with opportunity but do
you know how to make
the most of it?
You need a partner that understands Africa, that
can help you get the most from your investment.
We get Africa.
And we get you.
For more information, please contact
Anthony Thunstrom on +27 (0)31 327 6011
or email anthony.thunstrom@kpmg.co.za
kpmg.co.za
© 2012 KPMG Services Proprietary Limited, a South African company and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa
MC9346. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.
advanced into the new company. As a result,
the new company will be entitled to deduct
interest incurred, as the loan funding is
utilised to acquire the business of the investee
company (as opposed to equity shares).
The abovementioned transactions are
currently being subjected to scrutiny and
challenge by the South African Revenue
Service (SARS), and in light of this, various
provisions have been legislated to regulate
the deductibility of interest incurred in
respect of such acquisitions. In terms of
new legislation, depending on the nature
of the transaction, an interest deduction
cannot be claimed unless prior approval
is obtained from SARS, and approval may
not be granted in all instances.
Further, in terms of the draft TLAB,
interest incurred on loan funding obtained
to acquire equity shares will be tax deductible
in future, provided that certain requirements
are met. However, we note that the
deduction of interest in respect of transactions
of this nature will also require preapproval
from SARS.
Alternative funding mechanisms
In terms of South African tax legislation, in
certain circumstances, dividends received
may be treated as interest in the recipient’s
hands, and thus be treated as taxable and
not exempt income. This would typically
arise where a private equity investment
is funded with preference share funding,
and the preference shares are, for example,
redeemable within three years from
the date of issue, or (in terms of the draft
TLAB) are hedged with an instrument that
has debt-like characteristics (irrespective
of the redemption period).
Similarly, in certain circumstances,
interest incurred in respect of loan funding
will be treated as dividends, resulting
in the interest expenditure no longer being
deductible in the hands of the debtor. In
terms the draft TLAB, a debt instrument
will be treated as equity where, inter alia,
the debt (on a balance of probabilities) will
not be repaid within 30 years, repayment
is subject to the solvency or liquidity of the
debtor, or the debt is convertible into equity.
september 2012 the africa handbook 2012
Whilst often it is possible to structure
transactions to fall outside of the abovementioned
deeming provisions, the new
legislation proposed by SARS is becoming
more extensive and far-reaching, and may
have a significant impact on private equity
transactions in future.
Conclusion
The tax rules in South Africa need to be
comprehensively considered, not only at
inception of a new private equity investment,
but throughout the life of a particular
investment fund and upon exit, given
that the rules in South Africa governing
the taxation of private equity investments
are complex, and consistently undergo significant
amendments on an annual basis. n
Michael Rudnicki (partner) and Nicola Carr
(manager) are from the Corporate Tax department
at KPMG in Johannesburg. They can be
contacted on michael.rudnicki@kpmg.co.za or
nicola.carr@kpmg.co.za
27

Divestments
Heading for the exit
Exits have long been a challenge for Africa’s private
equity firms yet, while attracting buyers for businesses
remains far from easy, the continent’s realisation
options are starting to grow, finds Vicky Meek
Solid foundations: African assets are becoming more attractive to foreign buyers
Few would now deny the investment
opportunity that Africa presents. Home
to so many fast-growing economies, young
and rising populations and increasing disposable
incomes, private equity firms are
now seeing a wealth of opportunities right
across the continent. Yet, for all but the largest
deals, realising investments has always
been something of a challenge for firms.
Many corporates have historically viewed
Africa as a risky prospect, financial buyers
have been scarce and public markets shallow.
“Exits have historically been very difficult
in Africa,” says Jeremy Cleaver, Africa
portfolio director at CDC. “Funds that
were established in the early 2000s have
had some success, but those raised in 2006
and 2007 got caught up in the hiccup following
the financial crisis. A lot of funds
There is a lot of
activity among
Brazilian
buyers in Angola,
largely because of the
shared language
in Africa still have a significant number of
assets in their portfolios.”
There is still some way to go, but the
signs are that much of this is starting to
change. Indeed, even limited partners are
starting to appreciate the fact that exits
are now more possible in Africa than they
used to be. A recent Coller Capital/EMPEA
study of LPs found that just 14 percent of
respondents said that exit challenges were
a factor that would reduce their likelihood
of investing in the region.
One of the major forces at work is the
increase in private equity capital heading
towards the region. Some larger newcomers,
such as The Carlyle Group, which is
currently raising a $750 million Africa
fund, are joining emerging markets specialist
Actis as well as local African players,
such as Kingdom Zephyr and African Capital
Alliance, both of which have recently
raised large, $400 million-plus funds. The
development of the industry at the larger
end is creating exit opportunities for some
African funds through secondary buyouts.
Aureos Capital, for example, recently
sold its 49 percent stake in Golden Lay, an
egg producer in Zambia and the Democratic
Republic of Congo to a financial
buyer, the Phatisa-managed African Agriculture
Fund. And there are other similar deals
afoot. “We’ve seen an increase in interest
among financial buyers,” says Cleaver. “In
fact, there is currently an auction process
happening in Nigeria where an asset being
sold by a small private equity house is being
looked at by larger funds.”
“The presence of financial buyers is
increasing,” says Davinder Sikand, Africa
senior partner at Aureos. “Here in Kenya,
for example, we have around 30 private
equity firms on the ground and there are
a further 30 or so that fly in and fly out.
These firms cover the whole range from
small deals right up to the large ones.
As the private equity market deepens in
Africa, the potential for secondary buyouts
is rising. “Secondary buyouts are possible
for the right business,” says Murray Grant,
partner at Actis. “There is no reason why
Africa shouldn’t mirror the trends seen
elsewhere. Financial buyers see value in private
equity-owned businesses as many issues
will have been ironed out and many will be
28 private equity international september 2012

Divestments
looking for the kind of platform business
that smaller players are able to build.”
But it’s not just the potential for secondary
buyouts that is growing. Corporates,
both local and international, are starting
to become more acquisitive in Africa. On a
local scale, there are a number of industries
where structural changes are prompting
consolidation. Healthcare is one area where
this is happening; so too financial services.
Actis’s recent exit of Banque Commerciale
du Rwanda in a sale to Kenyan regional
player I&M Bank is just one example of
this trend in play. “Consolidation in the
banking sector is the prime driver behind
the Rwanda deal,” explains Grant. “For
now, that consolidation is happening on a
regional scale, so you are seeing it in East
Africa and West Africa. But I believe that
this is just a pre-cursor to consolidation
Alternative OUTCOMES
While the exit market may be improving,
its can still be tough getting an exit at the
smaller end of the deal spectrum. Focusing
on the $1 million to $5 million deal
size, Jacana falls firmly within this territory.
“Even if we are successful at growing
businesses several times over, exits can be
challenging – the exchanges are out of
reach and the businesses are too small for
strategics,” explains CEO Simon Merchant.
While there are some sectors of increasing
interest to strategics, such as healthcare
and financial services, in other sectors,
firms such as Jacana have to think laterally.
“Where we are not confident about exit
outcomes from trade, we have to look at
structuring deals differently,” adds Merchant.
“We can do deals that are similar
to mezzanine in that they sit between
debt and equity, such as subordinated
loan note securities with a coupon or PIK
Merchant: the exchanges are out of reach and
the businesses are too small for strategics
note. Alternatively, we can generate royalties
on sales.” The idea is that these deals
are self-liquidating, allowing the firm to
gain upside if the company grows without
the need to sell.
It’s a strategy used by others, even further
up the deal scale. “We have had some
success using structured exits,” says Doddy.
“We’re not mezzanine guys, but we have
found it is possible to structure deals so
that you get the cash flows from companies
and still get a private equity return.”
Another possibility is for funds to team
up with international companies. “We are
seeing some firms do joint ventures with
multinationals,” says Cleaver. “This mitigates
investment risk for the corporate
and brings the brand for the private equity
house. It can be an effective way of ensuring
an exit, but the downside is that you end
up tied to a particular buyer.”
september 2012 the africa handbook 2012
across the continent.” And Morocco, which
is home to a number of large businesses,
is increasingly looking to expand in sub-
Saharan Africa, say some.
International buyers are also warming up
to the possibilities in Africa’s private equity
portfolio, particularly those from emerging
markets. “There is a lot of activity among
Brazilian buyers in Angola, largely because of
the shared language,” says Grant. “And Indian
companies are looking for areas to expand
as domestic growth slows and companies
become bigger and better managed there.”
But what of China – a country that has
strong ties to Africa, particularly in the area
of natural resources? While China’s involvement
has historically been via governmentled
investment, Chinese companies are now
starting to look further afield. Emerging
Capital Partners recently sold its minority
investment in copper producer Anvil
Mining to Hong Kong-based MMG Malachite
and the firm’s co-CEO Hurley Doddy
says it is in discussions with another Chinese
group over a portfolio company exit.
As for the other main exit route, IPOs,
this may be some way off as local exchanges
remain illiquid and on many, such as Nigeria’s,
valuations have fallen sharply since the crisis.
Yet even here, there are some longer term
trends that give reason for optimism. The
Nigerian government has announced plans
to boost liquidity by pushing larger companies
towards public listings, while Ghana is set to
launch an AIM-like exchange for smaller businesses.
Aureos even has a couple of listings up
its sleeve – one in Kenya and one in Nigeria.
While it would be a push to describe
the exit market in Africa as vibrant, the
early signs of development appear to be
there. And, even where realisations remain
hard to come by, private equity is showing
itself to be highly adaptable (see box-out)
in finding alternatives. n
29

expert commentary: stanwich advisors
African investment round-up
Charles Daugherty,
managing partner of
Stanwich Advisors,
casts an eye over
developments in the
African private equity
market
Stanwich Advisors:
Firm Profile
Stanwich Advisors is a boutique investment
bank that focuses exclusively on
providing advisory and fundraising
services to private equity and venture
capital firms on a global basis. The senior
members of the Stanwich Advisors team
have worked together for an average of
12 years and have collectively raised in
excess of $17 billion for more than 40
funds across a wide range of private
equity strategies.
Over the past five years, Stanwich
Advisors has been particularly active in
emerging markets having successfully
raised capital for pan-regional, subregional,
and country specific funds in
Latin America, as well as funds focused
on China and India.
We have been active in emerging markets for
many years, particularly in Latin America
and Asia. Over the past 12–24 months, we
have seen a significant increase in appetite
from limited partners with whom we have
close relationships for private equity strategies
focused on Africa. Our experience is
supported by a recent survey conducted by
Coller Capital and EMPEA, which reported
that a majority of respondents indicated
that they are planning on expanding their
activities in Africa or beginning to invest in
the region over the next two years.
The increasing demand for Africa among
institutional investors has been driven by
several factors. First, Africa’s significant
natural resource endowment coupled with
its expanding middle class and increasing
consumerism have created positive growth
dynamics across many industries that have
historically been favorable for private equity
investment. For example, the retail, telecom,
banking, infrastructure, and natural
resources sectors are all expected to
present favorable private equity investment
opportunities over the near term.
Second, Africa remains significantly
underpenetrated from a private equity
investment perspective, particularly when
compared to its more popular emerging
market peers. The relative scarcity of capital
has created a view among some limited
partners that investment opportunities
in Africa may be less competitive than
in markets such as China, Brazil or India,
creating opportunities for well-networked
and experienced private equity players to
purchase stakes in high-quality companies
at relatively attractive valuations.
Finally, over the last decade, there has
been an emergence of several private equity
firms in Africa, which have provided solid
evidence that there is a positive role for
private equity to play on the continent and
that attractive investment returns can be
generated by managers with specialized
skills and expertise.
Africa Private Equity: Evolving
Market Place
Africa is an enormous and complex continent
consisting of over 50 countries, which
often vary dramatically in terms of their
economic, social and political conditions.
As the private equity market continues
to mature the differences between specific
countries, markets, and regions will
become more important as general partners
seek to differentiate themselves in
an evolving marketplace. Similar to what
has occurred in other emerging markets,
including Latin American and Asia, the
African private equity market appears to
be in the initial stages of a natural evolution
in which:
1) Sub-regional and country specific strategies
become more prevalent (as opposed
to the vast majority of funds taking a
pan-regional approach)
2) Experienced professionals spin out from
established platforms to create their
own firms
3) First time funds are founded by professionals
with varying degrees of relevant
experience (e.g., former entrepreneurs,
operators, consultants, and/or investment
bankers)
4) Large global players begin to enter the
market
Key Challenges for Limited
Partners
In light of the evolving marketplace
described above, particularly with regards
30 private equity international september 2012

expert commentary: stanwich advisors
to the growing number of spin-outs and
first time funds, limited partners are faced
with several challenges when looking to
deploy capital in Africa. Among the most
important and obvious considerations an
investor must examine, apart from the
macro opportunity, is a manager’s investment
track record. While private equity
is not new to Africa, very few firms have
deep track records making “traditional”
private equity investments over multiple
market cycles. In fact, in our conversations
with limited partners, this consideration
remains the largest deterrent for investors
that are new to the region.
Investors must therefore understand
the macro and micro drivers behind the
investment opportunity and be clear in
terms of what they must have as the sufficient
evidence of necessary ability and
expertise to execute against the opportunity.
They must be prepared to “roll up
their sleeves” to evaluate the return potential
of unrealized portfolios, make value
judgments with respect to key professionals’
attribution at previous firms, and/or
take first time fund risk with a manager
that has skills and experience that serve
as a close proxy to the ability to create
value in private equity.
Key Challenges for General
Partners
While the challenges facing limited partners
seeking to deploy capital in Africa are
considerable, they often pale in comparison
to those faced by local general partners
that are looking to raise capital from international
investors. The current fundraising
market remains among the most difficult
of the last two decades, driven primarily by
the fact that many investors are currently
over allocated to the asset class and/or are
proactively looking to reduce the number
of general partners in their portfolio.
The difficult fundraising environment
is exacerbated by the fact that, according
to Preqin, there are currently over
40 funds targeting more than $14 billion
for strategies focused on Africa, which
is more than the total capital raised for
African private equity strategies over the
previous five years. Within this context, it
is important for general partners to focus
their fundraising efforts on investors that
have direct experience in, or specific allocations
for, Africa rather than spending
substantial time educating investors that
are new to the region. In addition, it is
critically important for general partners
to effectively highlight those attributes that
differentiate themselves from competing
offerings. Finally, it is crucial for general
partners to be armed with marketing materials
that successfully address the increasing
due diligence requirements of institutional
investors.
Closing
Africa is an attractive and inherently complex
market, which will play an increasingly
important role within the portfolios
of sophisticated institutional investors. As
has occurred in other emerging markets,
successful general partners will establish
themselves as trusted destinations for
large pools of capital while other managers
will struggle to get institutional
support and produce attractive returns.
Stanwich Advisors is focused on partnering
with high quality general partners to
help them establish themselves as the next
generation of institutional private equity
managers. n
The difficult
fundraising
environment
is exacerbated
by the fact that there
are currently over 40
funds targeting more
than $14 billion for
strategies focused on
Africa
Daugherty: the relative scarcity of capital has
created a view among some limited partners
that investment opportunities in Africa may be
less competitive
32 private equity international september 2012

Responsible investment
ESG – as easy as 1-2-3?
As Africa cements itself as a rapidly-growing private
equity market, Sam Sutton discusses the importance of
investing responsibly
Reltex Africa Ltd: workers manufacture emergency relief tarpaulins at a Kenyan firm owned by Jacana
Do it properly, or not at all. That seems to
be the attitude of general partners when it
comes to environmental, social and governance
(ESG) standards in Africa – a region
where historically, such standards were often
found to be lacking. As a result, private equity
firms and LPs have tended to take the lead
on ESG practices on the African continent.
While most developed markets require
firms to adhere to clearly-defined ESG
standards, many African countries lack
the legal or regulatory framework necessary
to propel such standards into common
usage. As recently as last year, 40 percent
of institutional investors surveyed by Invest
AD voted “weak legal and governmental
institutions” as a key challenge to investing
in African frontier markets. That was the
second highest percentage recorded behind
“bribery and corruption”.
However, the study also found that institutional
investors view Africa as holding the
greatest overall investment potential across
frontier markets globally. And as interest in
the region has grown, many firms have pursued
strategies that add value to portfolio
companies as well the surrounding community.
Although complying with sometimes
lax local regulations may be enough
to tick the necessary boxes, doing the bare
september 2012 the africa handbook 2012
minimum isn’t enough for some firms’ ESG
requirements on new investments.
“In countries where local standards do
not meet international best practices, you are
likely to see the private market – particularly
foreign-owned companies – acting as catalysts
to raise standards,” says Namita Shah,
head of ESG at Emerging Capital Partners.
Providing that spark can be difficult,
however, as many African portfolio companies
may be unaccustomed to the level
of scrutiny brought by private equity firms
leading the charge in the region.
Out in front
A key element of the push towards responsible
investing has been the role of development
finance institutions. The likes of CDC and
International Financial Corporation (IFC)
consider Africa a key market in their mission
to invest in developing economies, and
often require their GPs to invest in a manner
that minimises adverse effects to local communities,
the environment and employees.
In the case of CDC, investment policy
guidelines forbid obvious abuses (like the
use of child workers and forced labour),
and also provide guidance on where GPs
can add value by lowering costs or mitigating
risk (for example, cutting waste of
resources that could be deemed harmful
to the environment). CDC supports that
effort by monitoring their fund managers’
implementation of the investment code on
a yearly basis, and conducting an evaluation
at the end of a fund’s investment period or
the halfway point of a fund’s lifecycle.
Similarly, the IFC actively guides fund
managers on sustainable investment strategies.
It is currently running one such programme
in Africa that helps private equity
firms identify energy, water and other cost
savings for their investees, says principal
investment officer for private equity and
investment funds, Kevin Warui Njiraini.
“ESG is becoming an integral part of
smart investing,” he says. “For a long ››
33

Responsible investment
›› time we have been convinced of the
accretive value brought about by good
governance and strong E&S practices. This
has been validated by others: for example
a recent study found that four out of five
companies committed to sustainability outperformed
industry averages by 15 percent.”
When factoring in how ESG can benefit
overall performance, Africa begins to pose
an interesting opportunity for firms seeking
large returns with a clear conscience. Compared
to more developed markets, there are
clearer goals and objectives to be reached
for African portfolio companies through
improved corporate governance and adoption
of best practices for environmental and
social management, Shah says.
Actis’ ESG director Ritu Kumar echoes
this sentiment: “We started to look at it
from a compliance perspective, to make sure
we were following the regulations. But we
quickly discovered there are tremendous
opportunities to create value for the company
as a result of the environmental and
social [improvements] that we identified”.
Given its developmental finance institution
pedigree, it is not surprising that Actis
would embrace ESG standards early. But
many other firms, including some of the
industry’s premier shops, are also taking a
forward-looking approach when it comes
to ESG investing in Africa.
Positive externalities
Take the Carlyle Group. Although relatively
new to the game in Africa – Carlyle
announced its expansion to the continent in
2011 – the firm has gone on record to say that
ESG strategies will be essential to its approach
as it begins to invest on the continent.
“We’re working in some challenging
environments,” says managing director
Genevieve Sangudi. “It is a critical part of
When factoring
in how ESG can
benefit overall
performance,
Africa begins to pose an
interesting opportunity
for firms seeking large
returns with a clear
conscience
our evaluation process for all the companies
we interact with. And quite frankly you’re
going to find that a lot of companies don’t
check all the boxes, so having an actionable
plan with very clear timelines for implementing
our ESG policies will be a critical
part of our decision-making.”
That approach benefits the firm in a
number of ways. Providing employment
opportunities and building companies in
local communities – and doing so in a way
that mitigates or has positive effects on the
environment – cultivates Carlyle’s image as a
“good citizen”, which then improves its ability
to attract a greater number of businesses
to partner with the firm. At the same time,
the implementation of stricter ESG requirements
on future investments will also help
the firm eventually attract a stronger class
of strategic buyers for its companies, which
has obvious benefits as the firm seeks exits.
“You want to build businesses that could
be attractive to big global strategic players
who are looking to enter the African marketplace,”
Sangudi continues. “The only way
you can do that is to have consistently sought
to implement best practices in terms of governance
and ESG standards, throughout the
holding period of the company.”
One firm Carlyle could look to in establishing
its brand as a socially responsible investor
is Aureos, which launched an Africa Health
Fund in 2009 to deliver social benefits alongside
investment returns. The fund is aimed
at developing the healthcare sector in areas
that are lacking in medical education or health
services. For example, profits from the fund’s
investment in Nairobi Women’s Hospital
helped to subsidise a free care programme
for HIV patients, as well as the construction
of a gender violence recovery centre.
Actis is another firm putting its money
where its mouth is. The private equity firm
recently invested in a textile company with
manufacturing operations in Ghana and the
Ivory Coast. In an effort to improve its manufacturing
workforce, the firm developed
seamstress training facilities for disadvantaged
women in the region, who then could
possibly go on to gain employment through
the portfolio company.
“There is now a program to train these
women to become seamstresses, which is a
really good marketing exercise for the company,”
Kumar says. “It enhances the brand
of the company, the value of the company,
and ultimately when these seamstresses are
trained, they could be stitching the cloth
that the company produces.”
Also, importantly, it helps Actis. As
Kumar and others are quick to point out,
socially responsible investment policies
broaden private equity’s ability to create
value in their investments. Through the
establishment of these training centres,
the firm is ensuring the long-term quality
of its manufacturing employees.
“Given the baseline and the social
upheavals some of these countries have gone
through and are going through, one could
say that there is a moral responsibility for
us to initiate such programmes,” she says.
“But there’s also a commercial benefit to it.”
In other words, if properly implemented,
ESG can be a win-win situation. n
34 private equity international september 2012

expert commentary: webber wentzel
Don’t mention the “C” word
Roddy McKean, head
of the Africa practice
at Webber Wentzel,
discusses how
international investors
are developing effective
strategies for dealing with
corruption issues in Africa
McKean: anti-bribery and corruption legislation
throughout the world has multiplied in
recent years
Corruption is often mentioned as one of
the reasons why international investors are
wary of investing in Africa. But is this perception
or reality and is the position changing?
Like many other risks for investors, the
reality on the ground is different. Risks do
exist but with a considered approach many
of these risks can be minimised.
Is there corruption in Africa? Yes. Is
there corruption in other parts of the
world? Of course. Is the corruption in
Africa worse than other emerging markets?
Probably not. It is occasionally suggested by
some commentators that corruption is just
part of African culture and a way of doing
business on the continent but this is based
on a lack of understanding of such culture.
Indeed a number of studies have shown
that this idea is completely misconceived.
Many African communities have a culture
of gift giving. So do many Asian cultures but
that does not mean that this is the genesis
of corruption.
As in many emerging markets around
the world, there are several catalysts for
corruption in Africa; such as the fact that
many economies are cash-based. There is
often opaque legislation and business practice
and endless bureaucracy, which slow
down business dealings. In many countries,
there is often a heavy state and political
involvement in the economy and there is
often a need for third party relationships.
All of these combined with a difficult and
challenging operating environment mean
that corruption can be an issue in business
in many African countries.
The discussion on corruption of course
is a global one. It occurs across both public
september 2012 the africa handbook 2012
and private sectors and can take many
forms from the abuse of public funds to
undue enrichment. Anti-bribery and corruption
legislation throughout the world
has multiplied in recent years and there is
a myriad of global conventions, legislation
and guidelines which focus on tackling corruption.
We are seeing that this is slowly
having an impact on the way business is
done. The trends in such legislation include
the fact that the legislation often has extraterritorial
application, it includes widely
diverging rules and enforcement practices,
there are now more agencies with better
resources taking tougher stances and there
is more co-operation and information
sharing between those agencies. Perhaps
the two pieces of legislation which have
received the most attention are the Foreign
Corrupt Practices Act of the US (FCPA)
which has been in existence for some time
and the recently enacted UK Bribery Act
both of which have wide-ranging remits
well beyond the boundaries of the enacting
states. Many investors are blissfully unaware
that these statutes can be relevant to many
transactions in Africa where there is some
“connection” (even tenuous) with either the
US or the UK.
The FCPA addresses two general areas,
the making of improper payments to foreign
government officials and the concealing
of “bribes” in the accounts of relevant
companies. The UK Act goes much further
than the FCPA in that it applies to bribery
of both public and private citizens and uses
a much more expansive definition of what
constitutes a bribe. It adopts a zero tolerance
approach to facilitation payments ››
35

expert commentary: webber wentzel
›› and, unlike the FCPA, there are no specific
exemptions. Whilst this global legislation
receives the headlines in the fight
against corruption, in fact a number of
African countries including South Africa,
Nigeria and Kenya have their own anticorruption
legislative frameworks in place.
When investing in any country it is useful
to understand how each of these regulatory
frameworks overlay each other.
Turning to the private equity industry,
the DFIs globally have driven an initiative
to improve the standards of behaviour
within the investment community
in relation to Environmental, Social and
Governance (ESG) issues and many DFIs
use the IFC’s Performance Standards as
the reference benchmark for investments
in emerging markets. Given the impact of
the global financial crisis on fundraising
over the last few years, the vast majority
of GPs focusing on Africa have raised their
funds and received support from the DFI
community. One of the requirements of
the DFIs for investing in those GPs is the
adoption of those standards by the GPs
on the closing of the fund and also when
investing in portfolio companies going
forward. Whilst those standards cover a
wide range of issues regarding environment
and social sustainability, there is also
a focus on governance issues including
Many investors
are blissfully
unaware that
these statutes
can be relevant to many
transactions in Africa
where there is some
“connection” with the
US or the UK
corruption and other collusive behaviour.
This has had an impact on how the due
diligence process is undertaken as well
as the documentation used when making
any investment. Specific undertakings
and warranties focusing on corruption
are now included in standard investment
documentation as best practice reflecting
appropriate standards of good corporate
governance whether or not the relevant
legislation is actually applicable to the
investment in question.
The question is often raised as to
whether this increasing mountain of rules
and regulation is having a positive impact
for investors. Does it just increase the costs
of investment or does it even put companies
who adhere to these principles at a
disadvantage when operating in emerging
markets? There have certainly been studies
by a number of consultancy firms which
argue that investing in ESG programmes
can generate significant financial returns
and improve shareholder value. When
investing in companies in Africa, imposing
such guidelines will not change behaviour
and practice overnight but it is making a
difference over the medium term where
GPs can add real value to portfolio companies
by driving such change.
However the dangers of not focussing
on corruption issues are illustrated by the
fact that there have also been examples
from around the world of companies who
have acquired other companies without
undertaking proper anti-corruption due
diligence which has dramatically impacted
on the value of the investment. There is a
particular example where a US company
purchased a company in Latin America
where certain corrupt practices were not
picked up during due diligence and indeed
were carried on by senior management
following the acquisition. When this activity
was discovered, it was reported to the
FCPA. The end result was that virtually
the whole purchase price was wiped out
through a combination of the cost of the
FCPA investigation (which was borne by
the company under investigation) , the
resulting fines and penalties , the termination
of the senior management and of
course the loss of business.
But is this making a difference to the
investment environment in Africa? Our
experience with our clients is that this is an
issue which more and more international
investors are taking extremely seriously
and they are putting in place compliance
systems for their employees to provide clear
rules as to how to deal with corruption
when it arises in their business dealings
as well as avenues for confidential reporting
of illegal activities by other employees.
But there are also many practical steps to
take to minimise the risk when investing
particularly in a new country. Understand
the environment in which you are operating
in. It is important to follow the rules rigorously
– some investors take the view that
when investing in a developing market they
can cut corners which they wouldn’t consider
doing in developed markets, often to
their detriment. Know with whom you are
doing business – use risk consultancy advisors
if necessary to carry out background
checks. The key is to do your homework
before you start.
Internal compliance programmes
should also be put in place for all employees.
Appropriate values and behaviour need
to be driven and lived by the senior management.
Clear policies need to be communicated
to those employees and training
programmes devised. Prepare employees
for bribe requests and run them through
36 private equity international september 2012

expert commentary: webber wentzel
particular scenarios. Much of the corruption
in practice is often petty requests for
cash, but there are ways to deal with these
situations effectively. It is also extremely
important to document everything from
policies, reporting procedures to specific
requests for bribes – even if it is discovered
that a bribe is paid. This could be an important
part of a defence under anti-corruption
legislation – under the UK Act the only
defence that a company has is to be able
to demonstrate that it has adequate procedures
in place to prevent bribes being paid.
Our sense is that there is a growing
move by international investors and
380 Private Eq Half Pg Ad FP 8/8/12 10:37 AM Page 1
multinational corporations to take on
corruption issues head on when looking
at investments in Africa, to adopt a zero
tolerance policy to corruption and to only
deal with other companies who adhere to
similar principles. There may soon be a time
when if an African company wishes to operate
globally or interact with an international
player on the continent, they will have to
have developed their own anti-corruption
policies otherwise they may find themselves
at a competitive disadvantage. There is still
a long way to go but we have certainly been
seeing a shift in approach over the last few
years. n
Many African
communities
have a culture
of gift giving,
but that does not mean
that this is the genesis
of corruption
C M Y CM MY CY CMY K
september 2012 the africa handbook 2012
37

data room
Africa in numbers
African private equity is picking up
after a slump in 2009 and 2010.
Sector growth is being driven by
the consumerism of Africa’s rising
middle class
African buyout trends
African buyout activity from Q1 2008 through to Q2 2012 in terms of
volume and value
$m
#
Sector breakdown
Mix of announced African buyout deals by industry sector August
2011 to July 2012
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
n
n
Value ($m)
# No. of Deals
Source: mergermarket
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
$m
#
Africa-based LPs by Country
Angola, Nigeria and Botswana are starting to increase the number of
commitments to local African funds
&
n
n
Industrials & Chemicals
Financial Services
Business Services
Value ($m)
# No. of Deals
Consumer
Energy, Mining & Utilities
*Technology
*Media
*Telecommunications
*Leisure
*Transport
Pharma, Medical & Biotech
*Construction
*Real Estate
*Agriculture
*Defence
Angola
Botswana
Burundi
Côte d`Ivoire
Egypt
Ghana
Kenya
Libya
Mauritius
Morocco
Nigeria
Sierra Leone
South Africa
Uganda
Source: mergermarket
Note: * – undisclosed value
Source: Private Equity International
Sector Breakdown – Deal Count
Financial services and the consumer sector continue to dominate deal
flow across sub-Saharan Africa
Africa-focused Global LPs by region
North America continues to provide the largest number of LP
commitments to African private equity
n
n
n
n
n
n
n
n
n
8.7%
8.7%
4.3%
4.3%
4.3%
26.1%
17.4%
13%
13%
Business Services
Leisure
Technology
Construction
Agriculture
Financial Services
Consumer
Industrial & Chemicals
Energy, Mining & Utilities
n
n
n
n
n
n
9%
1%
1%
18%
49%
22%
Asia-Pacific
Central & Eastern Europe
Latin America
Middle East / Africa
North America
Western Europe
Source: mergermarket
Source: Private Equity International
38 private equity international september 2012

Funds file
data room
A total of 52 Africa-focused private equity funds closed since 2009 have raised over
$9.9 billion
Fund Name Fund Manager Strategy
Fund Size
($M)
Vintage
Year of
Final
Closing
Fund Status
Fund Region
212 Capital Partners 212 Ltd. Venture Capital / Growth Equity 35 2011 2011 Currently Investing Middle East / Africa
Africa Health Fund Aureos Capital Buyout / Corporate Private Equity 105.4 2009 2011 Currently Investing Africa
Africa Telecommunications, Media and
Technology Fund I
East Africa Capital Partners Venture Capital / Growth Equity 100 2009 2011 Currently Investing Africa
African Agriculture Capital Fund (AACF) Pearl Capital Partners Venture Capital / Growth Equity 25 2011 2011 Currently Investing Africa
African Development Partners I Development Partners International Venture Capital / Growth Equity 394.7960069 2007 2009 Currently Investing Africa
African Infrastructure Investment Fund II
African Infrastructure Investment
Managers (Pty) Limited
Venture Capital / Growth Equity 500 2010 2011 Currently Investing Africa
Africinvest Financial Sector Tuninvest-Africinvest Group Venture Capital / Growth Equity 40.20571642 2007 2010 Currently Investing Africa
AfricInvest Fund II Tuninvest-Africinvest Group Venture Capital / Growth Equity 191.6472483 2008 2010 Currently Investing Africa
Agri-Vie Fund
Sanlam Private Equity and Strategy
Partners
Buyout / Corporate Private Equity 110 2008 2010 Currently Investing Africa
Al-Bawadir Fund Pitango Venture Capital Venture Capital / Growth Equity 50.02826456 2010 2010 Currently Investing Middle East / Africa
Alitheia Goodwell Microfinance Fund Alitheia Capital Venture Capital / Growth Equity 55 2010 2010 Currently Investing Africa
Aureos Africa Fund Aureos Capital Venture Capital / Growth Equity 381.11 2008 2010 Currently Investing Africa
Brait Mezzanine Partners II Brait Private Equity Mezzanine / Debt 50.66347077 2009 2009 Currently Investing Africa
Capitalworks Private Equity Fund 1 Capitalworks Equity Partners Buyout / Corporate Private Equity 150 2008 2009 Currently Investing Africa
Carlyle MENA Co-Investment The Carlyle Group Funds of Funds / Co-Investment 26.628 2009 2011 Fully Invested Middle East / Africa
Carlyle MENA Partners The Carlyle Group Buyout / Corporate Private Equity 500 2008 2009 Currently Investing Middle East / Africa
Citadel Capital Transport Opportunities
II Fund
Citadel Capital Buyout / Corporate Private Equity 150 2011 2011 Currently Investing
Africa, Middle East
/ Africa
Consensus Evaluation One Fund Consensus Business Group Funds of Funds / Co-Investment 94 2010 2010 Currently Investing Africa
ECP Africa Fund III Emerging Capital Partners Venture Capital / Growth Equity 613 2010 2010 Currently Investing Africa
EVI Capital Partners Buyout Fund EVI Capital Partners Buyout / Corporate Private Equity 400 2009 2010 Currently Investing
Africa, Middle East
/ Africa
EVI Capital Partners Mezzanine Fund EVI Capital Partners Mezzanine / Debt 400 2009 2010 Currently Investing
Africa, Middle East
/ Africa
Evolution One Fund
Inspired Evolution Investment
Management
Venture Capital / Growth Equity 106.2604928 2008 2010 Currently Investing Africa
Fusion African Access Fusion Capital Limited Venture Capital / Growth Equity 150 2011 2011 Currently Investing Africa
GC Equity Partners II Gulf Capital Partners Venture Capital / Growth Equity 5444 2010 2010 Currently Investing Middle East / Africa
GEF Africa Sustainable Forestry Fund
Global Environment Fund
Management Corporation
Venture Capital / Growth Equity 160 2011 2012 Currently Investing Africa
Genesis IV Genesis Partners Venture Capital / Growth Equity 150 2008 2009 Currently Investing Middle East / Africa
Goodwell West Africa Microfinance Fund JCS Investments Venture Capital / Growth Equity 23 2010 2010 Currently Investing Africa
GroFin Africa Fund GroFin Venture Capital / Growth Equity 170 2009 2009 Currently Investing Africa
Helios Investors II Helios Investment Partners Buyout / Corporate Private Equity 900 2009 2011 Currently Investing Africa
Invest AD Private Equity Partners I
Invest AD/SBI Africa Fund
Invest AD/SBI Turkey Fund
Investment Fund for Health in Africa
Istanbul Venture Capital Initiative
Invest AD (Abu Dhabi Investment
Company ADIC)
SBI Holdings (SBI Asset
Management)
SBI Holdings (SBI Asset
Management)
African Health Systems
Management
Istanbul Venture Capital Initiative
(iVCi)
Venture Capital / Growth Equity 120 2009 2009 Fully Invested
Venture Capital / Growth Equity 100 2011 2011 Currently Investing Africa
Africa, Middle East
/ Africa
Venture Capital / Growth Equity 100 2011 2011 Currently Investing Middle East / Africa
Venture Capital / Growth Equity 67.00952737 2010 2010 Currently Investing Africa
Funds of Funds / Co-Investment 229.3705837 2009 2009 Currently Investing Middle East / Africa
Jordan Growth Capital Fund braaj Capital Venture Capital / Growth Equity 50 2011 2011 Currently Investing Middle East / Africa
KFH Labuan Shipping Fund (Al Faiz
Fund I)
Kuwait Finance House Labuan
(Malaysia)
Venture Capital / Growth Equity 98 2009 2009 Currently Investing Middle East / Africa
ManoCap Soros Fund Manocap Venture Capital / Growth Equity 5 2009 2009 Currently Investing Africa
NBK Capital Mezzanine Fund I NBK Capital Mezzanine / Debt 157.4 2008 2009 Currently Investing Middle East / Africa
OrbiMed Israel Partners OrbiMed Advisors, LLC Venture Capital / Growth Equity 222 2011 2012 Currently Investing Middle East / Africa
Paladin-Invest A.D. MENA Fund Paladin Capital Group Venture Capital / Growth Equity 100 2012 2012 Currently Investing Middle East / Africa
Pan African Investment Partners II
Kingdom Zephyr Africa
Management
Venture Capital / Growth Equity 492 2008 2010 Currently Investing Africa
Pan-African Infrastructure Development
Fund
Harith Venture Capital / Growth Equity 630 2007 2009 Currently Investing Africa
PGM Development Fund PGM Development Fund Venture Capital / Growth Equity 13.54638256 2009 2009 Currently Investing Africa
Pontifax Fund III Pontifax LP Venture Capital / Growth Equity 88 2011 2011 Currently Investing Middle East / Africa
Sadara Ventures Sadara Ventures Venture Capital / Growth Equity 28.7 2012 2011 Currently Investing Middle East / Africa
Sierra Investment Fund (SIF) Manocap Venture Capital / Growth Equity 22.5 2010 2010 Currently Investing Africa
SOVEC Fund SOVEC Management BV Venture Capital / Growth Equity 7.7754 2010 2011 Currently Investing Africa
Tana Africa Capital E Oppenheimer & Son Venture Capital / Growth Equity 300 2011 2011 Launched Africa
TVM Healthcare MENA I TVM Capital Venture Capital / Growth Equity 50 2010 2012 Currently Investing
Africa, Middle East
/ Africa
Vantage Mezzanine Fund II Vantage Capital Mezzanine / Debt 2256 2011 2012 Currently Investing Africa
Vintage IV Vintage Investment Partners Funds of Funds / Co-Investment 92 2008 2009 Currently Investing Middle East / Africa
Viola PE Viola Private Equity Venture Capital / Growth Equity 150 2009 2009 Currently Investing Middle East / Africa
Source: Private Equity International
september 2012 the africa handbook 2012
39

data room
Regional hot spots
A look at the key
geographies where
buyouts have occurred
over the past year in
sub-Saharan Africa
Country Breakdown for African Buyout activity
$M
#
Value (US$m)
# No. of Deals
n
n
South
Africa
Value ($m)
# No. of Deals
Morocco Kenya Nigeria Sierra
Leone
Ethiopia Egypt Ghana Mauritius*
* Note: Mauritius – undisclosed value
Buyouts occurring from August 2011 to July 2012
Source: mergermarket
Mix of Announced African Buyout Deals by geography
Buyouts occurring from August 2011 to July 2012
Source: mergermarket
n
n
n
n
n
n
n
n
n
4.3%
4.3%
4.3%
4.3%
4.3%
4.3%
52.2%
13%
8.7%
Nigeria
Sierra Leone
Ethiopia
Egypt
Ghana
Mauritius
South Africa
Morocco
Kenya
Africa is such a diverse continent it helps to break it down into different
countries or areas when considering the best private equity
investment opportunities. Sandeep Khanna, partner at Aureos
Capital, sums it up well by dividing the continent into three main
zones. “Commodity growth is strong in places like South Africa
Angola and Zambia, while urbanised consumer growth can be seen
in places like Kenya, Egypt, and Ghana, giving rise to opportunities
in FMCG (fast-moving consumer goods), healthcare, education and
low cost housing. Then there are the emerging frontier markets,
which include Ethiopia, Mozambique and DRC where there are
opportunities in value-added services to mining, agriculture and
infrastructure.” n
40 private equity international september 2012

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