PROPARCO is dedicated arm to private sector of AFD, the French DFI. - It issues a magazine which in it #2 tries to respond a question on Private Equity role in African development

1. Private Sector & Development proparco's magazine
N° 12 / October 2011
The Next Chapter for Private
Equity in sub-Saharan Africa
Can private
Jennifer Choi
EMPEA
2
Profitability
and development hand in hand equity boost African
development?
Jeanne Hénin and Aglaé Touchard
PROPARCO
6
PE Funds Improving Corporate
Governance and Investor Climate
Davinder Sikand and Kiriga Kunyiha
Aureos Capital Private equity divides opinion: for some it is a financial product like any
10 other; for others it is an effective development tool. Can Africa afford
Living with an investment
to do without the financial opportunities it offers? This is the challenge.
fund – the company perspective
Alexandre Vilgrain
EDITORIAL BY ÉTIENNE VIARD CHIEF EXECUTIVE OFFICER OF PROPARCO
SOMDIAA
13
In just the last decade or so, private equity has carved out a new territory
Key figures for itself in sub-Saharan Africa. For the region this is a fantastic opportunity
Private equity in figures to attract new investors whose funds are entrusted to specialist professional
16 management teams. For many companies – from major corporations to start-ups
– it is an opportunity to access not only the long-term funding vital
The transparency for their growth but also close support in terms of defining their strategy,
challenge facing private equity
improving their governance and accessing international professional networks.
François d’Aubert
General delegate of the To date private equity has remained over-focused on a few sectors and
fight against tax havens geographic areas – yet increasingly it is venturing into new terrain, via specialist
18 funds, and developing innovative strategies.
However, this development tool attracts criticism on numerous counts.
Private equity and SMEs: And indeed its impact, which is undeniable, should not overshadow the
an instrument for growth
limitations of this investment model. Focusing on profitability – in itself justified,
Jean-Michel Severino
in terms of making the business sustainable and attracting investors – can lead
Investisseur & Partenaire
pour le Développement fund managers to neglect particular sectors, and SMEs in particular. It can instil
22 a short-termist bias. It can also lead some fund managers to distort the model
by siphoning precious fiscal resources from national governments through
Pioneer role of DFIs aggressive tax optimisation schemes.
in sub-Saharan Africa Yet what makes private equity effective is that it enables economic players
Yvonne Bakkum and Jeroen Horsten
to build long-term partnerships, selecting and supporting the businesses
FMO
25 most capable of generating growth, employment and innovation.
The challenge is therefore to make private equity in Africa a virtuous tool
of growth and development, creating wealth for the largest possible number
of people while also enforcing rigorous standards of governance
and accountability. —

2. 2
The Next Chapter for Private
Can private
equity boost
African
development?
Equity in sub-Saharan Africa
Private equity is well suited to the continent and is attracting an increasingly diverse
spectrum of investors. It is true that its activities remain focused on a few markets,
and that concerns remain regarding the reliability of local teams and that exit conditions
are inadequate. Yet the process of diversification is under way, the region’s image
is improving and the prices are genuinely competitive.
Jennifer Choi This article provides an overview of the
sub-Saharan African private equity oppor-
Vice President of Industry and External Affairs, Emerging
Markets Private Equity Association (EMPEA) tunity in the global context and touches
on some unfolding trends in the fundrais-
A
s faith in the Western buyout model ing and investment environment in the
faltered during the financial cri- region, concluding with a commentary on
sis, emerging market private equity the investment outlook.
cemented its place in investor portfolios
and received greater allocations. The risk- Sub-Saharan Africa in the Global Context
ier prospects of financial engineering, cou- As with private equity in developed markets,
pled with worsening views of sovereign risk, there was a buildup of activity in sub-Saha-
is prompting many investors to reconsider ran Africa leading up to the financial crisis.
emerging markets. Sub-Saharan Africa is Private equity capital raised for investment
among the under-penetrated high-growth in dedicated sub-Saharan African funds
markets receiving more attention, boasting between 2006 and 2008 totalled
“Private equity
six of the 20 fastest-growing economies in USD 6 billion (EMPEA, 2011).
capital raised for
2010, with growth rates averaging 5%, com- Even with dramatic increases
investment in
pared with 3% in OECD compared with earlier years (sub-
dedicated sub-
markets (IMF, 2011). Saharan African funds raised only
Saharan African
Private equity first took off USD 2 billion between 2000 and
funds between 2006
in South Africa in the 1990s 2005), the scale of private equity
and 2008 totalled
following a wave of multina- in the region is modest in glo-
USD 6 billion.”
tional divestment and post- bal terms. Sub-Saharan Africa
apartheid reforms. Over the accounted for less than four percent of the
last two decades the field has USD 159 billion raised for all emerging mar-
JENNIFER CHOI
grown beyond South Africa, kets between 2006 and 2008, and less than
Jennifer Choi manages
to more than fifty firms a half percent of the USD 1.4 trillion raised
EMPEA’s external and across the continent manag- globally by private equity funds during the
public affairs activities, and ing billions of dollars. same period. Investment volumes during
institutional partnerships. The scale of private equity this same period across 47 markets in sub-
As its first research director, in the region remains mod- Saharan Africa totalled USD 8 billion, com-
she built EMPEA’s industry
statistics program and
est relative to other markets, pared with the USD 136 billion invested
publications. Previously, and its growth slowed during across all emerging markets, including the
she was a consultant to the worst of the recent finan-
the private equity industry, cial crisis. However, several FOCuS
providing due diligence and new vehicles appearing in
advisory services. Jennifer
holds a Masters in Law
recent months – from niche The mission of the Emerging Markets Private Equity Association
and Diplomacy from the strategies in frontier mar- (EMPEA), an independent global membership association, is to
Fletcher School at Tufts kets to sizeable pools of inter- catalyse private equity and venture capital investment in emerging
University (USA) and a national capital managed by markets. EMPEA’s members include institutional investors and
private equity and venture capital fund managers across developing
B.A. summa cum laude in industry veterans – signal
Economics and Political and developed markets. It leverages a global industry network to
Science from Augustana
that sub-Saharan Africa is deliver intelligence, promote best practices, and provide networking
College (USA). poised for significant growth opportunities, giving members the edge in raising funds, making
in the medium term. good investments and managing exits to achieve superior returns.
www.proparco.fr

3. 3
USD 59 billion invested collectively in China, ing markets investor Aureos Capital4 raised
India and Brazil alone. In 2010, sub-Saha- USD 381 million in February 2010 for its lat-
ran Africa’s share rose to 6% of total capital est Africa-focused fund.
raised for emerging market private equity – Recent developments point to the region’s
an all-time high, and growth is expected to growing ability to attract capital from an
continue (Figure 1). increasingly diverse group of investors and
When scaled to gross domestic product the potential for eclipsing even pre-crisis
(GDP), however, private equity investment fund sizes. The USD 900 million raised in
activity in sub-Saharan Africa is compara- June 2011 by pan-African investors Helios
ble across BRIC1 markets and greater than Investment Partners – the largest pan-Africa
other regions such as Latin America and private equity fund ever raised – sources
Central and Eastern Europe. Between 2008 70% of total commitments from outside
and 2010, private equity-backed investment the development finance community, tradi-
in sub-Saharan African countries accounted tionally African private equity’s most stal-
for approximately 0.17% of GDP, versus wart investors. In the spring of 2011, glo-
0.16% for China and 0.10% across Latin bal private equity house The Carlyle Group
America (EMPEA,2011). announced the launch of a fund dedicated
to sub-Saharan Africa, targeting commit-
Fundraising Trends ments of at least USD 500 million. South
After bottoming in 2009, private equity fun- African private equity firms Ethos and Brait,
draising rebounded in 2010, with improving responsible for two of Africa’s largest funds,
investor attitudes towards Africa translating are expected to raise significant pools of new
into meaningful fund commitments. Fund- capital over the next 12 to 18 months. Addi-
raising for sub-Saharan Africa rose by 50% to tionally, a number of more discretely focused
USD 1.5 billion in 2010, thanks to a handful and modestly sized funds are currently in the
of sizeable regional funds. Industry veteran market and lining up commitments.
Emerging Capital Partners’ third fund2, which
closed at USD 613 million in July 2010, was Investment Trends
at the time the largest pan-African growth Deal activity in 2010 nearly matched 2008
capital fund raised. Kingdom Zephyr Africa levels with 48 transactions, although capital
Management3 captured USD 492 million in invested fell by 54%, pulled downwards by
February 2010 for its second Pan African falling valuations,. the result of both a nar-
Investment Partners Fund, and pan-emerg- rowing gap in expectations between buyers
and sellers, and the disappearance of bank
financing, which had previously made larger
FIGURE 1: SUB-SAHARAN AFRICA’S PERCENTAGE OF transactions possible. The largest disclosed
EMERGING MARKET PRIVATE EQUITY FUNDS RAISED sub-Saharan African private equity invest-
100% ment in 2010 was USD 151 million, versus
USD 175 million in 2008.
90% A small number of markets continue to
80%
draw the bulk of investment activity, with
South Africa, Kenya and Nigeria, drawing
70% 27 of 48 deals in 2010. However, invest-
ments are becoming more geographi-
60% cally dispersed. South Africa’s share fell
from 56% of deals in 2008 to 21% in 2010
50%
(EMPEA, 2011). In the last 18 months, pri-
40%
vate equity investors have backed compa-
nies in Benin, Congo, Ghana, Liberia and
30% Madagascar and Tanzania.
20% 1
BRIC refers to the group of Brazil, Russia, India and China, which are all
deemed to be at a similar stage of newly advanced economic development.
10%
2
Emerging Capital Partners (ECP) is an international private equity firm
focused on investing across the African continent. It is the first private equity
6.4% 4.3% 6.4% group to raise over USD 1.8 billion to invest exclusively in African companies.
0% 3.4% 3.4% 3
Kingdom Zephyr Africa Management (KZAM) is a joint venture between
2006 2007 2008 2009 2010 Zephyr Management, L.P., a New York-based asset management firm,
and Kingdom Holding Company, an investment vehicle headed by HRH
Multi-region China India Pan-Asia funds, Southeast Asia Prince Alwaleed bin Talal Bin Abdulaziz Al Saud of Saudi Arabia. Both
Zephyr and Kingdom Holding have been investing in African private
MENA LatAm & Caribbean Eastern Europe & CIS Sub-Saharan Africa
equity for over 15 years.
Note: CIS: Commonwealth of Independent States (including Russia). 4
See the article by Kiriga Kunyiha and Davinder Sikand, p.10 in this issue
Source: EMPEA, 2011 of Private Sector & Development.
Private Sector & Development

4. 4 The Next Chapter for Private Equity in sub-Saharan Africa
Can private The private equity model is particularly FIGURE 2: PLANNED CHANGES TO LP EMERGING MARKET
equity boost
African well matched to the African context, appeal- PRIVATE EQUITY STRATEGIES, NEXT 2 YEARS
development?
ing to an increasingly international and Begin investing Expand investment Decrease or stop investing
diverse class of investors. Equity markets offer
50% % of Respondents
an alternative to institutions who might oth-
erwise prefer to invest directly in companies
40%
but are deterred by market opacity. Most Afri-
can exchanges are concentrated in a few com-
panies and sectors, e.g., financials and natural 30%
resources, with minimal exposure to the grow-
ing middle class, a fundamental growth driver 20%
for the region that forms the core of most pri-
vate equity fund strategies. 10%
While the banking and extractive industries
figure prominently in the private equity space, 0%
more than half of transactions in 2010 were
in other sectors, such as food and beverages -10%
(e.g., South Africa’s Dewcrisp and Foodcorp), As
ia
pe
ina
i
ia
r
NA
il)
Afr ica
)
y
CIS
il
ca
rke
Ind
az
ng
raz
uro
Ch
ME
healthcare (Liberia’s Snapper Hill Clinic and rgi
uth f
Br
a/
Tu
So n A
.B
nE
ssi
e
(ex
cl. ara
ter
Em
Ru
(in -Sah
Nairobi Women’s Hospital) and media/tele- r
ca
as
he
&E
eri
Ot S
ub
Am
al
ntr
communications (Kenya’s Wananchi Group)
tin
Ce
La
- EMPEA, 2011. As the asset class matures,
fund strategies are becoming more special- Note: CIS: Commonwealth of Independent States.
Source: EMPEA/Coller Capital Emerging Market Private Equity Survey, 2011
ised, with niche strategies emerging, such as
agribusiness (Phatisa, Chayton Capital, Silk
Invest Food Fund), cleantech and renewa- flow is sourced on a proprietary basis, man-
ble energy (Inspired Evolution One Fund), agement talent is all the more important.
healthcare (Aureos Capital Health Fund) and Encouragingly, the financial crisis may result
mezzanine finance (Vantage). in many Western-trained African profession-
als returning home to fill this void.
Outlook and challenge for Investors in An exit environment is another hurdle to
sub-Saharan Africa attracting more capital. Apart from a small
EMPEA’s most recent research on Limited number of private equity-backed public list-
Partner (LP)5 appetite gives evidence of the ings, primarily in South Africa, trade sales
region’s brand improvement, with 67% of LPs accounted for the bulk of exits in 2009 and
surveyed viewing Africa as attractive in 2011 2010. Exit activity remains sluggish in 2011,
and 39% planning to begin or expand their but signs of an improving exit environment are
investments in sub-Saharan African funds emerging. Recent examples include the July
(Figure 2) – Coller Capital and EMPEA, 2011. 2011 listing of Ethos-backed sporting goods
Concerns – chiefly about the depth of the retailer Holdsport on the Johannesburg Stock
fund manager pool – remain, as do residual Exchange, and the sale of Aureos Capital’s stake
concerns related to political risk. Investors in Nigerian biscuit manufacturer Deli Foods to
without exposure to the region indicated South Africa’s Tiger Brands. Secondary sales
in both the 2010 and 2011 EMPEA/Coller remain rare due to the small field of assets ripe
Surveys that a shortage of experienced fund for transfer between financial sponsors.
managers inhibited their willingness to African fund managers hope for a larger
invest in Africa (Table 1). Yet, over the last and more diverse ecosystem coupled with a
decade, the number of fund managers active deeper pool of mature private equity-backed
in Africa has grown fivefold. companies, translating into more options for
Fund managers cite the human capital defi- exiting, including secondary transactions.
cit – professionals to develop, screen, struc-
ture and execute deals – as limiting their Pricing and Performance Expectations
ability to exploit opportunities. The pool of One positive by-product of Africa’s thin
skilled management within portfolio compa- domestic private equity market, whether
nies, particularly CFOs, is also shallow. Yet due to shallow talent pools or challeng-
another constraint facing fund managers is ing exit environments, is more competitive
the absence of a robust intermediary network pricing. Assets in sub-Saharan Africa – with
– advisors, bankers, brokers and data provid-
ers – making sourcing and evaluating oppor- 5
Limited Partner is one of the co-owners of a business organized as limited
tunities labour-intensive. Because most deal partnership who does not participate in the management of the firm.
www.proparco.fr

5. 5
entry multiples in the high single digits Private equity in sub-Saharan Africa is not
compared with double-digit multiples in new, but the region is certainly under-pene-
markets such as China and Brazil – are con- trated. In fact, the nascence of African mar-
sidered bargains by many investors. Prices kets may mean a greater upside for inves-
are expected to rise, yet most fund manag- tors. Many African economies are less
ers believe that good deals abound. correlated to the volatility wrought by debt
According to the 2011 EMPEA/Coller Sur- in developed markets. Much of the fore-
vey, investors with exposure to assets in casted growth will come from domestic driv-
sub-Saharan Africa expect higher returns ers such as consumption and investment
than do LPs without exposure, suggest- in energy. Private equity offers tremen-
ing confidence in the abilities of experi- dous additionality to capital-starved com-
enced fund managers to anticipate and panies at saner prices than are commanded
manage the risks of investing in these com- elsewhere in emerging markets. While the
paratively nascent private equity markets. data is not present to enable definitive
While returns data on the whole of sub- claims about performance prospects, opti-
Saharan Africa is not available, mism surrounding the trajectory for private
“The pool of skilled
a 2011 study by RisCura and the equity is by no means misplaced.
management within
South African Venture Capital
portfolio companies,
Association showed that South
particularly CFOs,
African private equity out-
is also shallow.”
performed UK and US private
equity funds over three-, ten-, and five- year
horizons, with South African funds deliver-
ing pooled net internal rates of return of
more than 20% over a ten-year period, ver-
sus roughly 13% in the UK and 8% in the
US (RisCura and SAVCA, 2011). Two of the
most active investors in the region - the
International Finance Corporation (IFC)
6
An index created by Morgan Stanley Capital International (MSCI) that
and the UK’s CDC Group - report that their is designed to measure equity market performance in global emerging
African funds have outperformed relative markets. The MSCI Emerging Markets Index is a free float-adjusted market
capitalization index that is designed to measure equity market performance
to emerging markets benchmarks such as of emerging markets. The MSCI EM Index consists of the following 21
the MSCI Emerging Markets Index6 (CDC), emerging market country indices: Brazil, Chile, China, Colombia, Czech
Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico,
or to their emerging markets private equity Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand,
portfolios overall (IFC). and Turkey, as of May 30, 2011.
TABLE 1: DETERRENTS TO INVESTMENT, LIMITED PARTNERS’ VIEWS, NEXT 2 YEARS
Limited Scale of Entry Weak exit Challenging Political risk
number of opportunity to invest valuations environments regulatory/tax
established GPs is too small are too high issues
China 7% 7% 45% 14% 31% 24%
India 14% 0% 58% 14% 8% 11%
Other Emerging Asia 38% 19% 4% 35% 12% 19%
Russia/CIS 25% 12% 2% 17% 30% 63%
Turkey 28% 23% 5% 12% 7% 12%
Central & Eastern Europe 19% 16% 5% 27% 11% 16%
Brazil 11% 3% 31% 11% 11% 3%
Latin America (excl. Brazil) 32% 19% 16% 10% 10% 23%
MENA 39% 33% 2% 14% 12% 32%
Sub-Saharan Africa 47% 24% 2% 14% 12% 39%
Note: CIS Commonwealth of Independent States.
Source: EMPEA/Coller Capital Emerging Market Private Equity Survey, 2011
References / Coller Capital and EMPEA, 2011. Investor’s Views of Private Equity in Emerging Markets, Emerging Markets Private Equity Survey. // EMPEA, 2011. Database, FundLink. // IMF, 2011. World
Economic Outlook database, April. // RisCura and SAVCA, 2011. RisCura South African Private Equity Performance Report, February.
Private Sector & Development

6. 6
Profitability and
Can private
equity boost
African
development?
development hand in hand
A question frequently asked is whether profitability is the only criterion to be taken into
consideration when private equity is evaluated. By itself, profitability is not an adequate basis
on which to assess the effectiveness of private equity. The questions surrounding investment
funds go beyond merely securing the required profitability: private equity can also mobilise
additional investments and play a key role in developing local economies. But alongside
this tangible and quantitative impact, private equity also has a qualitative impact, and while
it is not yet systematically measured, it represents an opportunity to make private equity
a tool for development in Africa.
Jeanne Hénin and Aglaé Touchard see them as a way of boosting the impact of
Evaluation officer, PROPARCO their funding, by providing indirect sup-
Senior Investment Officer, PROPARCO port to large numbers of businesses, and as
a means of influencing the governance and
T
he arguments against private equity strategy of these businesses. Beyond its func-
and investment funds follow a well- tion as a simple funding mechanism, private
trodden path: its critics argue that equity can help develop long-term local eco-
this funding mode is geared solely to secur- nomic networks and support the transition to
ing short-term returns for investors at the inclusive and sustainable business models.
expense of the entrepreneurs. This means, Analysing PROPARCO’s equity portfolio
the argument goes, that investment funds in sub-Saharan Africa will help to quantify
actually create instability for businesses and these impacts and identify ways of maximis-
also facilitate tax evasion, since the funds are ing them (see Box).
frequently based offshore.
It is, however, no coincidence that private The sine qua non of profitability
equity and investment in funds form an inte- Profitability is a sine qua non of developing
gral part of the range of tools available to private equity. The assumption that it plays
development finance institutions (DFIs). DFIs only a limited role has long acted as a brake
on the development of a mode of funding that
has become more prominent over the past
JEANNE HÉNIN AND AGLAÉ TOUCHARD
few years. The debate has, however, moved
Jeanne Hénin joined After five years spent working on: African private equity, long provided by
PROPARCO’s Environmental, in investment banking (with
Social and Impacts Unit in Rothschild&Cie) and in strategic
development finance institutions, now holds
2010, where she works on consulting (with LEK Consulting), its own with other funding mechanisms.
evaluating and measuring Aglaé Touchard joined the French Measuring the yield from equity is, however,
the development impact development agency AFD in 2006. particularly difficult in sub-Saharan Africa,
of projects. Graduated After initial experience in the since analysts use indicators from the devel-
from EDHEC, before joining Risk Department, she has for the
PROPARCO, she worked for past three years been involved
oped world that do not yet, unfortunately,
two years on implementing with capital investments within reflect the situation in developing countries. It
employability projects in the Private Equity Division of may, therefore, be helpful to consider the port-
Cambodia, followed by five PROPARCO, focusing particularly folios of three development finance institutions
years in Ernst & Young’s on the renewable energy sector. that have historically been active in sub-Saha-
Sustainable Development She has qualifications from
Department. three prestigious Paris-based
ran Africa – CDC in the United Kingdom, FMO
There, she developed institutions, the Institut d’études in the Netherlands, and France’s PROPARCO.
evaluation and advisory politiques (now Sciences Po), the The global internal rates of return (IRRs, both
services for the social and École supérieure de commerce
societal performance of (Paris School of Management),
businesses based in developing and the Université de Paris
1
It is very difficult to compare the internal rates of return of different investors be-
cause the reported figures cannot be verified and there is substantial variation in
countries. IX-Dauphine. She has also been methodology (in particular in terms of: (i) the scope of equity held, either in the in-
lecturing at Sciences Po since 2006. vestment phase or liquidated, (ii) inclusion of the remuneration of the manager as
a gross or net IRR, and (iii) the method used to assess latent added value).
www.proparco.fr

7. 7
FIGURE 1: QUANTITATIVE IMPACT OF BUSINESSES BENEFITING
FROM INVESTMENT FROM PROPARCO’S FUNDS EQUITY PORTFOLIO IN SUB-SAHARAN AFRICA
Sub-Saharan Number of Number of Number Average annuel Contribution Average annual growth Average annual
Africa funds businesses of jobs preserved growth in turnover to state revenue in earnings before growth in employment
receiving funding or created (in %) (million euros) interest and taxes (in %)
PROPARCO
25 229 50 000 +16,54%** 230* + 12%** + 11%**
(2010)
*EUR 230 million represents the contribution to state revenue over the last financial year by the 87 businesses in the sub-Saharan Africa portfolio which had reported this figure as at 31.12.2010.
** Analysis of 53 businesses in the sub-Saharan Africa portfolio as at 31.12.2010 for which historical data are available.
Source: PROPARCO, 2011
actual and potential) on sub-Saharan Africa ple, that for every pound sterling invested in
funds are good at between 14% and 23%.1 equity, the same amount is invested by other
In fact, their average profitability is better than development finance institutions, while a fur-
in France, where – according to figures pro- ther GBP 2.70 is contributed by private inves-
duced by the French Private Equity Association tors, increasing the initial investment to a
AFIC2 – the net internal rate of return at end- total of GBP 4.70 per pound (CDC, 2010).
2010 was 9.1% (AFIC/Ernst & Young, 2011). For businesses in sub-Saharan Africa, pri-
Since 2004, IRRs in France reported by AFIC vate equity is an invaluable source of
have ranged from 8.3% to 14.7%. finance: although local financial markets are
In terms of the average multiple,3 another constantly improving, access to finance –
profitability indicator, PROPARCO’s port- and particularly to equity, which is the key
folio in sub-Saharan Africa yields 1.8x on to ensuring growth – remains a major issue
“Equity has an equity being managed or dis- for African businesses.
economic, social and invested, a higher multiple
environmental impact than that achieved in other The quantitative
on local economies.” PROPARCO intervention zones impact on local development
(1.5x in Asia and 1.2x in the Private equity also contributes to develop
Middle East and North Africa region). While local economies. To gauge its impact,
the creation of long-term value is greater in PROPARCO has strengthened funds portfo-
sub-Saharan Africa, though, investments are lio monitoring with a systematic reporting of
also held for longer than elsewhere, particu- the results of funds’ investees companies. To
larly since the African markets are less liquid do this, it uses quantitative indicators relat-
than, for example, those in Asia (Figure 1). ing to non-financial issues (Table 1). Its
This demonstrated profitability is beginning
to attract a growing number of private and 2
Based on a survey of 475 funds with total assets of EUR 38.6 billion (between
1988 and end-2010).
local investors. For example, the Develop- 3
The average multiple on invested capital measures cash inflow against cash
ment Bank of Southern Africa (DBSA) has outflow but does not take into account the temporal dimension of IRR.
noted that the contribution of development
finance institutions to the equity they finance FIGURE 1: TYPICAL LIFE CYCLE OF A PRIVATE EQUITY FUND
declined from 54% between 1995 and 2000
Investment phase Maturity / liquidation phase
to 36% between 2005 and 2009 (Mamba,
2010). The DBSA also notes that local inves- Development phase
tors, too, are contributing more to the funds Calls for funds
Distributions
in which the Bank has invested, their share Internal rate
Cash flows/yield
of return from
rising from 30% between 1995 and 2000 to private equity
52% between 2005 and 2009. This growth is
a good sign: Africa’s image is improving and
it is becoming more attractive to the poten- 1 2 3 4 5 6 7 8 9 10 years
tial capital investors its businesses need. Investment Development Maturity / liquidation
phase phase phase
The economic and financial impact Year 1 to years 4 or 5 Year 3 to year 8 Year 8 onwards
One of the key roles played by equity funds is (typical situation) (typical situation) (typical situation)
their ability to bring with them a wide range Capital call Initial investments Most investments
and paid in capital mature have been liquidated
of investors keen to spread their risk. This Investment Exit from Some investments
enables development finance institutions or in targeted businesses mature Investments still remain to be liquidated
Investors remunerated
sponsors to act as catalysts by mobilising addi-
tional sources of capital, particularly from for- Additional investments
eign investors. CDC has calculated, for exam- Source: HSBC
Private Sector & Development

8. 8 Profitability and development hand in hand
Can private analysis shows that the 229 businesses setting up committees to monitor activ-
equity boost
funded by its private equity funds portfolio
African ity, establishing performance indicators,
development?
in sub-Saharan Africa employed 50,000 peo- or monitoring budgets. The impact is even
ple for both skilled and unskilled labour. For greater where the investor has a majority
those companies that reported data, work- shareholding or where he is investing in
force grow by an average of 11% a year. a start-up that is still structurally under-
In terms of economic activity, average annual developed. In such cases, the investor can
growth in turnover has been 16.5% and the boost development of the business, for
average growth in earnings before interest example by putting forward key managers
and tax (EBIT) 12%.4 The pattern and scale of from within his own networks.
growth in these businesses varies The presence of development finance institu-
“Private equity meets
according to the stage they have tions means that investment is increasingly
a specific funding need
reached in their development, the being used as a vector for improving environ-
that neither the banks
country in which they are located, mental and social (E&S) performance. Before
nor the equity markets
their size, and the sector within they make their investments, management
nor microfinance
which they operate. Higher turn- teams assess each business’s main E&S risks,
institutions are
over is noted in the countries of identify ways in which they can be miti-
currently satisfying.”
East Africa, for example. gated, and set out action plans for helping
This twin growth – a higher pay bill and a the business reach compliance with national
higher level of economic activity – also and international standards. These improve-
means businesses make a more substan- ments also act as levers for boosting per-
tial contribution to state revenue: the formance in other areas: acquiring certifica-
87 businesses in the sample providing tion can, for example, open up new markets,
this information contributed more than while reducing energy consumption helps to
EUR 230 million in taxes to domestic gov- drive down overheads.
ernments in the countries in which they
were based during the last fiscal year. How can the impact
Comparison with other geographical regions, of private equity be maximised?
including France, highlights the greater If private equity is to make a greater contri-
impact that private equity has in Africa than bution to developing the continent of Africa,
in Europe, where businesses have been harder then high-quality management teams need
hit by the economic and financial crisis.5 The to be convened and consolidated that are able
added value of a management team in sub- not only to structure and support businesses
Saharan Africa is also felt both in increased but also to embed the development criterion
earnings and in improved business profita- as a key objective for investment.
bility. In more mature markets, such as the Ultimately, however, the tried-and-tested
French market, by contrast, the added value criterion of profitability is based on the qual-
tends to focus more on financial leverage or ity of the management team. A good team
bargaining on the purchase or exit price. should have good operational skills. Creat-
ing value in sub-Saharan Africa takes place
The qualitative largely through the lever of growth, unlike
added value of management teams in European markets, where it relies heav-
Beyond these quantitative benefits on ily on the lever of debt and on cost rational-
local economic development, though, pri- isation. The organisational skills of the fund
vate equity also offers an effective lever for manager therefore become more important
value creation within a business. As share- than skills in banking syndication, which are
holders, management teams can instigate more highly valued in more mature markets.
good management practices, good gov- The local profile of fund managers is also
ernance arrangements, more appropri- particularly vital for success in sub-Saharan
ate organisation, more transparent finan- Africa, given the greater significance of infor-
cial reporting, and more efficient human mal networks there than in other parts of the
resources. This added value is particularly world. Finally, it is also important to be able
marked in sub-Saharan Africa, where busi- to form partnerships with investors, entre-
nesses frequently still operate informally preneurs and other parties involved.
or are based on family structures. Some
management teams are instigating finan- 4
EBIT reflects net turnover minus operating costs, such as salaries, social secu-
rity contributions, materials, energy, and so on.
cial reporting arrangements geared specif- 5
AFIC, study by Ernst & Young 2010: as at 31.12.2009, 848,954 jobs in the
ically to improving corporate governance, 1,268 businesses receiving investment funds from 213 private equity funds.
The dynamic analysis of growth in the labour force and in turnover carried
including such measures as increasing the out in France between 2008 and 2009 highlights a 5.9% decline in turnover in
number of businesses subject to auditing, France and a 1.8% contraction in numbers employed over the period.
www.proparco.fr

9. 9
A high-quality team is also a team able to sup- as type of business, level of maturity of the
port good governance and improvement in a business (start-up, growing business or turn-
business’s environmental and social perform- around, for example), quality of employment,
ance. As a result, some funds make technical integration of populations excluded from eco-
assistance envelopes available to businesses nomic opportunities, or sectors affected (for
to strengthen specific aspects of their man- example, social sectors).
agement or organisation. 43% of the investee Moreover, there are still no standardised tools
companies surveyed within PROPARCO’s sub- for measuring such impact, which may be
Saharan Africa funds portfolio had their com- reported in very different ways by management
pliance with international environmental and teams. For example, one of the first projects
social standards evaluated before investment carried out by the Global Impact Investing
was made, and all these businesses reported Network,6 through the ‘Impact Reporting and
that they had received support to improve Investment Standards’ initiative, involves
their performance in these areas. defining a standard for measuring the social
Where local development is considered as impact of an investment on the investor.
important as financial indicators, it shifts to In contrast to their public image, private
being one of the main objectives of invest- equity funds can be major vectors for devel-
ment. A number of specific development opment in low-income countries. Impact on
objectives need to be defined and assessment development and financial profitability are
tools need to be developed in order to eval- certainly not mutually exclu-
uate results transparently through a report- sive. The opposite is true, in “The 229 investee
ing standard or by means of an external eval- fact: profitability enables sus- companies funded
uator. Governance should also be structured tainability of business and by the PROPARCO’s
to achieve these objectives. means that the reach of devel- sub-Saharan Africa
There are a growing number of examples of this opment can be maximised but funds portfolio
happening. The Africa Health Fund, for exam- also that new investors can be portfolio have
ple, which was set up to develop high-qual- recruited. Development organ- contributed to create
ity and affordable health care for populations isations have a greater part to or preserve more
in sub-Saharan Africa, especially those at the play than ever in terms of pro- than 50,000 jobs.”
bottom of the income pyramid has linked fund moting environmental and social performance
managers’ remuneration to achieving this spe- and boosting the transition to sustainable and
cific objective. Governance has been supported inclusive economic models. They also need to
by external evaluation of the targets for popu- fulfil the function of catalyst to cover sectors
lations affected by the businesses. and countries that investors have neglected,
Effective measuring of impact has become sometimes because they do not know the area
one of the key issues involved in boosting the and consider it still to be a risk.
effects of private equity in sub-Saharan Africa.
Reporting of indicators has limitations and 6
The Global Impact Investing Network (GIIN) brings together about 20 orga-
nisations, including banking institutions (such as JP Morgan and Citigroup),
does not by itself ensure that all the relevant alternative investment funds (such as Acumen), and philanthropic foundations,
qualitative data are taken into account, such including the Bill & Melinda Gates Foundation and the Rockefeller Foundation.
ANALYSIS OF EQUITY IN THE PROPARCO PORTFOLIO
The 25 funds making up PROPARCO’s and FISEA’s1 Third, the geographical location of the businesses financial services – banking, insurance and
portfolio in sub-Saharan Africa as at 31 December highlights their concentration in the English- leasing – and in distribution, services to
2010 provide capital for 229 businesses. Four main speaking countries. 75% of the businesses business, the agrifood sector, and transport.
characteristics can be identified. First, most of benefiting from investment are located in just However, sectors, such education or healthcare,
the businesses benefiting from investment are ten of the 29 countries of intervention2 (excluding are also represented.
mature: the average investment is EUR 5.3 million, multi-country investment): in descending order
which shows that development of these of value of investment, these are Nigeria, South
businesses is well advanced. Second, however, Africa, Kenya, Ghana, Rwanda, Tanzania, Uganda, 1
FISEA is an investment fund making equity investments in sub-
Saharan Africa and was set up in 2009. With EUR 250 million in
this average figure conceals a wide diversity, Ivory Coast, Cameroon and Senegal. Moreover,
funds, it is held by the Agence Française de Développement (AFD)
spanning everything from large companies and just under half (47%) of the businesses funded are and managed by PROPARCO.
infrastructure projects to micro-businesses (for located in the first four of these countries. 47% of 2
The countries covered by funding are: Benin, Botswana, Burkina
example, three funds have an average investment the business funded are located in poor countries. Faso, Cameroon, Chad, the Comoros, the Democratic Republic of
Congo, Djibouti, Gabon, Ghana, Guinea, Ivory Coast, Kenya, Libe-
of EUR 250,000). Accordingly, each of the Finally, analysis of the portfolio reveals a
ria, Madagascar, Mali, Mauritius, Namibia, Niger, Nigeria, Rwanda,
businesses benefiting from investment employs sectoral concentration. The businesses funded Senegal, South Africa, South Sudan, Tanzania, Togo, Uganda,
an average of 300 people. operate mainly in growth sectors, such as Zambia, and Zimbabwe.
References / AFIC/Ernst & Young, 2011. Performance nette des acteurs français du Capital Investissement à fin 2010, study, 1 June. // CDC, 2011. Annual Review 2010, report. // Mamba, G., 2010. The Changing
Profile of Investors in African Private Equity, EMPEA Insight, Special Edition, Private Equity in sub-Saharan Africa, November. / Wilton, D., 2010. A Comparison of Performance Between First Time Fund Managers & Established
Managers Moving Into A New Market. How Important Is Track Record?, IFC, 15 September.
Private Sector & Development

10. 10
PE Funds Improving Corporate
Can private
equity boost
African
development?
Governance and Investor Climate
While fund managers may influence public policy geared towards improving the investing
environment, they make a more significant impact by improving portfolio companies’
governance standards. This is because the resulting improved performance is transmitted
to other corporate entities and entrepreneurs emulating them to replicate success.
With increasing acceptance of private equity capital, the probability of best practices being
adopted greatly increases.
Davinder Sikand et Kiriga Kunyiha emerging economies. Lobbying local autho-
Deputy CEO, Aureos Capital rities and improving corporate governance
Kenya Investment Principal, Aureos Capital contributes toward improving the investment
climate. Private equity funds, as a key compo-
A
n improved investment climate is nent of a diversified financial environment,
viewed as a key component of foste- also play a vital role. As providers of capital to
ring economic growth and reducing businesses in emerging markets, private equity
poverty. Studies have demonstrated the posi- funds play an active role. They work towards
tive correlation between good governance improving governance standards to optimise
and economic growth. “Accelerating growth the management of and return on investments
and poverty reduction requires governments made, which, in turn, fosters greater invest-
to reduce policy risks, costs, and the bar- ment flows to the economies concerned.
riers to competition facing firms of all types
– from farmers and micro-entrepreneurs to The Reform Dividend
local manufacturing companies and multi- in Challenging Environments
nationals” (World Bank, 2005). While redu- As seen in Table 1, from the 2011 World Bank
cing public sector governance risk in deve- Doing Business Survey, sub-Saharan Africa
loping countries is important, private sector pose challenging operating environments.
governance cannot be underplayed. The des- However, this snap shot hides the true picture
tabilising effect of deficiencies in corporate of the trend on the continent. After imple-
governance is counterproductive to econo- menting structural adjustment programs in
mic development. The decisions, conduct the 90s, governments today acknowledge
and operations of private sector entities have that while a stable macroeconomic environ-
serious implications, as observed in the 2009 ment is necessary to accelerate growth, it is
global financial crisis. not sufficient. Governments recognise the
The private sector’s role is increasingly viewed role played by the private sector and have, as a
as a critical component of the development of consequence, become more receptive to crea-
ting business-friendly environments. Evi-
DAVINDER SIKAND ET KIRIGA KUNYIHA
dence can be seen in countries like Rwanda, a
global leader in business regulatory reforms
Davinder Sikand is Aureos Kiriga Kunyiha is an
Capital Deputy CEO and Regional Investment Principal
as recorded by Doing Business in 2008/09,
Managing Partner for Africa. based in Nairobi. He joined which attracted around USD 1.1 billion in
He has been with Aureos since Aureos in 2003 and has over investment, 41% more than in the previous
its inception, 2001, having eight years private equity year, in the midst of the global economic cri-
25 years of private equity and experience, focusing on deal
sis (World Bank, 2011). Despite such impro-
investment banking experience. origination, structuring,
Previously, Mr. Sikand worked execution, monitoring and
vements, substantial progress still needs to
at Drexel Burnham Lambert, exit facilitation in East be made to transform the continent into a
Financial Security Assurance and Africa. He holds a BSc. in preferred investment destination.
PricewaterhouseCoopers. He holds a Economics from Queen While funds may be limited as catalysts
Masters in Business Administration Mary and Westfield College,
for influencing change in public gover-
(MBA) from the Kellogg Graduate University of London.
School of Management,
nance, they are beneficiaries of the chan-
Northwestern University (USA). ging environments, as evidenced by new
and renewed investor interest in funds
www.proparco.fr

11. 11
TABLE 1: REGIONAL AVERAGES IN PROTECTING INVESTORS INDICATORS
Strenght of investor protection index (0-10) Ease of shareholder suits index (0-10)
OECD hight income 5.9 6.0 Eastern Europe & Central Asia 6.1 6.2
Eastern Europe & Central Asia 4.7 5.5 Middle East & North Africa 3.3 3.4
Middle East & North Africa 4.5 4.8 OECD hight income 6.9 6.8
East Asia & Pacific 5.2 5.3 East Asia & Pacific 6.0 6.3
Sub-Saharan Africa 4.2 4.4 Sub-Saharan Africa 4.9 5.0
South Asia 5.0 5.0 South Asia 6.3 6.3
Latin America & Caribbean 4.9 5.1 Latin America & Caribbean 6.0 6.0
5.1 5.7
Extent of disclosure index (0-10) Extent of director liability index (0-10)
Eastern Europe & Central Asia 4.9 6.3 Eastern Europe & Central Asia 3.1 4.0
Middle East & North Africa 5.7 6.3 Middle East & North Africa 4.4 4.6
OECD hight income 5.7 6.0 OECD hight income 5.2 5.2
East Asia & Pacific 5.1 5.2 East Asia & Pacific 4.4 4.5
DB 2006 DB 2011
Sub-Saharan Africa 4.7 4.8 Sub-Saharan Africa 3.1 3.4
South Asia 4.4 4.4 South Asia 4.4 4.4
Latin America & Caribbean 4.0 4.1 Latin America & Caribbean 4.8 5.3 2010
global
5.3 4.4 average
Note: The data sample for DB 2006 (2005) includes 174 economies. The sample for DB 2011 (2010) also includes The Bahamas, Bahrain, Brunei Darussalam, Cyprus,
Kosovo, Liberia, Luxembourg, Montenegro and Catar for a total of 183 economies
Source: World Bank – Doing Business, 2011
dedicated to the region. According to the ber of concerned sector participants, lobbied
Emerging Markets Private Equity Asso- authorities to change the selling method. In
ciation (EMPEA), between 2006 and 2008 2009, the Kenya Bureau of Standards gazetted
sub-Saharan private equity funds raised the new standard of selling by weight.
USD 6.2 billion and invested USD 7.7 billion,
which was substantially higher than at any Private Sector Governance Leading the Way
point in history, showing further evidence of “The governance of companies is more
the reform dividend (EMPEA, 2010). important for world economic growth than
Further, private equity funds can significantly the government of countries”. These words
impact the investment landscape within an of James Wolfensohn, president of the World
economy through their activities. This can hap- Bank 1995-2005, emphasise the importance
pen either directly through consultation with of the governance of corporate entities in
stakeholders, through portfolio companies or today’s world. Over and above, the macroeco-
indirectly as members of private sector groups, nomic consequences of failures such as Leh-
like the African Venture Capital Association. man Brothers,2 the private sector plays a lar-
The Acacia Fund1 experience illustrates impro- ger role in our economies than ever before.
ved local regulations through consultations Globalisation and deregulation have opened
with stakeholders. It formalised private equity up growth opportunities for companies but
in Kenya by obtaining government recogni- also increased complexity and risks. These
tion for private equity as a distinct financial opportunities and risks are not limited by
instrument. This formed the basis of new size or geography. African businesses are
regulations for venture capital, introduced by also subject to the same reward/risk issues,
the Kenyan Capital Markets Authority. with small- and medium-sized enter-
Moreover, as mentioned, private equity fund
managers can also improve quality standards 1
Established in early 1997, with a total committed capital of USD 19.6 million,
the Acacia Fund made equity and quasi-equity investments in well-managed
through lobbying via a portfolio company as Kenyan SMEs which demonstrated strong potential for growth. By the end of
experienced in Kenya, where legislation gover- January 2003, the fund had invested USD 15.6 million in 18 companies. The fund
has taken minority stakes in businesses across a diverse range of sectors.
ning building codes and standards was positively 2
Before declaring bankruptcy during the financial crisis, in September 2008, Leh-
influenced and changed. An area where safety man Brothers Holdings Inc. was the fourth-largest investment bank in the USA.
standards had not been adequately addressed
was the sale of structural steel for buildings. Prior FOCuS
to 2009, the sale of structural steel was done “by
piece” and not “by weight”. Without a defined Aureos Capital is a private equity fund management company
safety standard policy, the weight consistency specialising in expansion and buy-out capital for small to medium
would vary, and some manufacturers would deli- size enterprises in Asia, Africa and Latin America. Since 2001,
Aureos has increased its funds under management to
berately undersize, compromising the structu-
USD 1.3 billion, managed by over 90 investment professionals in
ral integrity of the steel. Athi River Steel Plant, its 28 offices worldwide. Investors include financial institutions,
a steel recycling company that is part of Aureos development finance institutions, pension funds, sovereign wealth
East Africa Fund’s portfolio, along with a num- funds, fund of funds, family offices, and high-net-worth individuals.
Private Sector & Development