The call of Africa: Risk mitigation

Read the first instalments of our Africa series here

While the risks associated with investing in Africa cannot be generalised due to the continent's size and diversity, a report by EMPEA, a global industry association for private capital in emerging markets, finds there are a number of risks investors face across developing economies, namely currency volatility, capital outflows and declines in commodity prices.

Currency risk
Currency volatility is especially a problem in South Africa, where the rand depreciated against the dollar. In Nigeria, the naira slid dramatically after its central bank devalued the national currency in June to cope with falling oil prices. Before this change in strategy, the currency was pegged at N197 per US dollar for more than a year.

"The lack of foreign exchange liquidity in several markets is a clear risk in the short term," says David Cooke, a partner at Actis. "However, when there are risks presented like that, there are opportunities that perhaps in the past were not available to private equity investors."

Recruitment
Finding the right people to lead portfolio companies to success can be a worry too. Cooke argues the pool of experienced managers is too small in some countries: "We are certainly not short on entrepreneurs on the continent. Adding to that entrepreneurial energy, the management expertise can be more challenging than in other parts of the world."

Cooke also observes new private equity firms struggle to hire experienced professionals, and attributes this to the small pool of sizable and established firms.

Alison Klein, private equity manager at Dutch Development Bank, however, says the situation is improving: "It is getting a bit easier. Especially with a wave of what we call 'repats', expats who were educated abroad and are drawn by the opportunities back home to countries like Nigeria, Kenya and even Ethiopia."

We are certainly not short on entrepreneurs on the continent. Adding to that entrepreneurial energy, the management expertise can be more challenging than in other parts of the world" – David Cooke, Actis

And in terms of sourcing talent locally, private equity houses appear to be making headway. According to Doug Agble, co-founder and partner of 8 Miles, his firm now knows which search firms to use and continues to explore innovative ways of finding talent to work in Africa.

Furthermore, Ponmile Osibo, research analyst at the African Private Equity and Venture Capital Association, notes private equity houses increasingly use their networks to find managers: "They can bring in new management that they have previously worked with to supplement the skill sets of family owners and entrepreneurs." He has also seen greater active engagement, where houses bring together management teams from their entire portfolio to transfer core skills such as ESG and system integration or assist with introductions to suppliers, customers and industry specialists.

Mitigating risks
Private equity firms wanting to do business in Africa need to know about specific challenges and opportunities in individual countries and need to be able to evaluate these, Cooke says. He argues risks can be limited this way and goes one step further by claiming that the most promising deals can be found in unlikely places, for example Egypt during the Arab spring: "During macroeconomic challenges, we've been able to identify attractive private equity opportunities. You can only do that by having a local view. Doing that from afar is impossible, I would argue."

Klein advises LPs to play safe by not focusing on one country: "There might be the opportunistic family office that wants to gain exposure to Africa through a single commitment to, for example, a Nigerian private equity fund, but I think most first-time investors in the continent would tend to select a more geographically diversified fund."

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