Searching in Africa
March 05, 2018
by a searcher from IE Business School in Arusha, Tanzania
Dear Searchfunders,
I would appreciate your feedbacks on a few thoughts I am having regarding searching in Africa, where I am planning to focus.
My first observations about searching in Africa are the following:
1) Africa seems to differ from US and Europe as it do not really has a real population of baby boomers. The continent is still young and its youth population is expected to continue growing in the coming decades.
2) SMEs in Africa seems to be too small (by African standards) while many of its middle size to large companies tend to be of equivalent size with the SMES in US and Europe.
3) Conscious of this fact (2), some private equity companies focusing on Africa tend to target companies similar to those targeted by potential searchers, which could lead to some competitions, although the market seems large, given the size of the continent.
In consequence of the above it seems like Searching in Africa might required some adjustment compare to Searching in US/Europe. I think in particular about the followings:
a) Search areas should focus on regions with an abundant population of foreign SME entrepreneurs thinking about cashing out, on advance economies such as South Africa or on markets traditionally targeted by local PE or Africa-focused PE.
b) African-focuses PE could be good partners during the acquiring round for a Searcher, and could therefore be a part of the initial investors, but they do not know the model and might be reluctant to invest in it.
c) African Searchers might have to focus on smaller companies than their US/EU counterparts. Here I think about an enterprise value of 1-5 million and a 10%-30% EBITDA (given it is a fast growing region)
d) Given that in some regions of Africa, distressed companies are available and are often in this situation due to mismanagement (case of many state companies which were then privatised for instance), I also feel that turnaround cases could be considered in situation where such distressed companies (due to mismanagement) are available in Africa.
Are these things making sense?
Thank you Kind regards, Hubert
from Northwestern University in 195 Santa Clara Ave, Oakland, CA 94610, USA
from INSEAD in 10 Rue de la Chasse, 77000 Melun, France
IMHO, your statement of facts is absolutely correct. I would only add a downer, though: because Private Equity funds are mostly self-defined by their risk appetite, bringing them to invest in the search model is probably even harder in Africa. They'd be compounding currency and country risk with relatively smaller track record of the young manager.
Distressed situations are a totally different ball-game in terms of risks and time horizon and most actors only do that (it's financial engineering and asset negotiations, not value creation through management), some exceptions come from trade buyers but not many.
As a matter of fact, cost of capital is so high in most countries that the option of starting from scratch might be a less risky situation than delving into the intricacies of distressed companies: I encourage you to research (and maybe contact) Jane Kagwa (impalainvestmentholdings), whom I met in one of the Search Fund conferences when I started my own endeavor.
All the best,
Amine Chabbi