Growth in private equity in Africa despite impediments

By Elikem Nutifafa Kuenyehia

Private Equity has provided capital necessary to grow businesses

Over the past 15 or so years, private equity has played a key role in unlocking growth in Africa. It has provided African entrepreneurs across a multitude of industries with much needed capital to help fund their growth and expansion aspirations.

African firms closed 823 private equity deals between 2010 and 2015 alone, with a total value of US$21 billion and raising a total of US$16.2 billion for projects.
This capital has funded companies making a huge variety of products, such as clothes and detergents, as well as those building shopping malls and power plants. Industry players are unanimous that private equity growth in Africa shows no signs of slowing down soon.

There are several factors that make investment in Africa so attractive to investor including: the stability and growth of the continent’s economies; increased appetite for risk in emerging markets and the increasing exit opportunities.

Additionally, the rise of the African middle class – which is reliant on consumer goods – has created many opportunities for private equity investment in Africa.

Although there are without doubt some barriers to investment – such as inadequate exit opportunities – investors seem undeterred.
Indeed, surveys show that investors remain enthusiastic about private equity. This should be welcome news and encouragement for entrepreneurs across Africa – the vast majority of whom cite access to capital as their biggest constraint to growth.

Small and Niche

Yet as a percentage of total capital available and taken up by African entrepreneurs, private equity is likely to remain small and niche.

Given the nature and dynamics of entrepreneurship in Africa and the mindsets of the vast majority of African entrepreneurs, private equity is unlikely ever to become a mainstream source of finance for African entrepreneurs. Most successful indigenous African businesses have been built by a single entrepreneur who in many instances is used to having their own way. According to academic research over the years, it has been found that entrepreneurs are seldom willing to submit to authority.

This is particularly true in the context of Africa. A combination of relatively weak institutions, corruption and poverty gives successful entrepreneurs significant influence. Many such entrepreneurs have no incentive at all to submit to the authority of a private equity fund, no matter the size of the check.
There is also the issue of control: the typical African entrepreneur is unwilling to give up control of his company the way a private equity firm would like. In many instances, equity and control are currently concentrated in the hands of a single entrepreneur or their family or close friends.

I have met hundreds of African entrepreneurs who would rather own 100 percent of a small business than dilute their stake to own a small percentage of a bigger pie. Admittedly, many private equity firms only take a minority stake; but the reality is that they exert more control on the companies they invest in than the typical African entrepreneur would be comfortable with.

Another barrier to greater use of external financing is the level of scrutiny and corporate governance that private equity firms require. Many African entrepreneurs are simply not willing or able to work with these structures.
While researching my book on African entrepreneurs and the companies they create, I was particularly struck by the lack of interest many have of them have in adopting proper governance structures. These entrepreneurs recognize that investors and bankers like to see boards of directors in place and so they do make the effort to find qualified people to join their boards.
However, in most cases of a strong founder-led company, the board becomes no more than window dressing – good for the website, brochures and for making pitches to banks and investors, but in practice unable to hold the founder to account.

The vast majority of businesses built by African entrepreneurs are local businesses, often limited to a particular city, country or region. Local political patronage and connections often sustain the enterprise. Given historical colonial divides, language barriers, lack of integration and fragmented markets, only a small number of African entrepreneurs have regional, let alone pan-African ambitions.
The business model adopted by, say, Aliko Dangote or Tony Elumelu – building pan-African businesses which diversify risks, is more the exception rather than the rule.

For these reasons, private equity, although continuing to grow steadily in Africa, will remain a small percentage of total capital available to and taken up by African entrepreneurs. The vast majority of African entrepreneurs would continue to rely on debt capital – even at rates close to 30 percent. That in itself may perhaps be indicative of another opportunity for investors looking to Africa.

There is no doubt that change can happen. But it will need the support of government, industry bodies and African corporations to encourage the necessary shift in culture across the continent.

Elikem Nutifafa Kuenyehia is a serial entrepreneur and lawyer. He is the founder and chairman of law firm ENSafrica Ghana and in 2012 was named the Young Business Leader of the Year at the West African All Africa Business Leaders Awards. The original version of this article was published at the African Business Review.