This is the first of several articles I will write concerning private equity in Africa.
I will be discussing what is private equity, what is its origins and why is it useful in the African context.
Then in further articles, we will dive deep into private equity and how it can be used to drive development in Africa.
In doing these articles, I am aiming to build an intellectual and theoretical foundation on which the African private equity movement can be built.
If this is not done, my concern is that private equity practitioners will simply transplant the shape of private equity in other markets and try to fit it in within Africa and it will not work.
To give a practical example of this, it is important to note that private equity mostly referring to buyouts as an asset class (excluding VC which is a discussion for another day) emerged in the USA after a period called ”the conglomerate boom” in the 1960s.
Favourable macroeconomics, the rise of the middle class and a general sense of optimism created an environment where companies began to buy other companies in unrelated industries to build a firm as a portfolio model, where there is diversification for their investors.
However, for many of them, they did not build their management capacity to the point where they could manage these unrelated subsidiaries.
Therefore, buyouts really came into its own with early practitioners like Henry Kravitz, Jerome Kohlberg and George Roberts of KKR and Theodore Forstmann of Forstmann Little & Company alongside others that were able to buy some of these underperforming units from these large companies, hold it for a few years while improving the operations and eventually sell it to typically another company in that sector, sell to another private equity firm operating in the secondaries market or list it in the stock exchange where the stocks are offered to the public.
The companies are sold for a premium, then returning the money to the investors, the fund mangers keep their profit and most of them raise other funds.
Most of this structure cannot work in Africa, for example, we need longer holding periods, less leverage and work to develop our capital markets so investors are able to exit these investments.
In this series of articles, we will take a deep dive into the origins of private equity, how it works and how it can be used in Africa.
Within this context, we will also speak about strategies. There are already strategies that have been developed in other markets, but there are others that are necessary in Africa that has not been developed.
It is this creativity and agility that I want to encourage in Africa based private equity practitioners, fundamentally, as private equity professionals, you are first an entrepreneur that studies your market, find problems, and create solutions using the tools, practices, and mindset of private equity.
As your fund invests in companies, it is the same gospel you practice of agility, risk management that you will also preach to the managers of your portfolio companies.
As I alluded to earlier, private equity is first a mindset that focuses on solving problems, taking and managing risks, establishing operational excellence, building an entrepreneurial culture and self-sustaining ecosystem where today’s founders become tomorrow’s private equity investors.
If we can take these lessons from global private equity and work to build an operational model for African private equity, then it will only be a matter of time before Africa reaches her development potential and becomes that blessing to the world she is destined to be.