Frontier private equity firms turn sights on Africa
Posted Monday, May 31 2010 at 00:00
Zain Latif has swapped a career in investment banking for a niche start-up, and $100 million-plus deals in Africa for tiddlers of $3 million.
Once a banker at Goldman Sachs, Latif last year took the plunge to set up a private equity firm which sports a headcount of five.
From an apartment in a smart block in London’s West End, between budget clothing store Primark and chain restaurant Ask, Latif and his team at TLG Capital have invested in three companies in the past half-year in frontier markets — Uganda, Ghana and Cambodia.
Frontier markets are typically regarded as markets where market capitalisation, liquidity and market-making are lower, not only than in developed, but also than in the bigger emerging markets.
But what if these countries do not, or barely have, their own stock exchanges or bond markets?
One of few ways to invest in these frontiers is through private equity— buying a stake in a local company, helping it to grow, and then achieving an “exit” either through selling it on to a bigger firm, or turning it into a listed company.
Bigger players like Latif’s former employer Goldman tend to overlook these tiny deals.
“An investment bank will do nothing less than $100 million, five to six deals a year of that, and you are restricted to three countries — Nigeria, Kenya, Angola, the commodity plays,” Latif told Reuters. “We are looking at small and medium-sized businesses at a size of $3-5 million. We will go down to half a million.”
TLG is attracting money from private investors in the Middle East and Europe, and none of the countries in which it has invested so far even make it to the MSCI Frontier Markets index, against which many frontier market funds will be measured.
Its first three investments are in a pharmaceuticals plant in Uganda making anti-retroviral and anti-malarial drugs, a cancer centre in Ghana and a Cambodian company running cruises along the Mekong river.
One of TLG’s pipeline projects is in the healthcare sector in Liberia, still recovering from a 1989-2003 civil war.
Last year less than $1.5 billion was invested in private equity projects in sub-Saharan Africa, one of the main regions for deep frontier markets, compared with around $3 billion in each of the previous two years, according to data from the Emerging Markets Private Equity Association.
The figure for sub-Saharan Africa compares with over $22 billion invested in private equity in emerging markets globally last year, and $43 billion in the United States.
But private equity investment in sub-Saharan Africa has risen from $651 million in 2003, while in the United States it has fallen from $59.2 billion in the same year.
Liquidity issues are a particular constraint in frontier private equity markets, where the way to make real money is, after grooming a company, to sell on the stock to what will be a relatively small pool of buyers.