Viewpoint: The transformational power of private equity

James Mwangi
CEO, Equity Bank

Equity Bank is a regional bank based in east Africa which has twice been a beneficiary of private equity (PE).

Equity was a technically insolvent organisation which then started experiencing very rapid growth. Eventually we became constrained by both capacity and capital. This prompted us to consider who would be willing to work with a fast growing company and have the capacity not only to invest money, but also the capacity to manage this rapid growth and risk. We wanted an investment of US$200m for operations in sub-Saharan Africa. We needed a partner which could help execute a regional growth strategy and open doors for us in different countries — ensuring that we would be listened to as we moved from one country to another. We needed all these skills and competences.

We did have concerns, however. Firstly, we needed to implement the right governance structures in order to protect the original shareholders. The second was alignment — how do we build and institutionalise alignment with private equity investors. Then there was the question of control — who shares the governance and strategy? Will the strategy of the original founders be sustained or do we change direction? These are some concerns you have to confront along the way.

One of the biggest challenges is agreeing on price. In 2006 I decided to risk the company on the Nairobi Stock Exchange in order to discover its real value. This meant that a year later we were in a far stronger position when we received our next PE investment. It was no longer a competition between ourselves and the PE investor on price, but instead it was a competition between the six PE houses which were seeking to work with us.

How do you choose a partner? There are a number of factors to consider. They are not supposed to just bring money — we were looking for the right experience, knowledge and focus. The second is you need to consider who will sit on your board from the PE investment house. They wield some power so the right chemistry is very important.

And thirdly you need to know how deep their pockets are. You need a PE partner which is able to come to your aid — this was a huge consideration. Finally their reputation; what is their reputation they are bringing on board — how will the public and other investors react to them coming aboard. These are all factors which need to be fully worked through in order to achieve a prosperous and fully aligned partnership.

Viewpoint: Shaping markets of tomorrow or an African "go to" strategy

Charles Brewer
Managing Director,
Africa, DHL

At DHL we are shaping the markets of tomorrow. Not only are we the leading logistics company in the world, but the leading one in Africa too – we have over 34 years of experience as a pioneer and innovator on the continent.

I’ve been in Africa for about a year and there hasn’t been a single week without an overwhelmingly enthusiastic and positive experience. However, there also hasn’t been a single week without a frustrating moment – Africa provides a very dynamic but sometimes very challenging environment. And it means you can’t always play by the playbook…

An interesting local example is the political tension between South Sudan and Sudan. Many countries don’t recognise South Sudan as a shipping destination so, in error, they send their goods through to Khartoum. And, rather than promptly reshipping the goods to South Sudan, it can take days for DHL to obtain the necessary customs release and on-forwarding from the authorities. This example – one of many – shows how the emotive political relationships between countries play into the logistical challenge of doing business in Africa.

However, Africa is not always alone with its challenges. I spent eight years in Asia-Pacific and that region has certainly evolved. Only ten years ago, doing business in China or India was considerably more complicated than it is today. For example, India has twenty eight states, and each one can work autonomously, which creates major logistical challenges.

The biggest issue in Africa is the physical infrastructure itself – whether you move a product across border by road, train, plane or ship. This doesn’t, in my opinion, prevent growth but is a fairly unique challenge that working in Africa creates – it adds to the cost of doing business.

For example, in Mali, the two largest cities share a joint population of just over two million people but there are over twelve million people who don’t live in those cities that, for the most part, have never touched or seen one of our products. So the challenge is getting your product into those markets but, equally, it is an enormous opportunity as well.

We’re therefore concentrating on a ‘go to’ strategy which targets the 80 – 90% of the African population who live outside of urban centres. If you can tap into this market, and create the infrastructure and accessibility, then the sky is the limit.

Viewpoint: Embracing the opportunities

Donald Gips
US Ambassador to
South Africa

I look at the story of Africa and the United States and it is starting to change. There are more Americans certainly coming to South Africa and they can see there is potential. And when you talk to American businessmen, which is what I spend a lot of my time doing, they talk about the potential and the profitability. Sure there is risk, but the potential rewards are commensurate with that risk.

Many African governments are raising the bar to make it easier to do business and are welcoming economic investment. Huge strides have been made across the continent, from the large-scale efforts such as regional trade zones to country specific efforts to streamline bureaucracy and improve access to small and medium business resources. Africa is rapidly re-inventing itself from an aid recipient to a trade and investment destination, and an increasingly important trading partner for the US.

However, while the perception of Africa is changing, we think that governments and business people can do more. As Ambassador, I've made it a personal priority to promote Africa to the American business community. While many US businesses understand — and have embraced — the opportunities, there are others for whom the perception of the difficulties of doing business on the continent outweigh what they see as the benefits.

For some US businesses, the path to investing is as simple as getting past stereotypical and alarmist headlines. For others, specific support will be required to address some of the perceived and real challenges to doing business on the continent.

Working together with governments and business associations like the American address these concerns and both change the perceptions and clarify the rules so that investment and job creation increase dramatically.

This rising prosperity in Africa will open new markets for American goods and create jobs in both regions. More and more people understand that the 21st century will be the African Century.

Viewpoint: Government and business have aligned objectives

Jeff Nemeth
President and CEO,
Ford Southern Africa

Ford has operated in Southern Africa for 96 years and has been manufacturing on the continent for 88 years. So we have a long history with various forms of government, particularly in the southern half of the continent.

The auto industry and government work closely together. Ours is one of the most highly regulated sectors in the world – CO2, safety, and manufacturing regulations. We are also a great engine for manufacturing industrialisation – we create a lot of jobs around us and so we are an important industry to government in that regard.

One of the things that is good about doing business in South Africa is that capital inflows and outflows are very easy. But in our conversations with policy-makers, we have also been pressing the South African government to ensure that the country's industrial sector is globally competitive. Our latest product is a Ford Ranger and we are exporting it to 148 countries. Our challenge is exporting it at a competitive cost level. We have been working with the government on transportation because logistics costs are our single biggest cost. As such, the logistics service has to be at global cost levels.

And when it comes to the African continent as a whole, we have encountered some challenges regarding the regulations - not only their onerous nature but also the variation that exists in enforcement – from country to country and within countries. We always strive to abide by the regulations but the problem is a lot of our suppliers and people we deal with are forced into informal channels because of the heavy tax codes and regulations, and because they are not enforced consistently.

Looking forward, it is important to remember that both government and business have aligned objectives. We would rather grow our business and supply base in South Africa because that leads to more customers and will help sell our cars. We believe in jobs and skills growth; we need both to grow our business. While we are driven by profits on behalf our shareholders, at the same time there is huge scope for alignment with government and to help each other out. As long as we find that space and work together both government and business can be successful.