African government agri support can boost PE: Warren

Government-led initiatives to develop and professionalize agricultural sectors could help provide opportunities for private equity investors in Africa in the years ahead, according to the author of a recent Economist report on private equity investment into the continent.

Herman Warren, Africa Director for the Economist Corporate Network, told Agri Investor that efforts by African governments — including those of Ethiopia, South Africa and Kenya — to support their agricultural sectors could help lead to opportunities for private equity firms active in the region.

Relevant government support can amount to the equivalent of a public-private partnership model, he said, with governments offering tax incentives, infrastructure and irrigation spending designed to support the development of value-add agriculture and food processing sectors that can attract private investment.

“In many African countries, employment is a big challenge,” he said. “Those sectors that are very labor-absorbing, tourism and agriculture being two examples, are prioritized by those countries to try and provide viable employment opportunities, particularly for the young.”

Warren’s views fall in line with broader market sentiment that agri initiatives from public, government and global bodies will be needed to boost PE investment in developing regions, which Agri Investor also argued in a recent commentary.

In the report, Warren wrote that overall private equity activity in Africa is marked by a generally smaller deal size than other regions, longer lead times and a particular focus on improving the environmental and social governance (ESG) performance of investments.

Warren also wrote that hold periods tend to be longer in Africa, with exits most often coming through trade sales to corporate buyers purchasing assets in their core line of business, as opposed to management buyouts or sales to other financial buyers.

“Rather than buying a business, significantly increasing its debt levels, aggressively reducing costs and exiting after a short holding period, the GP approach to Africa centers on holding and scaling businesses with limited, if any, debt capital included in deal structures,” Warren wrote.

Herman said private equity investors in Africa often focus on businesses with the potential to expand within its current geographic market, but also into other regions.

He highlighted Washington, DC, based pan-African private equity firm Emerging Capital Partners’ (ECP) investment in Java House, a Kenyan coffee and restaurant chain offering local coffee and international cuisine.

ECP, which currently holds a 90 percent stake Java House, invested in the company in 2012 and helped it expand from 12 stores in Kenya to about 60 locations in both Kenya and Uganda. ECP is reportedly in talks about a possible sale of Java House to TPG and the Carlyle Group.