How would you describe the investment environment in Africa today for a pan-regional fund as compared to a decade ago?
Investment opportunities have grown and evolved over the past decade, both in volume and in quality. Yet competition remains modest, especially for pan-regional firms, and the continent as a whole remains extremely capital short.
The critical quality required in Africa is to be a deal-maker, rather than merely a deal-taker. For example, the model of independent ownership of telecom towers did not exist in Africa until we founded HTN Towers.
An important tool for value creation in private equity is leverage. Historically, access to debt to finance acquisitions or to fund growth has been constrained in Africa. However, in recent years, we have seen a material improvement as domestic debt capital markets have evolved and as international investor appetite for bonds and loans from high-quality African corporate issuers has grown.
Many of our companies have been successful in tapping international and local debt capital markets, including for dividend recapitalizations, a rarity in Africa. In 2017 Helios Towers, our second telecom towers business, issued a heavily oversubscribed USD600 million bond. Last year, Acorn issued a ~USD40 million equivalent five-year senior, secured, rated, and guaranteed fixed rate bond, as part of the company’s medium-term note program in the domestic Kenyan market. It was the first green bond in East Africa.
Helios is traditionally a growth equity investor. Tell us about Helios’ current investment strategy as a result of the growing tech opportunity, and as reflection of your investment in fintech unicorn Interswitch.
Regardless of the structure of any given investment we make, whether it is a buyout, carve-out or growth equity investment, our focus is always on growth.
Over the past five to ten years, new technologies have opened up opportunities and played a critical role in the transformation of our portfolio companies. Since our 2007 vintage fund, our investments in the financial sector have shifted to focus on services. In 2011, we invested in Interswitch, a Nigerian electronic payments processing company, which at the time was growing through increased debit card penetration. With increased mobile penetration, its payments offerings have grown in scale and importance and, along the way, we sold minority stakes to TA Associates and to Visa.
Since then, we have invested in other pioneering payment platforms serving African consumers, including Fawry, an Egyptian electronic payment platform, and TPAY, a digital merchant acquirer for mobile phone users in MENA. On the wholesale side we own Crown Agents Bank, a UK-regulated, EM-focused provider of FX and payments. These businesses are at the forefront of innovation in the African payments space – which has had a significant positive impact in terms of financial inclusion and driving down costs over the past decade.
Based on your current portfolio, can you share an example of specific challenges and/or opportunities around environmental sustainability and social impact when doing deals in Africa?
As a way to verify our long-standing commitments to sustainability and responsible business practices we recently became a B Corp. B corps are required to meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. We firmly believe this approach creates more valuable and more sustainable businesses with stronger long-term growth prospects.
The environmental and social impact made by companies in our portfolio is significant. For example, at Helios Towers, we reduced the carbon footprint of the company’s operations and improved reliability and efficiency of its energy supply through solar and hybrid technologies. In 2017, Acorn received IFC’s EDGE certification, a green building standard that typically achieves a 20% increase in energy and water efficiency and a 20% reduction in CO2 emissions per year. At Starsight, senior management successfully increased the number of women in leadership and technical roles. The company’s management team is now 42% female, well above the industry average, and the firm plans to increase the number of female engineers in field teams as its next initiative.
Please describe the exit opportunity for the region in general and how it compares with 3-5 years ago. Are you seeing interest from global and/or local strategic acquirers and how does that compare with IPO windows?
The range of available exit paths has broadened as African capital markets have developed. We see growing appetite from strategic and financial buyers for the kinds of platform companies we build. Given the nuances and complexities of originating our investments and then optimizing the operations of these companies, such buyers are typically not equipped to compete with us at the outset. However, once we have institutionalized and put the businesses on steady growth trajectories, they become attractive acquisition targets.
We have successfully tested all paths to liquidity, generating USD2 billion in aggregate proceeds: dividend recaps (Vivo Energy and Interswitch), listings on the London Stock Exchange (Vivo Energy, Helios Towers) and on local exchanges (Fawry), on-market and block trades on local exchanges (FMCB, Equity Bank), partial sales to financial buyers (Interswitch, Fawry), partial and full sales to strategics (MTC, HTN Towers, Continental Outdoor Media, Interswitch, Eland).
From the public market perspective, we see increasing appetite from global emerging and frontier market portfolio investors for high quality, geographically diversified African companies across a range of sectors; and from local institutional investors for local champions in sectors that are underrepresented in the public markets. While large global exchanges such as the London Stock Exchange offer greater depth and liquidity, IPO windows there tend to be highly susceptible to global factors and sentiment and, therefore, more fickle. Local listings may lack the profile and depth of the global exchanges, but participants are usually better placed to appreciate the differences between real and perceived risks. As a result, local IPO windows tend to be more reliably open.