Beyond money: What private equity needs to bring to ventures on the African continent

By Bryan Turner, Partner, Spear Capital

 

If you ask an entrepreneur or even the leadership team of a larger company why they’re approaching private equity investors, the answer will usually be pretty straightforward: money. There’s a good reason for that too. Whether the company has serious growth ambitions or is aiming to turn its fortunes around after a rough patch, money is vital.

But investment funding can only take a business so far. And if it’s not used effectively, then the business receiving that funding can quickly end up in trouble. In some markets, that’s not too much of a problem. In fact, in places like Silicon Valley, it’s part of every investor’s calculus. They can make that calculus, at least in part, because they know that if a company folds, its employees will quickly find work again and the company bosses are in an environment where they can easily start up something new. The companies that do make it and grow, meanwhile, make their investments worthwhile.

But that’s simply not the case across almost all of Africa. Even in South Africa, one of the continent’s biggest and most advanced economies, the official unemployment rate is 32.6%. There are also fewer companies achieving the kind of massive growth that allows for riskier investments. Those and other factors mean that the stakes for private equity investors in Africa are higher. They need as many of the companies they invest in as possible to thrive. And that means bringing more to portfolio companies than simple funding.

Expertise, access to networks, oversight, and operational improvements

But what should private equity investors bring to African portfolio companies in addition to funding?

A good start is expertise. That expertise shouldn’t just lie within the field that a prospective portfolio company plays in but also in the markets in which the company operates. This dual expertise allows the private equity investor to provide proper guidance to the portfolio company. As a result, the company will be in a better position refine their business strategies, identify growth opportunities, and navigate challenges. But investors can also provide financial expertise, aiding with things like financial planning, budgeting, and capital allocation.

Another important thing that investors can bring to African portfolio companies is access to networks. Private equity investors typically have extensive networks of industry contacts, potential customers, suppliers, and other stakeholders. They can leverage these networks to create new business opportunities, partnerships, and collaborations. These networks can also be leveraged to help portfolio companies enter new markets, both domestically and internationally, further bolstering their growth prospects. Additionally, investors may draw from their networks to bolster the management teams of their portfolio companies.

Private equity investors can additionally play important governance and oversight roles. A good investor will provide oversight, governance structures, and accountability mechanisms to ensure that the company’s operations are aligned with strategic objectives.

Those are, of course, just a handful of examples of the additional value that private equity investors can bring to African companies. But there’s another one that’s increasingly important for any company looking to thrive.

The ESG elephant in the room

Institutional investors and regulators alike are increasingly insisting that companies adhere to environmental, social, and governance (ESG) guidelines. African companies are no exception to that.

Even in the increasingly unlikely scenario that their home markets don’t have tight regulations concerning these things, they may try and get additional funding from investors who are bound by ESG guidelines. A company may also need bolster its ESG capabilties if it’s looking to export its products to a new, more tightly regulated markets.

Private equity investors are increasingly focused on environmental, social, and governance (ESG) considerations. They can assist portfolio companies in implementing sustainable practices and ESG initiatives, which can enhance long-term value.

Finding the real value in private equity

Ultimately, it’s not just important for private equity investors to provide these additional value sets, but for companies looking for investment to seek them out. In fact, there are times when the right expertise, access to networks, and strategic direction provided by really good private equity investors is worth more than the finding they put into a company.

And with Africa’s very real economic potential (there’s a reason private capital funding in Africa has plataued while falling everywhere else in the world), that additional value will become more important than ever.

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