June 2015

LEGAL EASE: Pursuing an Africa fund strategy

Tom AlabasterWhile Africa has long been cited as a market that offers great opportunity for private equity, its development has been held back by the idea that investing in the continent involves a high degree of risk relative to other parts of the world. This view is rapidly changing, with Africa fast becoming one of the most talked about regions for private equity investment. Given this heightened interest in African investment, what are the key issues to navigate when raising Africa-focused funds? • Structure. Realising returns for a diverse cross section of investors across a varied and often disparate range of jurisdictions requires an appropriate structure. Mauritius, coupling the traditional advantages of an offshore financial centre with its wide network of tax treaties, continues to remain dominant as the jurisdiction of choice for investing into Africa. Sometimes investors participate through a Cayman Islands or Channel Islands vehicle under which a Mauritian vehicle sits, but increasingly investors are offered direct participation into a Mauritian (Category I) company. For Mauritius to be most effective, the fund company must maintain directors resident in Mauritius, must hold board meetings with individuals on the ground, and must prepare, file and audit financial statements in Mauritius – all activities that have become easier as local service providers continue to become more sophisticated in the private equity space.    • Increasingly varied and diverse investment strategies. Traditional private equity investment in Africa has focused on a limited group of ‘safe’ countries such as South Africa, Nigeria and Kenya, and a limited range of investment types such as infrastructure, education and logistics. As the industry develops in the region, general partners and their investors alike are taking an increasing look at the region’s wide array of opportunities. Strong economic growth across a diverse set of industries, favourable demographic and urbanisation trends (including the increasing size of the African middle class) and significantly improved socio-political environments have seen investments increasingly made outside the traditional set of countries and sectors. Indeed, there are a number of sponsors seeking opportunities in new jurisdictions like Ethiopia and Tanzania, while others take advantage of capital and lending scarcity to pursue funds in the credit space and commodities market. Due to the limited number of very large potential portfolio companies out there, fund size on the whole has remained small but the range of investment strategies and approaches continues to diversify.   • Finding the right exit opportunity. Today, development of Africa’s financial markets and listed exchanges provides increasing opportunities for exit, as do private equity secondary acquisitions and increasing strategic interest from elsewhere in the globe (perhaps most materially China). As the industry continues to grow and develop and traditional low levels of private equity penetration cease, quicker and higher returns seem likely amongst the most knowledgeable and connected participants.   Africa’s development will take time, but most commentators would expect the volume of private equity funds and private equity deals to increase as the economic and regulatory backdrop in Africa continues to evolve. The increasing sophistication of the industry – not least the rising local investment funds increasingly apparent in the region – coupled with broader investment opportunities, diversified strategies and greater investor appetite will only hasten that industry’s development. ©2015 funds europe

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