Lessons from the frontline
What are the lessons in buliding portfolio and maximising value learned from some of the continent’s seasoned fund managers?
It has never been more important for Africa’s GPs to manage their portfolios and build maximum value in companies than it is today. So what are the lessons in execution learned from some of the continent’s seasoned fund managers?
It has been a tough 12-18 months for private equity in general as exit markets have dried up and as LPs have faced liquidity issues. African markets’ private equity firms have not been immune to these challenges, while also having to deal with issues such as currency devaluations and political unrest in some countries.
As a result, GPs are having to double down on their portfolio management efforts to ensure they are building businesses that can secure exits at attractive valuations and generate attractive returns for their investors. So what does this mean in an African context? Four veteran GPs offer their hard-won perspectives.
“The times of buying low and selling high have gone. It’s very difficult to buy assets at below market price today. As a result, fund managers are having to become operating managers as well as financial investors – it’s really important to know how to build an operating model and just as important to execute well. That means hiring people, either in-house or externally, who have experience of managing companies. We’re also seeing more entrepreneurs who have been successful on their own, but who are now looking for a partner to help take the business to the next level – these can be great businesses for private equity investors to back.
“Currency devaluation is a risk we have to manage. Diversification is a key strategy to mitigate this, but so is deploying capital as early as possible in the investment cycle. That gives you a head start on creating value in the businesses you back.”
Albert Alsina, Founder and CEO, Mediterrania Capital Partners
“You have to be a hands-on manager – if you want to achieve a double-digit IRR, you can’t stay too long in a business and so you have to build value with the company in the first two years of ownership. That means devising a value creation roadmap before investing and having the right resources to implement it. One of the lessons we’ve learned is to find those resources ahead of investing.
“You also have to know when to cut your losses. There will always be issues in a portfolio and one of the questions is where the team’s energy should be focused.
We’ve found that for those not quite achieving what we expected, as long as we expect them to grow by 15% to 20% a year, we have to do the hard work and get them on track; if they’re unlikely to grow that much, we sell them so we can use our energy on the more successful businesses and do the best for our LPs. Otherwise, you can spend a lot of time fixing things, but not enough time being hands-on and helping successful businesses become more so.
“Another important lesson we’ve learned is that, while you don’t invest in the macro environment in private equity, you don’t want to be investing against it. One of the reasons for poor performance in African private equity is exposure to currency devaluation – it’s very tough to beat that. At a portfolio level, you want exposure to countries with relatively stable currencies or those pegged to the euro or dollar. Where you have exposure to countries that could face currency devaluation, make sure you invest in business models that can offset this, either through export
Luc Rigouzzo, Managing Partner, Amethis
“The strongest and most effective tool we have as GPs is strong alignment of interest with management teams. If we can achieve that, half of our work is done. However, misalignment can happen.
That’s either because the business enters a new cycle and the management team is not equipped to deal with where the business is going or because, occasionally, there can be a break-down in the relationship between investors and the company. Businesses can need different CEOs at different points in their development.
“Occasionally, as managers, we all have to admit that we can get it wrong. If misalignment happens, we have to act swiftly and decisively – if you’re making a change, do it. We also need to communicate openly and transparently with all stakeholders in the business, particularly the remaining management team, who will be going through uncertainty – we need to support them. And we need to minimise the handover period so there is an effective, clean break that allows the new CEO to step in and chart a new course for the business.
“Investments can also go awry when there is a change in the industry or sector, or in the demand for the product or service. When this happens, we work very closely with the management team. We assess whether we have the right skill set and whether we need to appoint a new non-executive director or outside advisor.
We have an intensive focus on cash flow management and how we may release cash from, say, working capital or discontinuing lower margin product lines. We also work to protect the balance sheet and reduce debt – that could be through non-core disposals or converting short-term debt to longer term debt.
We then communicate a clear strategy that we articulate to all stakeholders, especially the balance sheet lenders. All this is aimed at buying time to weather the storm and steer the business back to health.”
Jamie Hollins, Principal, Helios Investment Partners
“Even before building a value creation plan, you need to be sure you’re targeting the right industry, business model and management team – and at the right price. You need to invest behind tailwinds if you want to be successful through cycles. Have conviction on all these factors.
“During the investment period, seek to transform the business through growth and to achieve that, you need to be a high-quality, strategic business partner to the companies you back. Over the 60 months or so that you are an investor, there will be eight to 10 big decisions to make – you need to get those right. And, vitally, inculcate a growth mindset in the business. The management team will have a significant equity stake in the business and they need to think like shareholders; they are your partners, but they are also working for themselves.
“When things get tricky, it’s the hallmark of high quality managers to roll up their sleeves and really get involved. After all, if we get an investment wrong, we at least need to deliver the capital back to investors and reach the hurdle rate.”
Chumani Kula, Co-Head, Old Mutual Private Equity
