The road to realisations
How firms can improve exit prospects and avoid dreaded zombie funds? A range of GPs and LPs share their experiences
Development finance institutions (DFIs) may be among the most patient of capital sources, but they are looking more at realisations than ever before – after all, they can’t help attract and mobilise commercial capital if exits aren’t emerging.
“We’ve always been focused on exits,” says Fadi Bassir, Investment Manager, Private Equity Funds and Co-Investments at British International Investment. “But we, and DFIs like us, are more focused on them today because unrealised valuations don’t mean that much – there have been instances where we have committed to successor vehicles and unrealised valuations from predecessor funds haven’t materialised. We want to see DPI.”
“The pace of exits need to pick up across Africa,” says a private equity fund head at a DFI. “This is the business that we are in. If we bring up the pace, we can mitigate some of the macro events that happen.”
“Managers on the continent are haunted by the idea that we have to deploy capital and we should look like Silicon Valley,” says Maurizio Caio, Founder and Managing Partner at TLcom Capital. “There is no rush. We need to invest in companies that are worth the LP capital we are investing. We need to move from celebrating deployment to celebrating returns.”
It’s a point that Catherine Swanepoel, Partner and Chief Investment Officer at South Suez Capital, also picks up. “We always hear that’s it’s a great time to invest in Africa, but there has to be an exit,” she says. “Liquidity is very important and GPs need the ability and discipline to take advantage of exit opportunities when they present themselves.”
Start with the exit. "GPs have started to fully integrate liquidity and exit strategies into their investment thesis from day one,” says Hannah Subayi Kamuanga, Partner at Launch Africa Ventures. “They need to go into a transaction with the exit in mind, know which corporates or other buyers are likely to be interested, engage in active portfolio company management and develop a clear path to exit.”And that means that GPs need to maintain contact with these potential acquirers. “Don’t just know what kind of buyers are likely to be interested in the asset, but have specific buyers in mind,” says Dipo Okuribido, General Counsel, Commercial at Verod Capital.
“Have conversations with them to understand what the business needs to achieve to make it interesting for them. Keep up regular dialogue to help them keep track of the company’s progress and help you understand how their thinking is evolving.”
Macro and currency risks have loomed large in some African markets over recent times, so getting capital back to investors quickly can lower the risk of shocks denting returns. “Get early liquidity,” says Albert Asina, Founder and CEO of Mediterrania Capital Partners. “If you have the opportunity to sell at 1.9x, that’s OK. You are locking in a return and giving the next owner the opportunity to benefit from future upside. You are also mitigating risks that are beyond your control.”
Luc Rigouzzo, Managing Partner at Amethis, agrees. “Discipline and liquidity were missing a little over the past 10 years,” he says. “If you’re offered 2x early on for a business, take it. Overall, that’s good for the industry because you are generating liquidity for your investors.”
Look to other private markets firms.
Venture capital, for example, is relatively young on the African continent, yet players do have an exit advantage over VC firms in other, more developed markets. “There are many challenges in Africa,” says Caio. “Yet for earlier stage funds, there is an exit route that doesn’t exist so much elsewhere – private equity firms here are running out of companies to buy. As VC firms, we can supply them with deal flow of companies that are growing and have positive EBITDA. To the extent we have fast-growing companies with $5m-plus of EBITDA, there will be private equity funds around the table at exit.”
Deal with the zombies that exist today...
This takes effort from LPs as well as GPs. “We do see funds that are past their 10 years, plus two-year extensions, that still have a number of assets left that need exiting but there are no fees left to pay for this,” says Shruti Chandrasekhar, Head of Private Equity Investments for the Africa Region at the IFC. “There is a lot of stuck capital in these and if we could get this unstuck, that capital could flow back to new funds across Africa.”
“There needs to be greater co-operation between LPs to agree a solution to tail-end funds,” says Swanepoel. “Investors may need to consider a new manager and appropriate performance-related incentives to encourage a focus on exits. We haven’t seen that solution emerge on the African continent yet, but it will hopefully happen.”
… and don’t create new zombies.
“Exit when you have the opportunity,” says Chandrasekhar. “You don’t want to end up at end of fund life with a relatively full portfolio and expect to be able to exit them all in a short space of time – that won’t happen. GPs need to work harder to not be in this position, but it’s also incumbent on LPs to push a bit harder on exits.”
