OBG talks to Doug Lacey, Partner, LeapFrog Investments

Interview: Doug Lacey

How do Ghanaian companies assess the various financing options available to them?

DOUG LACEY: Relative to Europe and North America, Ghana has a large number of family-owned businesses, and these tend to approach capital raising and partnering very differently. The two fundamental challenges are, first, owners’ reluctance to open up their business dealings to an outsider, and second, their wish to maintain control. In fact, this makes private equity an attractive source of capital, as private equity firms don’t always want a controlling position, whereas multinationals or trade buyers more likely do. Private equity funds such as LeapFrog can provide not only capital but also muchsought-after value added, allowing local management to accelerate value creation and at the same time run the business in line with their own aspirations.

For potential acquisitions in West Africa, how challenging is risk management and valuation?

LACEY: The biggest challenge on the valuation side of the business is depreciation of the cedi. When you’re doing a dollar transaction, and you agree on a valuation in March but only complete due diligence and transaction documents in July (when the money would flow) any currency depreciation in the interim poses a challenge. This is part of the territory when dealing with emerging markets. Besides currency risk, we haven’t felt any unique challenges to valuation. In most cases, financial statements are reliable, though they may require some adjustments.

What is the outlook for greater venture capital involvement in African economies?

LACEY: There is no indication that private equity firms will change the type of enterprises they tend to choose for their portfolios. Therefore, venture capital will remain in its infancy in the short term. In West and Central Africa, among the funds surveyed, not one indicated an interest in investment in these areas. East Africa, with its renowned IT industries, seems to be the anomaly.

Time and time again, entrepreneurs in Africa complain of lack of capital. In turn, the financial service providers will say there is adequate capital but inadequate business plans from those seeking the loans. The lesson is that an entrepreneur must be able to commercialise their idea and present it in a way that the financial provider can understand. Until that gap is bridged, venture capital will remain a challenge.

What are the challenges for raising funds, and how is the mix of contributors changing over time?

LACEY: According to a recent survey by E&Y, the perception of Africa’s attractiveness is higher among African investors than among non-African ones. Yet most of the money being raised for African private equity is still coming from Europe and North America.

Many foreign investors looking to Africa see a knowledge gap, as most are used to transacting and trading in Western Europe and Asia. One way these companies can close such knowledge gaps is by learning from specialist funds and investing in them. Thus, we are seeing an increase in funds coming from institutional investors. One change we have noticed recently is that some of the traditional providers of capital to emerging market funds, like development finance institutions, have reduced their contributions to investment funds, having closed their own knowledge gaps and increased their capacity to make direct investments.

What are the most common exit strategies?

LACEY: Studies show that between 2007 and 2012, there were 118 exits across Africa, 25% of them coming from West Africa. The state of African capital markets has a big impact on the exit strategies in use. If you look at exits since 2007, the vast majority have still been trade sales. Data on the African market show that sales to strategic buyers have been the most successful exit route in Africa, accounting for half of all exits. Following that are private sales, secondary sales to other private equity funds and initial public offerings.