Tapping the market: Efforts are under way to boost listings and provide easier exits

Far more dynamic than the public markets as a source of equity funding, African private equity (PE) has drawn increasing attention from global investors, with €2.5bn in new funds destined for the region in 2013, up 136% year-on-year according to the second annual study by EY and the African PE and Venture Capital Association (AVCA). While bigger economies like South Africa, Nigeria and Kenya still produce the largest deals, investors in search of higher returns are expanding their scope to Côte d’Ivoire and the region.

To foster a more active initial public offering (IPO) market, the Bourse Régionale des Valeurs Mobilières (BRVM) is working to facilitate listings of small and medium-sized enterprises (SMEs) and expand the means of exit for PE funds. This could mark a watershed moment for the market. “The launch of an SME board has the potential to attract smaller firms actually needing to raise funds,” Hermann Boua, head of research at Hudson & Cie, told OBG.

Growing Crowd

The track record of private equity funds in Côte d’Ivoire is relatively short, with the first fund based in the region dating back to 1995 with the advent of Cauris Management, established by the West African Development Bank and European development finance institutions. The private equity landscape has become more crowded, particularly since 2010, with two broad segments of funds emerging: those focusing on African mid-cap deals in the €3.5m-€15m range, and continental or global funds that tend to seek larger deals. For Côte d’Ivoire, funds of the first type typically fall in the €37m-€57m range, including Cauris; Phoenix Capital; Tuninvest, a subsidiary of AfricInvest; Amethis Capital; and Adenia Capital, which is part of the Investisseurs & Partenaires group.

The regional regulator, the Regional Council for Public Savings and Financial Markets (Conseil Régional de l’Epargne Publique et des Marchés Financiers, CREPMF), was working on new rules in 2014 that would allow mutual funds to invest a small share (rumoured at 5-15%) of their assets in PE. While this could channel resources to existing funds, asset managers are expected to start establishing in-house PE funds as well.

A crowd of larger PE funds has been drawn to the West African Economic and Monetary Union’s largest economy in recent years. “Interestingly, Côte d’Ivoire has emerged as a regular destination for PE funds, thanks to the country’s strong growth, stable politics, solid infrastructure...and connections to francophone Africa,” noted Deloitte’s “2014 East Africa Private Equity Confidence Survey,” published in March.

The Washington-based Emerging Capital Partners (ECP) is a large PE fund with the longest track record in Côte d’Ivoire, having taken stakes in insurer NSIA, MTNCI, tuna-canner Thunnus Overseas Group, Nestlé-CI and others. Emirati fund manager Abraaj entered the market by acquiring UK-based Aureos Capital in 2012, which managed a €300m pan-African fund with some €37.5m invested in West Africa.

Large fund managers with offices in Nigeria, like UKbased Actis (private successor to CDC’s PE business), and the Carlyle Group, are also seeking deals in this market. Actis is already present through stakes in the Dutch wax-fabric producer Vlisco, which owns a majority in Uniwax, as well as through its power operating company Globeleq, which is developing the upgrade of the Azito gas-fired power plant from 288 MW to 432 MW. Carlyle completed fundraising on its €525m sub-Saharan Africa Fund in early 2014 and invested €110m in Nigeria’s Diamond Bank in November.

Wider Targets

With five deals concluded in 2013, Côte d’Ivoire was the fourth-most-active market in sub-Saharan Africa after Kenya, South Africa and Nigeria, according to Deloitte. As the pace of investment has grown, the sectors targeted have broadened significantly. “While the greatest opportunities in the 2000s were in finance and telecommunications, the scope for private equity is broadening to more sectors, linked to rising domestic consumption as African economies mature and become increasingly sophisticated,” Jean-Marc Savi de Tové, an associate director at Cauris, told OBG.

According to Deloitte, the deals since 2012 have favoured sectors exposed to domestic consumption, such as fast-moving consumer goods and banks, as well as agro-industrial firms, particularly those producing inputs. Cauris’ investment portfolio includes financial and ICT investments, and has expanded to a broader set of domestically exposed sectors. While it invested in Atlantic Financial Group and internet service provider VipNet, it has also taken stakes in Malian hotel operator Azalaï and pharmaceutical producer Cipharm over the past year. Fuel retailer Petro Ivoire has been a darling of smaller PE funds, raising equity from Cauris, AfricInvest, Phoenix Capital and Amethis over the years. With consolidation looming in the banking sector, funds have also taken positions in smaller banks positioned for strong growth, with AfricInvest taking a 30% stake in Bridge Bank Group in March 2014, for instance.

Larger PE funds have less scope for diversification, given their target deal size, and have thus focused on infrastructure. “The large-cap PE funds are looking for public-private partnership deals, predominantly in energy and infrastructure in Côte d’Ivoire, given the project size,” Jean-Jacques Ngono, an analyst at ECP, told OBG. “Smaller funds looking for African mid-cap deals operate in more diversified sectors.” While ECP has taken early positions in financial and telecoms firms, its main focus in Côte d’Ivoire is through its 60% stake in Finagestion, which it has held since 2009, with stakes in water distributor SODECI, power utility CIE, gas-fired power producer CIPREL and water services operator SDE.

The region’s independent power plant market is drawing significant international PE interest. Aside from CIPREL’s €300m investment in two new plants, Actis’ Globeleq is developing the €150m Azito expansion, while competitor funds run by Carlyle and Abraaj are also on the look out for opportunities. Despite the relative lack of the right size of agro-industrial deals in the region, Abraaj beat other large funds to acquire 51% of Denmark-based Fan Milk, matched by the 49% bought by Danone, in June 2013 for an undisclosed sum.

Exits

Although exits have been a perennial challenge in francophone West Africa, given its shallow financial markets and cultural reticence to sell majority control of smaller firms, Côte d’Ivoire has recently seen a growing number of successful trade sales. Smaller funds have traditionally sold out through management buy-outs or sales to other funds, with Cauris achieving 35 exits of 42 deals by 2013. A primary challenge is that the PE fund investment timeframe does not match company maturation in the region. “The timeframe for a company’s growth in Africa tends to be longer than the average five-year time horizon for PE funds,” Tibor Asboth, investment officer at Proparco, told OBG. “This means exits will continue to be through fund-to-fund sales.”

This dynamic was evident in ECP’s successful exit from its stake in MTN-CI in December 2013 by selling to AfricInvest through the Mauritius-based special purpose vehicle Planor Capital International. The transaction yielded a cash multiple of 2.6x and roughly €60m in capital from its six-year investment in the operator. Fund managers also typically include clauses for a trade sale in the original investment agreement to facilitate exits. Case in point, Abraaj included provisions for co-investor Danone to take majority control of Fan Milk after several years – effectively a put option for Abraaj’s investment. Yet PE funds speak of a growing maturity amongst business owners in Côte d’Ivoire. “The governance of SMEs has evolved over the past decade,” Vissého Gnassounou, an associate director at Cauris, told OBG. “Whereas business-owners used to only be interested in put-options and management buy-outs, they are increasingly interested in discussing options for trade sales and potential IPOs.” FOSTERING IPOs: Eager to tap this potential pipeline, the BRVM is seeking to establish an alternate board for SMEs and high-growth companies in 2015, inducing firms to sell shares to the public with lower strictures imposed by the CREPMF. Indeed, small firms are disincentivised from listing by requirements like capitalisation in excess of CFA200m (€300,000); net profits of 3% of annual turnover for more than three years; and five years of audited accounts. The idea of reducing requirements to CFA50m (€75,000) turnover and two years of audits has been floated, though specifics of the board and possible tax incentives have yet to be finalised. “While incentives to list on the BRVM would be useful at a later stage, it is crucial to get business owners interested in listing for real reasons, creating a pipeline of issues,” De Tové told OBG. “We think we stand at a watershed with the potential of five new listings a year on the regional market.”

The exchange concluded a partnership with Cauris in February 2014 to foster a pipeline of new IPOs through information sharing and closer involvement of broker-dealers in planned exits. Indeed, the IPO underwriting process and pricing will be key. Some fund managers have already indicated interest in exits through IPOs, such as Cauris’ stake in Azalaï and ECP’s stake in NSIA. While activity in the PE space has been more dynamic than for listed equities, the challenge will be drawing high-growth companies to the exchange.