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As Africa continues to emerge as an investment destination of choice, so too does the risk of private equity providers overpaying for scarce assets that are in increasing demand amid the second “scramble for Africa”.
Speaking at the Frontier Advisory Africa Risk and Investment Forum, in Johannesburg, on Wednesday, Investec frontier and emerging markets head Chris Derkson said there was a threat of overpayment by of assets by investors offering private equity – relative to those offering public equity.
Noting that Investec looked to make investments into Africa that “made sense over the long term”, he asserted that most of the JSE-listed companies had now evolved their strategies to include making investments into the continent, which could lead to overpayment for assets in countries perceived as offering potentially buoyant returns.
“In public equity, there’s a lesser risk of overpaying, but in private equity, the opportunity is [far larger]. There are very few scale projects in Africa, so there is [considerable] opportunity to burn your fingers,” he commented.
Supporting Derkson’s assertion, Renaissance Capital sub-Saharan Africa economist and director Yvonne Mhango said during a panel discussion that the risk of overpaying for assets emerged as a greater threat in countries that were “overhyped”.
“This risk should, however, decline as country economies in Africa develop,” she said.
Citing recent examples, Derkson referenced consumer goods group Tiger Brands’ acquisition of Dangote Flour Mills (DFM), in Nigeria, which saw the group admitting that it had underestimated the challenge of operating in the country.
Engineering News Online reported in November that the company would write off about half of its investment in DFM – some R849-million – less than two years after buying a majority stake in the business, as a result of underperformance and excess milling capacity that continued to dog its operations in the Nigerian flour market.
“We underestimated the challenge of operating in Nigeria. [We] paid a strategic premium for obtaining scale in a market that has recently seen sweeping capacity changes,” Tiger Brands CEO Peter Matlare said at the time.
To avoid the likelihood of such impairments, Derkson advised private equity firms to ensure that all due diligence processes were followed prior to the acquisition of any asset, ensuring that the local company with which the deal was being concluded aspired to best practise standards.
“Do everything you can to make sure that you know the management [style and ethics] of the company you work with and ensure they aspire to best practise. Even so, there is still a chance that you won’t always catch it,” he noted.