| May 2017 1

Sub-Saharan Africa’s private equity industry is showing signs of maturity—including a record US$8.4 billion in capital raised for funds focused on the region in 2014 and 2015, increasing commitments from commercial investors based both locally and internationally and geographic diversification on the part of GPs. One missing puzzle piece in the development of the industry in the region, however, is control investments. In other EM regions, a rise in buyout activity has accompanied the broader maturation of the PE market. In Latin America and Emerging Asia, the number of buyouts from 2008 to 2016 increased by 43% and 42%, respectively. In Sub-Saharan Africa, only one more buyout was completed in 2016 than in 2008 (see Exhibit 1). Indeed, growth investments accounted for 67% of the number of investments completed from 2008 to 2016, contrasting sharply with buyouts, which accounted for just 14%.

Views from the Field: Control Investments in Sub-Saharan Africa May 2017

Exhibit 1: Buyout Investments for Select Regions, 2008-2016

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012 2013 2014 2015 2016

No

. of

Dea

ls

Emerging Asia Latin America Sub-Saharan Africa

Source: EMPEA. Data as of 31 March 2017.Note: For the purposes of this report, a buyout is defined as the acquisition of a majority equity stake in an established company (majority stakes in “greenfield” projects are excluded). Secondary, or sponsor-to-sponsor, buyouts are included.

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Those fund managers that have ventured into buyouts have tended to focus on South Africa, which attracted almost half of all such investments in the region over the past three years (see Exhibit 2). A few of these deals in South Africa even employed debt financing, demonstrating both the relative maturity of the country’s capital markets and the gap between it and the rest of the region, where banks tend not to support such transactions.

The advantages of majority stakes over minority positions seem clear enough. A majority shareholder can take the driver seat over the full lifecycle of an investment—modifying the corporate structure and management, implementing operational improve-ments without obstruction and engineering the desired exit at a time that makes sense for a PE fund’s limited partners. Yet these supposed advantages beg the question: why has Sub-Saharan Africa not seen more control investments? In this Views from the Field, EMPEA shines a light on this matter by exploring the nuanc-es of “control” at the investment level, the current landscape for buyouts and the causes of their slow take-up among fund man-agers in the region. EMPEA interviewed fund managers who op-erate across the shareholding spectrum, ranging from a minority investor to a control-only GP. They shared their views, drawing from deep knowledge of the Sub-Saharan African market.

Christophe Scalbert Principal, Adenia Partners

Adenia Partners invests across Sub-Saharan Africa, focusing solely on control transactions.

Much of the deal pipeline in Sub-Saharan Africa is composed of family-owned businesses that seem reluctant to part with control. Has this presented challenges to your strategy?

Control investments or buyouts represent a different universe of deals, which typically present themselves when entrepreneurs face succes-sion issues. In these cases, there needs to be a change of ownership. Take, for example, an entrepreneur who is 70 years old and has kids, none of which want to, or are capable of, taking over the company. To those entrepreneurs left with few choices, we offer a transition solu-tion to take the company through its next growth phase. One would have a very different conversation with, for example, a company look-ing to raise capital to finance a new plant. When negotiating control deals, credibility is key. Control investments are more about dealing with individuals because entrepreneurs are keen to ensure their com-pany is in the right hands as they are looking for a handover. In that sense, it is really a business discussion more than a finance discussion.

What does the future look like for control deals in Sub-Saharan Africa—and what factors might drive an increase in their prevalence?

We believe there will be an increase in control investments as more and more entrepreneurs reach an age where issues of succession and transmission arise. Regarding leveraged buyouts in particular, acquisition financing is not always available, especially when your asset is active in economies with fragile currencies; however, we see increasing interest from banks to finance acquisitions. Not only have we completed LBOs with 40% to 50% of acquisition debt in the Indian Ocean region, but also banks have shown an appetite to finance such transactions in other geographies, like West Africa. Nevertheless, companies in Sub-Saharan Africa are growing quite rapidly, so it is often best not to put in too much leverage and in-stead use internal resources to drive growth. In our experience, value creation strategies through operational efficiency programs are more likely to provide good returns than financial engineering or relying on multiple expansion, since operational efficiency programs can be implemented in all market conditions. The more value addition strategies are based on operations rather than top-line growth or financial engineering, the more resilient your performance will be.

Exhibit 2: Sub-Saharan Africa Buyout Investments by Sub-region and Country, 2014-2016

Cam

eroon

Cote d’Ivoire

Ghana

West Africa

Nigeria

Ethiopia

Madagascar

Mauritius

Mozambique

Zambia

Zimbabwe

Tanz

ania

Uga

nda

Nam

ibiaKeny

a

East

Africa

Southern Africa

South Africa

Source: EMPEA. Data as of 31 March 2017.

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Papa Ndiaye CEO, AFIG Funds

Private equity firm AFIG Funds focuses on growth equity investments, particularly in West and Central Africa.

Why have there been so few buyouts in Sub-Saharan Africa?

There are several reasons. The main one is that captains of industry are not seeing their companies with the steely-eyed, detached look of an asset owner. Emotional attachment, particularly in the frontier markets of Africa, has been an impediment to private equity, period. Entrepreneurs do not understand the need to team up with a capital provider on a temporary basis. They personally identify with the com-pany and develop emotional thinking—“I’m selling my company”—as opposed to strategic thinking: “I am selling an asset that I have matured in order to continue to maximize my return on investment.” Severing that emotional attachment will be a factor in the maturation of the market. GPs like AFIG Funds and others need to prioritize engag-ing with entrepreneurs about the way they manage their companies. They actually understand once you start talking to them, but it takes a while for it to fully sink in. Without this change in mentality, buyouts will continue to be the realm of individuals in financial distress or those switching industries, diversified groups doing carve-outs to cre-ate liquidity for another venture or multinationals exiting the region.

What changes have you implemented in your portfolio companies as a control investor?

We have replaced the CEO in about half of our portfolio companies, not that the previous CEO was inadequate, but because of the change in ownership mentioned earlier. This decision is of paramount impor-tance: the difference between a good and bad investment is mainly linked to the quality of the CEO. We have also stepped in as interim CEO in some of our companies as needed. A control position helps achieve a good balance between an autonomous and entrepreneurial CEO still incentivized by virtue of the shares they own and an active shareholder, such as ourselves, with the power to quickly implement new ideas, standards and initiatives. For example, we recruited an industrial manager for our Madagascar-based carton manufacturing company, who managed to decrease the scrap ratio and optimize the use of paper, which drove significant improvements in EBITDA.

We have control over the timing and nature of the exit: we can trigger liquidity when we see fit and seize sale opportunities at the right time, versus a put option for a minority position that has to be exercised within a particular window.

Captains of industry are not seeing their companies with the steely-eyed, detached look of an asset owner. Emotional attachment, particularly in the frontier markets of Africa, has been an impediment to private equity, period.

What are the biggest advantages that Adenia leverages as a majority shareholder?

We have control over the timing and nature of the exit: we can trig-ger liquidity when we see fit and seize sale opportunities at the right time, versus a put option for a minority position that has to be exercised within a particular window. On one end of the spectrum, we have sold a company after two years, but on the other, we have also held on to an investment for as long as eight years, waiting for the best moment to sell. Control over the exit is largely driven by the fact that you are selling a business, not shares. Strategic buyers, who prefer majority stakes, find such an offer attractive.

When thinking about exits, are you worried by talks of multinationals retrenching from Africa?

This is not a concern for us. Some corporates may not find Africa attractive, but many other players continue to invest as they are looking for growth. Danone, whose ex-CFO was appointed as head of Africa, has developed an aggressive strategy toward Africa. Heineken has recently made a significant investment in a brewery in Côte d’Ivoire. L’Oréal has also invested in the region—the list goes on. Perception of the continent has been volatile. I feel that global sentiment was too optimistic three years ago and is now perhaps too pessimistic.

The fact that entrepreneurs are usually older than in other markets is another complicating factor. If one sells his company, the likelihood of him turning around at age 65 to start another venture is very low. There aren’t a bunch of Mark Zuckerbergs and other serial entrepreneurs roaming the streets. If you are an entrepreneur in Senegal or Liberia and sell your company, what are you going to do with your money?

Finally, in other emerging markets, there is a more developed sec-ondary leveraged buyout market, which is a good source of potential buyouts. The lack of development of the capital markets, particularly debt markets, makes it difficult to successfully complete LBOs, unless they are funded with hard currency. This option is dangerous, which we have seen in Nigeria, Kenya and Ghana, since one can face a serious currency meltdown. This has made poor people out of mil-lionaires in Nigeria in the last year.

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AFIG Funds focuses on minority investments. Have you considered control investments?

If control means having a determinant role in various governance bodies, control investments are actually what we do all the time, the only difference being that we have a minority equity stake. Given the market we are in, holding a minority equity stake and being very active with our portfolio are the ways we disguise ourselves to do control work. This can go as far as being able to fire or hire C-level personnel, which is the case in most of our portfolio com-panies. We recently worked closely with a board and put it in a position to remove the CEO in one of our companies. We immedi-ately stepped in to take control of operations until we find a proper CEO replacement. We have embedded a full-time COO that over the past two years has engineered the successful turnaround of the company. We also do a lot of convertibles, which are a nifty way to have shareholding control in your back pocket. Many African entrepreneurs are wary of welcoming investors, yet tend to need more money than you can provide if you are limited to a minority position. Convertibles fit the profile of the African entrepreneur: we take a small sliver of equity, 10% to 20%, and give them double or triple in the form of convertible debt or convertible preferred shares, which gives us equity and debt rights. A number of scenarios could trigger conversion, including the CEO or main shareholder deciding to sell their shares. We can then convert into a controlling stake in the company.

In our conversations with company owners in the past, we have negotiated substantial control through minority shareholder rights that I don’t believe will continue to be available to GPs in the near future. For example, in pretty much every company we invest in, you cannot convene a board without us, which is a huge plus when things go sideways. We can then block the company. They can’t borrow. They can’t move. They can’t go left. They can’t go right. It is simply illogical that a minority investor can regularly block a company from operating. Admittedly, we go into markets that no one goes into and are still in a semi-monopoly situation. In addition to more established markets like Nigeria and Côte d’Ivo-ire, we invest in places like Rwanda, Liberia, Chad and Mauritania and don’t run into any other PE firms. I still think those rights have to disappear simply due to the natural maturation of the markets. The dust will settle. For that reason, we have started dipping our

toes in shareholding control opportunities, but are not going to jump in the pool just yet. We want to time it right, when the market is ready for control investments. In AFIG Fund II, for which we recently reached a first close, we have the flexibility of taking control positions.

If you hold a control position, you have to create your own technical pool. We are thus pushing hard on the operating part of the model to have industry experts on our roster, that we can bring into the decision-making process. At the right time, you can pull them in and make them senior advisors to the board for example. We also look forward to putting together a proper M&A team to try to bring in strategics to co-invest alongside us. Partnering with a strategic, which we have seen buyout firms do, is a smart way to go about control investments. It’s an admission of your limits. We, GPs, fool ourselves into believing that once you have invested into an industry three times, you’re now an expert. Just investing is not enough. You can get lucky but you can’t plan your life on miracles. To really know a sector, it has to be what you live, eat and breathe for several years.

What are some of the challenges of control investments?

The way to do buyouts with the entrepreneurs I work with, right now, is to pay ridiculously high multiples. We hear of PE funds enter-ing at 13 or 15 times EBITDA and up. In contrast, the average entry multiple in our first fund for our first five or six investments was about 4.1. We are increasingly being pulled higher but haven’t gone past 5 or 6 on average.

One of the main advantages of control shareholding is ease of exit. Have you run into difficulties as a minority shareholder?

Not having a drag-along provision is not an option for us. If we do not have a drag-along or a tag-along provision, we generally don’t invest in the company. When owners resist, we tweak it to make it a circumstantial drag. For instance, we can ask them—among a set of circumstances under which we would need to drag—which one they think is least likely to occur. We then agree that the drag-along will only be triggered in that event, and interestingly, such a circumstance will happen. Another incentive to ease the exit is that owners we work with do not want you to exit and be forced to let in an investor that they did not vet. In that scenario, they tend to prefer to sell.

If control means having a determinant role in various governance bodies, control investments are actually what we do all the time, the only difference being that we have a minority equity stake. Given the market we are in, holding a minority equity stake and being very active with our portfolio are the ways we disguise ourselves to do control work.

| May 2017 5

Avril Stassen Senior Partner, EXEO Capital

EXEO Capital has acquired controlling and minority stakes across Africa, with particular emphasis on South Africa.

How do you explain the high concentration of buyouts in South Africa?

There are three main factors that stand out to us. To begin with, Sub-Saharan Africa, outside of South Africa, faces a lack of avail-ability of relatively well-priced senior debt. When available, it’s at a high yield, which is a huge inhibiting factor for buyouts. In addition, banks take comfort around companies with big balance sheets, long track records and underlying assets for collateral. There are few tar-get companies with strong balance sheets and a deep 15-year track record of consistently growing cash flows. Lastly, the availability of control positions in Sub-Saharan Africa is relatively limited given the fact that business owners are slow to recognize private equity as a form of capital.

Private equity has been around for much longer in South Africa. There is a 25- to 30-year track record, and the market understands the role of private equity and has seen the value it can bring to business owners. The debt markets are also deeper, broader and more com-petitively priced. Tied to the level of development of the country, the businesses tend to be more mature and consequently have stronger balance sheets and a longer history. However, the opportunity for control investments outside South Africa is growing. We completed buyouts outside of South Africa in our first fund and continue to see in our pipeline potential control investments for our second fund. The senior debt markets outside of South Africa are starting to develop—we are seeing the launch of debt funds more often than before. Banks are also growing their balance sheets aggressively. The situation is improving but it is nowhere near as favorable as in South Africa.

When presented with an investment opportunity, how do you decide whether to enter as a minority investor or control investor?

What we are trying to achieve is not necessarily control, but rather meaningful shareholding where we can influence the direction and development of the company. Every situation is unique. It is critical to understand the composition and balance of power of the sharehold-ers of the company upon entry. If it is a nice, evenly weighted bal-ance—say if three other shareholders have equal ownership—you can become the single largest shareholder, and your minority position can effectively give you a strong influence if you align yourself with one or two other investors. This is our ideal level of shareholding in a portfolio company. In a situation where there is concentrated ownership, it is more difficult to achieve that balance. We avoid situ-ations where there is a single dominant shareholder and we are in a minority position. If for some reason you disagree with the dominant shareholder, it becomes very difficult to make a difference and to

influence the direction of the company. We experienced such situa-tions in some of the investments from our first fund.

One also has to consider the life cycle of the business. If the busi-ness is going through a dramatic growth phase and the shape of the business is changing rapidly, you may prefer a controlling position to make sure there is no hiccup in developing the business going forward. Especially after deploying significant amounts of capital through follow-on investments in new projects, you will want to control where the money is going.

What are some of the advantages and risks of control investments?

There are multiple objectives in one’s investment program to prepare the business for sale besides achieving economic returns, such as cor-porate governance, ESG matters and positive development impact. Achieving those parallel objectives is easier when you have a control position versus a minority position, simply because in the former, you implement, whereas in the latter, you may have to first convince your co-shareholders and the owners before the company adopts your approach.

The risks come into play when things go wrong. A control shareholding brings responsibilities that are larger than those of a minority share-holder. You become the lender of last resort; every capital provider will first look toward the controlling shareholder to chip in before assisting. You also have to step in and intensify your operational involvement in challenging situations, which requires more time and energy.

Sub-Saharan Africa seems to be falling out of favor in the eyes of some global corporations. Do you think these multinationals will continue to pull out from the continent—and will this present a challenge for exits?

Some strategics are re-aligning their investment strategy, which is often connected to how well or poorly they have executed a Sub-Saharan Africa strategy outside South Africa. We are aware that certain players are repositioning themselves, perhaps bringing other emerging markets into their focus instead of only focusing on Sub-Saharan Africa. We all know about the Unilevers and Nestles that are re-thinking their strategy. This obviously makes one a bit worried, but with the exception of a few players, we are actually seeing increased interest overall as opposed to reduced interest. We hear European companies that have very little activity in Africa at the moment talking about growing their footprint in Africa. I think there are more players that are intensifying their focus than there are reducing it.

It is critical to understand the composition and balance of power of the shareholders of the company upon entry.

| May 2017 6

Danladi Verheijen Co-founder and Managing Partner, Verod Capital Management

Verod Capital Management has completed both minority and control investments predominantly in Nigeria and Ghana.

What constitutes a good control investment opportunity?

We don’t disaggregate deals by control or no control. We simply look for great companies. If you wouldn’t invest in a company with-out a controlling stake, you probably should not invest for a minori-ty stake either. “Control” can be achieved through structuring. You can take a 49% stake in a business and actually have more control from your legal agreement than with a 51% stake, based on clauses you have negotiated in your agreements. When we have a minori-ty shareholding, we are usually able to bake in sufficient minority protection rights on the legal control and operational side, as if we had a 51% stake.

What are some of the advantages that come with a controlling stake?

The biggest advantage of control that the legal documents don’t entirely offer is the attractiveness to buyers in an exit. Larger pri-vate equity firms and strategic buyers, in particular, want equity control and will pay a premium to exiting GPs who have a con-trolling equity stake.

How did you obtain controlling stakes in Union Trustees and Niyya Food and Drinks?

Every situation is different. Union Trustees, which provides trustee and nominee services in Nigeria, was a management buyout as its parent company, Union Bank, along with other Nigerian banks, was mandated by the Central Bank of Nigeria to divest non-banking sub-sidiaries or convert to a bank holding model. We had to buy 100% of Union Trustees, in collaboration with management. Niyya Food and Drinks, a fresh juice and yogurt manufacturer, was a family-run business that was established 20 years before our investment. We

acquired a controlling position in the business (with our ability to exit in mind), brought in new management and turned the business around. As a trade-off, the family maintained a controlling position on the board. They trusted that Verod would be more than just a fund-ing source and actually help them achieve their aspirations for their businesses, which also made it easier to give us shareholding control.

Will we see more carve-outs from multinationals and local conglomerates?

Given the level at which those deals occur today, it can only go up from here. As some multinationals rethink their global strategies and local portfolios, they may decide that some of their business-es might be better off in the hands of local partners who have a much lower overhead cost structure and are more nimble. At the same time, I think local conglomerates are getting more and more comfortable divesting assets. There is still a bit of a cultural bias against letting go of the business as entrepreneurs and sponsors like the idea of building and controlling empires, but I think this will change eventually.

Has the recession in Nigeria created more deal flow for control investments?

It has definitely prompted more conversations. However, business owners are generally hesitant to sell since valuations are much lower (in dollar terms due to the Naira devaluation) than what those businesses might have been worth a year or two ago. Some businesses, though, are deeply starved of capital and their owners have no choice but to bring in new investors; for a few others, business owners view this as a strategically opportune time to raise capital and dramatically gain market share from their competitors. On the whole, however, we are seeing fewer deals closing. This is not only because of seller reluctance due to lower valuations, but also because some investors are concerned about deploying capital today.

What are your thoughts on leveraged buyouts in Sub-Saharan Africa?

I think most of the opportunities in Sub-Saharan Africa are for growth equity versus leveraged buy-outs. Relatively speaking, there are very few large, mature businesses that can afford to take on and service a large amount of debt. Across sectors, Africa is largely underserved in terms of products and services; companies need growth equity to tap into these opportunities. We believe we will ultimately get much better returns by focusing on generating free cash flow to redeploy into growth, rather than pay down acquisition debt. For example, we are building a greenfield modern aquaculture facility to mass produce fish. Although our facility is highly cash generative, our preference is to build new production facilities and integrate across the value chain to capture more of the opportunity that this space presents in Nigeria.

The biggest advantage of control that the legal documents don’t entirely offer is the attractiveness to buyers in an exit. Larger private equity firms and strategic buyers, in particular, want equity control of a business and will pay a premium to exiting GPs who have a controlling equity stake.

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