How important is private equity for Africa?
I think it’s important for a variety of reasons. Africa needs to invest a lot more. It’s estimated that you’ve got to spend another $50 billion a year in building Africa’s infrastructure. If you take the growing consumer, there is a huge opportunity there. Agriculture is also a huge opportunity. So, all of that requires investment. The big challenge that Africa has is its savings rate is very low. The savings rate to GDP ratio across Africa is 15%. In contrast, China has close to 45%. Also the size of the domestic financial sector, once you get outside of South Africa, is very small relative to the investment requirements of Africa.
I’ll give you an example, if you take the entire Nigerian banking system, the combined market capitalization of the top 10 banks, is less than a quarter of the market capitalization of the single largest bank in Indonesia… It means Africa needs foreign capital. Foreign capital takes the form of private equity, foreign markets, bond markets or bank lending. Africa probably needs all of them.
Also, private equity is useful in bringing in potentially an upgradation in management skills, technical skills and technology.
In terms of investment, how does Africa compare to other parts of the world you have worked in , like Asia, the Middle East and Europe?
In a word: attractive. But, it’s not without its challenges and risks. The way I like to look at Africa is this is China 1990. This is India 2000. This is Vietnam 2005. If you were to look at Africa as the great market for people wanting to buy their first microwave, their first refrigerator, their first car, their first apartment, there is a huge underlying market here.
Also, Africa has had the second highest GDP growth of any continent over the last 10 or 20 years. The levels of governance and the macroeconomic fundamentals of Africa are generally improving. In 20 years, Africa will have more people of a working age than either India or China. If you take agriculture, 60% of the world’s uncultivated arable land is in Africa. If you look across the spectrum, there is a huge need. But, it is not without risk because capital markets are not deep and liquid. The quality of governance in some of these companies is not really high. A lot of the entrepreneurs are third generation entrepreneurs. They need to be lifted up and almost mentored.
What do you look for in a company before making an investment?
As Gateway Fund, we look for companies that provide goods and services that cater to the basic needs of humanity in our markets. We don’t like to invest in companies to do caviar. We don’t like to invest in companies that are a bet on the future and no cash flows. We invest in very basic companies – what we like to call Maslow’s hierarchy of needs bottom of the pyramid – food, shelter, clothing, that kind of stuff. If you look at the stuff we’ve invested in: biscuits and buns, convenience stores, cement, optical fiber network, or data which today is basic.
We also look for companies that have good management that we can trust and work with. And we look where we can add value in terms of taking them into new geographies, new markets and new clients.
Aliko Dangote is on Gateway’s advisory board. How beneficial is it having the richest man in Africa part of your team?
It’s huge. He provides insight into how Africa thinks, how Africa behaves, what works in Africa, what doesn’t work in Africa. You can do a 100-year MBA program at any business school and you won’t get that. Then, also, when we look at transactions and understanding whether that makes sense, providing the due diligence on the deal, that helps us as well. Also having somebody like Aliko to help our investee companies go into other markets helps. But I would just hasten to add, Aliko is the star of Africa, but we are also fortunate to have similar high quality advisory board members.