Tom Barry: ‘Uneven Playing Field Blocks Investment’

Before founding Zephyr, Tom Barry was President and CEO of Rockefeller & Co, the investment management arm of the Rockefeller family (1983–1993) and before that, he was employed by T Rowe Price Associates, Inc (1969–1982). Tom Barry, CEO and founder of Zephyr Management LP in New York, is one of the pioneers of private equity investment into Africa. African Banker interviewed him.

African Banker: What are the key components for gearing up private equity into Africa?

Tom Barry: The most important thing a country can do is to focus on creating the expectation that there is a level playing field. It is a big problem when there is uncertainty about how an investor will be treated in the future, so regulatory and tax transparency is by far the most important.

In private equity you can’t change your mind once you make an investment, you have to feel that the rules of the game won’t change or, if there’s a commercial dispute, that this is addressable by litigation. The lack of that confidence about a level playing field is what inhibits a private investor.

Lots of countries have created good legislative frameworks, but in some places they can be subject to erratic implementation and things are changed, either through favouritism or bribery. It’s unnerving and this is where people get most discouraged. They make an investment and then find out someone gets some unequal privilege such as import relaxations and the playing field is no longer level.

Those things are much more important than specific issues such as double taxation in guiding which industries are attractive to investors. You need the concept of the law being above politics and not changing retroactively. However, there are some good countries and some which are not so good.

At Kingdom Zephyr, we support majority local ownership and we rely on local management skills, as we think it is risky to try to own a majority stake in a company in someone else’s country. We also work with good accountants who are important because they can be independent sources of information and can become financial advisers. We use good independent people, for instance as independent directors, as they can give some verification of what management tells you.

It can be a tough business environment and Africa’s biggest challenge is low productivity. Sometimes this is a symptom of red tape and bureaucratic barriers, which become reasons for low productivity. Governments need to be advised not to protect firms or to use licences and trade privileges. Competition helps increase productivity and employment and it is good for consumers.

Q: What about exits for private equity investments?

A: Traditionally in developing markets, you need a combination of exits. Governments should support regional debt and equity capital markets, where you could get critical mass. Ghana and the opening Nigerian market, and South Africa and Botswana could be very lucrative regional markets. When we make an investment, we limit the investments we choose to those that can be sold in some kind of business combination, maybe to another local business, a regional business or a multinational.

Q: Will there be a rush into African investments which will push equity prices up, as we saw before the 2008 global economic crisis?

A: There are tremendous growth opportunities but there is also evidence of increased demand to invest and prices being pushed up. That is worrisome because one should be cautious of the price paid, the exogenous risks are much greater than in the developed world.

However, in the last three years, there has been more talk than action and some leading fund managers have found it hard to raise the funds they expected. The 2008–9 experience was unnerving all over the world and commitments to new areas of investment since then have been slower.

In addition, the media is unrelentingly negative on Africa, most of the stories are health (starvation, dengue fever) or write-ups of political fights. They don’t write about the successful African entrepreneurs, as they do for China and India.