Development Partners International (DPI) a private equity firm deploying global capital to unlock the potential in Africa’s high growth, in October announced the close of its third fund, ADP III at $900m, with an additional $250m of dedicated co-investment.
This was their biggest PE close for many years. Eduardo Gutierrez-Garcia, a partner at DPI, talked to us about the latest close and the state of PE in Africa post-Covid.
You mention that this fund will invest in innovation-led companies. What exactly is an innovation-led company?
These are companies that are essentially doing things in a new way, or a better way, in their markets. They may have figured out some better way of dealing with the supply chain or they have unique technology underpinning their product or their service.
The ultimate product or service is fundamentally the one that an African middle-class emerging consumer would want. The innovation would be around the delivery of the products or services.
Your investments are substantial, starting at $40m. How does your origination process work; have you got a strong pipeline?
Because our minimum investment size is quite big, the companies we invest in do tend to be the bigger companies on the continent and in the industries that we like to go after. We take a regional view as well as an industry view and ask ourselves ‘Who are the likely winners within those industries?’
As we seek out those companies, we look to build relationships. We will also let industry intermediaries know that we have an interest in a particular industry or companies and get them to source opportunities for us. So, there is direct sourcing by ourselves, as we identify things – or there are people bringing transactions to us.
Are there certain specific characteristics in terms of PE investment on the continent that are different to other regions?
There is a very broad spectrum to types of transactions that one might describe as PE or venture – from early-stage businesses, all the way through to quite well-established, developed growth companies, to very big infrastructure-type transactions.
On that spectrum, the types of transactions a party may invest in have different characteristics. In some cases, a low-growth company for example may require a sort of typical buy-out.
With an infrastructure deal, a longer time horizon may be needed to build and develop it.
An early stage transaction may require quite a big portfolio, until you’ve got enough winners to compensate for the losers. Within this range DPI targets growing, established companies.
Africa’s a huge place with big economies and we are very disciplined and confident around the five-year investment cycle. We will find eight to 12 companies that meet our criteria and that will be able to achieve the sort of growth that we are seeking that will have the appropriate governance features, the right industry features, an attractive investment hypothesis.
Also, equally importantly, we are confident that when the time comes to exit, we will be able to exit within the requisite timeframe.
It is all about knowing what you are looking for and being disciplined in the execution of that investor strategy.
If you’ve gone on a fundraising, you must be pretty confident in the African narrative despite the recent cycles that we have gone through?
Previously there has been quite a lot of hype around Africa – perhaps it was oversold by some parties. People may have made investment mistakes, which might have resulted in some disappointment for some investors and some funders.
We have been quite careful in not over-hyping Africa. We have got a team of people who understand Africa intimately and they are people from different countries, well plugged in, with a deep and firm understanding of those markets and able to find those opportunities and partner with shareholders or management teams to create even more value.
That’s what we present when we fundraise. That we are able to access those opportunities.
We’ve seen resurgent stock markets in the West, and a stuttering recovery in Africa. How tough was the fundraising?
I think it is fair to say it has been a difficult environment. On a relative basis, the West has done quite well. We were able to demonstrate to our limited partners across our existing funds that we did what we said we were going to do. We’ve delivered sensible and sound returns.
We go beyond financial returns, we also measure and track non-financial outcomes, such as, gender balance, trying to reduce carbon footprints, employment growth – the sorts of things that I think are also increasingly important to investors.
We’ve got the trusted backing of LPs who have backed us again. Then there are also other LPs who are intrigued by what we are doing and sought to back us this time round. It has been a long conversation and a difficult process, so we are very pleased with where we ended up.
But the appetite is still there?
Absolutely. I think we have demonstrated that there is appetite there. As global economic dynamics change over time, that appetite may well increase. It is hard to predict with the current global environment.
I know you have a number of metrics, non-financial, that you apply to your investments. Do you think that this focus, essentially Environmental, Social and Governance credentials, helps?
It certainly does. Investors are increasingly looking for their investments to also deliver some sort of ESG impact. So, if you can demonstrate a commitment or track record of doing that, it definitely helps.
But you also have to be able to convince them that you can deliver the financial returns that they are seeking. You have to be able to cover both aspects.
According to the African Private Equity and Venture Capital Association, PE funds investing in Africa raised $1.2bn in 2020, down from $3.9bn in 2019. Will the numbers go back up on the fundraising side?
There has been a huge recession in Africa. A lot of funders have withdrawn. In some cases, there has been a level of disappointment with the investment returns.
However, some fund managers have done well and in certain niches, it remains quite healthy. I think there is a lot of interest in technology funding for example; in things like renewable energy, some infrastructure. In the areas we’re in, it really does depend on the track record and the trust in the manager.
I think fundraising was at a low point before we announced our own. I am actually feeling quite confident that the industry will start growing and become of the size that it ought to be in Africa.
One of the main concerns I hear from investors is currency risk. Hence why they often invest in companies with USD denominated revenues. Which doesn’t seem to be the case with the companies you invest in. How do you manage that currency risk and the potential downside of currency devaluations?
Currency devaluations pose significant risk. We take a portfolio view on that. We consider the currency risk across the portfolio and actually, some of our companies do have natural hedges within them.
When we look at an individual transaction, we consider the risk of currency devaluation and whether or not the target has features which might mitigate that risk.
We try to understand the currency within which it operates and what we anticipate currency devaluation will be. The approach we take seems to have worked.
You recently invested in a tomato processing company, SICAM in Tunisia. Why that particular business?
Firstly, Tunisia is the biggest per capita tomato consumer in the world; so, there is a big local market. It’s a leading producer of tomatoes in the world due to the amount of sunshine it gets. It’s a competitive product to export into Europe and elsewhere.
We saw a big opportunity to help them significantly increase their export initiatives and to benefit from the global competitive advantage that Tunisia has in that industry. Great management team; great product.
So, it checked all the boxes for us. Now that’s a good example of the kind of deals that we do; in its own way, it’s a world-class company.