Why big private equity firms failed in Africa

A few years ago, some of the biggest names in private equity entered Africa with plenty of hope. Now most of these firms are quitting the continent. We look at what went wrong and what strategy is needed to succeed there.

Capital News Africa: From the Trading Floor – Week 11-2022


There’s no doubt about it. Big private equity firms love big sums of money. The Carlyle Group of Washington D.C. manages the world’s biggest private equity fund with USD 201 billion (EUR 182 billion) in assets. New York-based KKR has the world’s second biggest private equity fund with USD 153 billion in assets. This is closely followed by a USD 150 billion vehicle managed by Goldman Sachs, one of the giants on Wall Street.

According to Gregor Böhm, Co-Head of Carlyle’s European business, the US private equity giant is planning to launch a European private equity fund that will have EUR 20 billion in assets. Speaking at a dinner event with the International Club of Economic Journalists in Frankfurt, Böhm said the fund would target companies with sales of between EUR 250 million and EUR 1 billion.

Big private equity’s African adventure

But several years ago, it was trendy for big private equity firms to enter Africa and launch buyout firms. Blackstone, Carlyle, TPG Group and Warburg Pincus all participated in the trend, but only Carlyle created a sizeable fund. In 2014, Carlyle’s “Sub-Saharan Africa Fund” was launched with USD 689 million in assets. Shortly thereafter, the now defunct Abraaj Group of Dubai launched a USD 1 billion private equity fund for Africa.

Ultimately, however, most of these firms were unsuccessful. Abraaj collapsed due to a massive fraud perpetrated by its founder Arif Naqvi, while most of the US firms have quit the continent. KKR, for example, was forced to dissolve its African team after failing to find enough companies to acquire. “To invest our funds, we need deal-flow of a certain size. It was especially the deal-size that wasn’t coming through,” KKR spokesman Ludo Bammens told the Wall Street Journal.

No more single deals

Other international investors in Africa have changed their strategy. Germany’s state-owned investment company DEG no longer invests in companies directly, but instead invests in other funds. For us, this is not surprising considering that DEG fell victim to the fraud at Abraaj.

Africa’s private equity landscape has also changed recently. Midsize private equity firms now dominate the market. And while their funds have likely taken in less money in 2020 and 2021 overall than in 2019 (total inflows: USD 3.9 billion), there have been some individual standouts during the two years of the Covid-19 pandemic.

A dynamic market

One is Ascent Capital Africa, whose two funds took in more than USD 100 million during the first half of 2021. The money will be invested in east Africa. Another is Helios Investment Partners, which has garnered a total of USD 290 million for its pan-African fund “Helios Investors IV.” In addition, the “Metier Sustainable Capital Fund II” has acquired USD 156 million from investors for investment in Africa.

As the examples reflect, Africa’s private equity market remains dynamic even without big sums of money. This does not surprise us, as Africa may not be the right terrain for big US players like Carlyle and KKR which specialise in buyout funds. To recall: The buyout strategy involves the fund incurring a huge amount of debt to acquire a firm. The fund then seeks to turn the company around and, due to the leverage, sell it at a handsome profit.

Buyout strategies just don’t fit Africa

Yet Africa’s economy is not suited to such a strategy. Instead, what’s needed is venture or growth capital. This is because younger African companies need capital for expansion and to explore and enter new markets.

The big private equity firms would have appreciated this fact as well as other difficulties had they not been so far removed from Africa. According to the Wall Street Journal, KKR didn’t open an office on the continent despite launching a fund there. Clearly the wrong approach. <LINK>

There were other mishaps: After Carlyle acquired the Diamond Bank in Nigeria, the worth of the investment fell almost 80%. In 2016, Bain Capital lost its stake in a South African retailer as part of a debt-for-equity-swap. And Blackstone had a hard time selling a shareholding in a dam in Uganda.

Among the big US houses, only TPG seems to have come up with the right strategy. Its growth fund focuses on African small-to-midsize enterprises (SMEs). Speaking to the Wall Street Journal, Bill McGlashan said: “The most interesting investments in Africa involve building businesses in partnership with entrepreneurs.” McGlashan added: “In most cases, these are new businesses that are being created. The continent is not an environment where buyout opportunities of mature businesses are prevalent.” We couldn’t agree more.