Sub-Saharan Africa offers investors attractive demographics and fast growth, but private equity is often the only way of gaining exposure.
Middle class focus
It is these service industries that Duet is most interested in. Smaller adds: "We tend to focus more on the consumer sectors of the economy, such as: healthcare, consumer goods, financial, insurance, mobile telephony, retail, food production and education, rather than mining, oil and gas or infrastructure development."
Although managers see this continent-wide demographic boom as a compelling reason to invest, it is important to understand the many differences between African economies. Grant is keen to stress the diversity of markets in Africa. "It is very important to resist talking about Africa in the same way you would talk about India or China," he says. "You will always generalise if you try to talk about Africa as a whole."
For Tyron, this diversity is what can make Africa-focused funds attractive: "In the wake of the Arab Spring, a lot of frontier markets suffered from political risks that were hard to diversify against," he says.
"We invest across Africa, so even though some markets are inter-related, for example South Sudan is dependent upon Kenyan ports, there is a huge amount of cultural and political diversity between the countries we invest in. There are risks to doing business in too few countries."
The diversity of the African economies enables private equity funds to manage country and political risk, but true risk management lies in close knowledge of the individual investments.
Grant says: "Management risk is the driver of private equity returns. Risk is always linked to management. As you focus on management, the importance of country risk lessens."
Tyron stresses that managerial talent is what really makes a tempting private equity investment. "The greatest challenge is finding good people. Operational execution is the key, not so much sourcing deals."
Perhaps unsurprisingly, private equity fund managers in Africa are quick to allay fears of adverse political environments.
Grant says: "The days of nationalisation are long gone for any rational government." These fears may be unfounded, but they keep the competition away and allow private equity fund managers in the region to pick up excellent deals.
Smaller says: "We tend to concentrate on those countries where there has been under-investment of foreign capital. We look for companies that need capital to expand and that are closed off to this additional financial source, due to it not being available in the local markets."
Tyron believes that doing deals locally is the key to good valuations. "If deals get brokered in London, they tend to be much more expensive and have been passed a number of people by the time they reach Europe," he says. This local knowledge is an absolute necessity, in a group of diverse and under-reported markets.
"We find that once we have made one investment it gives up surety to do a lot more. It takes time to build up the relationships locally," he says.
For those with the patience, and the risk appetite, fast-growing sub-Saharan African markets may prove hard to resist, and for the time being private equity is the only mean of access to many of them.