Thursday, May 2, 2013

Africa is ‘rocking with opportunity’ for investors ready to take a risk


By Steve Mbogo
In Summary
  • Citadel Capital’s 19 Opportunity-Specific Funds control platform companies with investments of more than $9.5 billion.
  • These companies are in 15 countries and industries including energy distribution, solid waste management, agrifoods, cement, refining, transportation and glass manufacturing.
  • Since it began operations in 2004, the firm has invested equity of more than $4.9 billion, including $1.1 billion of its own capital. In the same period, Citadel Capital has generated more than $2.2 billion in cash proceeds from five successful exits — three full and two partial — on investments of $650 million.
  • Development finance institutions have committed the lion’s share of the more than $761 million in equity and debt committed to Citadel Capital’s platform and portfolio companies in 2011.
  • The private equity fund is seeking a bigger role of being a regional investment holding company. The transformation has been necessitated by the growing opportunities in Africa presented by better managed economies, resources exploitation and a growing middle class.

Citadel Capital, the pan-African investment company that manages $9.5 billion worth of assets, is transforming from a private equity fund with short term outlook into a regional investment holding company with an outlook of up to 15 years before exit.

Steve Mbogo spoke to the managing director Karim Sadek on the company’s future investment plans in the EAC.
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Citadel Capital’s investment in Rift Valley Railways (RVR) was expected to result in a quick turnaround but there are still complaints that the railway cannot handle enough cargo and are too slow.
We have arranged full financing for a $287 million, five-year turnaround programme of RVR that will overhaul rolling stock, replace tracks and infuse best practices that will allow us to better serve both passengers and freight clients.

RVR has replaced 140 kilometre of unsafe track and completed installation of a state-of-the-art GPS-based central control and signalling system to replace a more than 100-year-old operations and signalling infrastructure.

Key turnaround times have improved more than 30 per cent, while accidents per million train kilometres are down more than 30 per cent. The company is rehabilitating and overhauling more than 90 wagons on average per month at its Nairobi and Kampala workshops.


Kenya is reforming its pension regulations to allow pension managers to invest in private equity. What impact will this have on the private equity industry?
Giving managers the flexibility to invest in long-term asset classes such as private equity is a net positive for both the pension funds and the private equity industry.

Pension fund managers will be able to lock in more stable long-term returns by choosing to invest with partners who have on-the-ground experience in Africa, while private equity funds will have a new pool of liquidity to make a concerted pitch to.

It hardly seems fair that Western pension funds have long been able to consider private equity opportunities, while pension funds on our own continent often face obstacles to investing in high-potential private businesses as long-term investors.


There is a lot of interest by PEs across the globe in investing in Africa. Is this interest sustainable?
If there is one thing both private equity general partners and more sophisticated limited partners now understand, it is that Africa is open for business.

The continent, as our chairman is fond of saying, is “rocking with opportunities.” This is not going to change soon: Seven of the 10 fastest growing economies in the world are in Africa, and Africa’s governance framework is sufficiently robust to give confidence to long-term investors.

Moreover, investors are heartened by a new generation of young African leaders who by and large speak the language of the private sector and are opening previously hands-off sectors of the economy to private investment. This is definitely the African century, and those who get in on the ground floor today will reap dividends.


Do you think Africa’s private sector has the capacity to absorb all this money from PEs?
The biggest obstacle to investing in Africa is the question of exits, and International Monetary Fund research on private equity has proven conclusively that whether through listing on a regional exchange — I’m thinking here of Kenya, Egypt, Nigeria, South Africa — or through a strategic sale, exits are possible.

Having accepted that, the question becomes one of “Are deals available?” And the answer is an emphatic yes. Governments are realising they have overstretched balance sheets and are allowing private players into new sectors.

Rollup and consolidation plays are very much on the menu. What it comes down to is having a private equity general partner who is African — who has the right mix of local insights and the global skill-set needed to structure compelling opportunities.

Throughout the process, though, I think we’ll see much more flexibility on the part of private equity general partners in terms of how they raise funds. It’s not going to be blind pools of capital, but an increasing preference for opportunity-specific funds or some of the more non-traditional fundraising strategies that Brait used with considerable success in South Africa.

How did the Arab Spring affect the performance of your investments?
2011 was challenging for some of our investments that lost the better part of the first quarter to unrest and the more than two-week shutdown of Egypt. And there were, of course, headwinds for the rest of the year.

But 2012 and the first quarter of this year, we’re seeing increasingly strong margins and better performances at the revenue and earnings before interest, taxes, depreciation and amortization (EBITA) levels, which is a function of our being biased toward companies that are export plays; that benefit from deregulation of energy and subsidy regimes; and that have hard-currency revenues but local debt. Our portfolio is designed to thrive in just these challenging macroeconomic conditions.
In 2010, Citadel said it will invest $400 million in EAC but not much has been seen apart from the RVR deal. We continue to look for new opportunities to complete the first stage of our investment programme in East Africa beyond RVR.

Concentrated attention on RVR and the interruption by the Arab Spring has seen us begin screening opportunities again in 2012. We don’t discuss future investments until we have something to announce. Anything we pursue would be in energy; agriculture and consumer foods; transportation and logistics; mining; and cement manufacturing and construction.

What legal and taxation issues would you like reformed to enable countries become stronger magnets of private equity funds?

There’s no “one thing” that private equity investors would like to see changed — just a continued commitment to transparency, fairness, consistency and clarity. Those are the keys across the legal and tax universe

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