Private equity can help bring good governance to Africa

Poor corporate governance can be a major concern for private equity investors in emerging or frontier markets such as Africa, especially in the case of minority investments in family-owned businesses.

But identifying the right deals and taking control of firms may enable fund managers to improve the way enterprises are run, generating a positive impact on the economy. “Private equity is one the best ways of accessing the African growth story, as you can find great opportunities and bring governance to them,” explains Eduardo Gutierrez, partner at African private equity specialist Development Partners International.

It is important to either take control or exert significant influence on companies to be able to bring best practice governance and meet international investors’ standards, he says.

Target companies must be potentially attractive to multinational strategic buyers looking to enter the market, or to financial investors. This investment discipline turns out to be crucial in the exit phase, which is the most delicate, particularly in Africa.

While it is difficult to gain control of family businesses, business owners with expansion plans are increasingly realising they need to professionalise the way they operate, in order to draw capital and increase the firm’s value. The aim is often to make themselves acquisition targets of international companies or to list on local and international stockmarkets.

 “Getting international auditors, improving the reporting, the board structure and putting in sub-committees are certainly areas we focus on, as a value creation mechanism,” says Mr Gutierrez.

Africa is a key destination for impact investing. Around a third of impact investors making investments intended to create positive social impact beyond financial returns focus their investments in sub-Saharan Africa, according a survey from the Global Impact investing Network (GIIN).

But even investments not labelled “impact” have significant positive impact on the economy, as bringing capital into the region funds economic growth, increases employment and generates tax revenues. Adopting best-practice governance helps make companies more efficient, explains Mr Gutierrez. “By demonstrating that investments can be made, it creates a virtual cycle driving more and more capital in over time,” he adds.

It is a misconception that in Africa there are high environmental, social and governance risks (ESG), says Fong Yee Chan, ESG product director at eFront, a software provider of financial solutions for managing alternative investments.

In fact, there are better ESG practices in African PE investments than many other parts of the world, because of the increased focus placed on them, by both the Development Finance Institution and fund managers, states Ms Chan.

Her firm recently launched a solution facilitating efficient ESG information collection, reporting and analysis between limited partners (LPs), general partners (GPs) and portfolio companies.

Integrating ESG factors into investment decisions helps manage actual risks of governance, corruption or environmental issues. Also, it allows taking advantage of unexploited environmentally and socially themed investment opportunities in Africa.

“If African investors can demonstrate they are managing these issues well, they will then improve their reputation as well as reducing perceived risks of investing in Africa,” she says.

Increasingly, investors demand more transparency on their portfolios, and software solutions can help make the process of gathering information more easy and efficient, enhancing investment decisions, claims Ms Chan. In this case, the costs are borne by the investment manager, but can be shared with the company in which the manager invests, if it also helps that company improve its strategy, she suggests.