Bulls n Bears Entrepreneurship Zone :: Due Diligence: ‘Out of 26 investments, we’ve only lost money on one deal’

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How we made it in Africa’s Due Diligence series asks top players in
Africa’s private equity industry about how they are mastering the art and
science of profitable dealmaking and fundraising. Doing the due diligence on
those who do due diligence for a living.

***

South Africa-based Medu Capital is celebrating its 15th anniversary since
its founding in 2003. “Out of 26 investments, we’ve only lost money on one
deal – it’s something that is in our DNA,” enthuses co-founder Nhlanganiso
Mkwanazi.

Michael Avery asks Mkwanazi about his investment philosophy and the lessons
learnt.


Where did it all begin?


The business was started by myself and Ernest [January]. We met while
working at Deloitte, which is where we did our articles. We went our
separate ways for a number of years. I spent some time in management
consulting with Gemini, I then joined what was then Capital Partners, which
became Brait, in 1998. I was there for five years. Ernest stayed on at
Deloitte before joining Anglo American in their investment management
division, essentially investing the pension funds of the Anglo Group
companies, until the listing on the London Stock Exchange. With the
unbundling he moved on to RMB Asset Management, focusing on the listed
equity market. In 2003 we teamed up to start Medu Capital.

We were quite fortunate in our start, which is not atypical to how most
private equity businesses start, in that it was supported by Brait. They
held a minority stake in the business and they helped us establish our first
fund. That provided us with the base to build the business with our first
pool of capital, R300m. We then raised our second vehicle on our own track
record, which was R900m. And then we raised R1.2bn  in 2014 for our third
fund.


Explain what you look for in an investment.


At a broader level we are not sector focused. There are obviously areas
where we believe we understand the risk/return profile for particular
sectors and we tend to have a preference for those. Because of that
orientation we partner with proven managers in the underlying businesses.
That’s one our core philosophies.

We don’t approach this from the perspective that we have all the answers
and are buying a broken business that we can fix. We believe in partnering
with proven mangers inside established businesses with a track record of
success and basically building off that base where we provide capital and
additional skills sets to take a medium-sized business into a corporate
business.


Tell us about the greatest investment lesson you’ve learnt.


After 15 years at Medu and five at Brait, I think some of the things that
might be nice theoretical debates get confirmed through experience. One of
them is obvious, but always interesting to see the absolute difference it
makes: the quality of our partners is a critical factor in the outcomes of
the performance of the investment. It’s interesting that when you are
evaluating a new investment opportunity, most of the professionals in the
sector are CAs or highly numerate and the can tell you about the income
statement and the free cash flow and margin, and that’s important of course,
but it’s a much harder thing to evaluate the potential partners in terms of
their competence and value system and how they react to different
situations.


Identify an untapped opportunity for private equity investors in Africa.


We see the private equity opportunity informed by a few drivers. One is
still that while we have a very well-developed capital market in South
Africa, it’s still geared toward the listed market. And there’s very limited
capital that’s available for unlisted equity. As a result, when one has got
the capital there is a good investment opportunity because it’s not overly
competitive.

>From a sector perspective, there are some themes that are well articulated
around changing demographics: we still have a fairly youthful population,
the whole consumer story, unmet infrastructure demands and requirements. So
across the economy there is a lot of opportunity.

Whether you can make money and earn a good return within a three- to
five-year window is a very short period of time in our view to invest on a
basis of long-term secular trends.


What is the biggest misconception about your job?


The biggest misconception about private equity is that from the outside it
looks glamorous and maybe easy, but it is a hard slog and returns are made
over time and there are a variety of drivers that make for a success.
Growing your profit one year is great but if you don’t sustain that over a
five- or seven-year period it doesn’t mean much. It requires a lot of
patience and a long-term orientation as an individual.

The other is – especially because we’ve raised three funds – sometime this
year we’ll be going to market to raise our fourth fund. It’s a part of my
job I sort of dread, because the reality is that even with that track
record, fundraising is still a significant battle for all entities.


Name the deal you wish you invested in.


There are several businesses that we felt were very strong businesses that
we had to sell. We used to be invested alongside a few private equity
players in Pepkor. We sold in 2011 and in 2014. It’s more luck, to a certain
extent, from a valuation perspective. Brait had an interest they sold to
Steinhoff and that business now resides inside STAR. We saw a very
impressive return on that and none of us got fired for harvesting such an
impressive return, but you think if you were a long-term holder of that
asset, maybe there would have been even greater value to be realised.—
Howwemadeitinafrica 


<https://www.howwemadeitinafrica.com/due-diligence-out-of-26-investments-wev
e-only-lost-money-on-one-deal/61467/n-mkwanazi-600x300/> 

Nhlanganiso Mkwanazi

 

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