Bulls n Bears Entrepreneurship Zone :: Due Diligence: ‘This is Africa’ not an excuse for underperformance

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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.

Mbuyu Capital Partners, with offices in London and Nairobi, invests
directly in African companies through co-investment with lead investors and
also in funds, through primary and secondary investments managing assets for
institutional investors. Michiel Timmerman, managing partner of Mbuyu, tells
us about his firm’s investment philosophy, Africa’s untapped opportunities
and the biggest misconception about his job.


1. Explain your firm’s investment philosophy.


Africa will for the foreseeable future be a small part of any institutional
investor’s portfolio. We believe that the best way for commercial investors
outside Africa to benefit from the opportunities is through a diversified
portfolio invested by a specialist firm, selecting from the entire universe
of opportunities: co-investments and fund investments across private equity,
credit and real estate.

To have commercial investors committing to African private equity means
generating above median performance vs global growth market private equity.
This means GPs need to be rigorous and realistic in selecting investment
opportunities, with a laser-like focus on management quality, the business’s
ability to achieve the growth targets needed to deliver the IRRs, companies’
resilience to adverse currency and macro events and minimising the gap
between gross and net performance. “This is Africa” is not an excuse for
underperformance vs global peers.

Consequently, we need to be highly selective in evaluating GPs and
co-investment opportunities. This starts with access to abundant deal flow
to build a portfolio. An exclusive focus on Africa and multiple touchpoints
through fund investment, co-investment and involvement in operating
businesses is essential to creating the network needed to generate that deal
flow, evaluate effectively and therefore build a portfolio which maximises
the chance of delivering returns which can compete with global growth
investments.


2. What is the greatest investment lesson you’ve learnt?


I have two. First is that management quality is what matters most. But
however impressively management have delivered in the past, be realistic
about where they can take the business next. Evaluate whether what they say
they can deliver and what is expected of them post investment correlates to
their past experience. Around 10 years ago I made a co-investment in an
emerging markets commercial farming business with an exceptional track
record of growth and technical skills. But expanding this regionally
stretched management beyond their zone of competence.

Second, never run out of cash, because you are then at the mercy of others.
This has not happened to any of my investments, but during the 2008
financial crisis, some businesses came close.


3. Identify an untapped opportunity for private equity investors in Africa.


There is currently a scarcity of capital investing in Africa, outside the
development finance institutions (DFIs). So being a commercial investor able
to be flexible and quick attracts a steady stream of opportunities.

I would like to highlight two areas. First, non-bank financial services.
Banks in many countries are highly conservative and make a good return
collecting cheap deposits, lending to large corporates and investing in
local treasuries. This leaves a wide-open field of lending and providing
other financial services to SMEs and individuals. Asset finance is one
example. The leasing business in Tanzania which I co-founded 10 years ago
and still chair has had no serious competition ever, yet is a profitable
business with high demand for its products from SMEs around the country.

Second, technology-enabled businesses. Africa is exploding with high growth
early-stage businesses using technology to disrupt (or deliver for the first
time) services which are being held back by the poor infrastructure in many
countries. The challenge is picking the winners.


4. What is the biggest misconception about your job?


That travelling around Africa looking at investments is a hardship and
dangerous. It is a pleasure and it beats New York and Hong Kong any day.


5. Name the one deal you wish you invested in.


The early telecoms deals, which made some people very rich and transformed
lives in Africa. One of those rare examples of getting involved at an early
stage of an investment theme can really pay off. Technology-enabled business
models, which build on the telecoms infrastructure, may be another one.


6. What are the skills needed to succeed in Africa’s private equity
industry?


As a commercial investor not raising capital from DFIs: an evangelical
belief in the investment opportunities in Africa and willingness to convey
this to developed market investors. Also tenacity, good local knowledge and
networks and application of developed market rigour to evaluating GPs and
investment opportunities, to identify those that can compete with the best
outside Africa.--Howwemadeitinafrica



Michiel Timmerman

 

Invest Wisely!

Bulls n Bears 

 

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