Thierry Hugnin: Financial risk is the main issue for Private Equity in Africa

Interview of Thierry Hugnin by Fraser Schurer-Lewis for Platform Africa :

Thierry Hugnin is the Co-founder and Managing Partner of Kibo Capital Partners (KCP), a leading private equity management company domiciled in Mauritius with assets totalling $100 million USD. Hugnin is a committed advocate of Africa as a continent offering attractive opportunities for private equity. Platform Africa spoke to Hugnin in London at the annual AFSIC (African Financial Services Investment) conference at the beginning of May, where he participated in a panel discussion on the investment opportunities in Southern Africa’s Financial Services Sector.

What are the main challenges for private equity investments in Africa?

In terms of performance, I think the main issue right now is the financial risk. Most of the activity in the PE space in Africa has really been to invest in companies driven by local GDP growth, consumption booms, FMCG and so on. However, most of these businesses essentially sell goods and services to the local market in their local currency, and aren’t, therefore, protected against the effect of depreciation against USD. So, as a PE manager, you can end up achieving very good returns in local currency, but still have disappointing returns in USD. I think a big challenge for PE investors over the next few years will be to reconcile this strategy and to invest in domestic companies with strong USD returns.

Are there any trends in terms of private equity investments that you think have already been established, or are currently emerging?

Certainly, from a type of investment, we’ve increasingly moved away from companies or funds that are focused in a single country, instead concentrating on multi-jurisdictional or multi-regional funds. The reason for this, is quite straightforward: if you are a single country fund, and that country goes into a slump – which, let’s be honest, is quite a common occurrence, as most African countries experience some form of a crisis every now and then – there is nothing you can do; you just sort of sit there and wait for things to improve. Whereas, if you’re investing in a portfolio spread over several countries, if one country starts to experience difficulties, you can simply compensate for that in the others. So, I think a trend we are beginning to see is one very much for diversification in fund type.

Additionally, this trend for diversification is not only evident in terms of country, but also in terms of sectors as well. PE is now penetrating most sectors in Southern and Eastern Africa: we have firms going into mining and natural resources, property, industrials, education, healthcare, financial services and so on.

Finally, perhaps the last big thing we are seeing, at the moment, is the increasingly fundamental role of new technologies in African markets. Smartphones are becoming easier and cheaper to obtain, and that opens up a whole world of applications able to provide new and exciting business opportunities. You can get really good quality smartphones for next to nothing now: it’s been estimated that in five years’ time, 45% of the entire African population will own a smartphone. Africa’s population is enormous, and the key to unlocking that market’s potential is connectivity. Companies who can capitalise on the technology boom the continent is currently experiencing will have certainly have the edge over companies that don’t. That’s true for banks, insurance companies, healthcare, private education, retail and so on.

You’ve mentioned that there is a real appetite to invest in a wide range of sectors. If you had to choose one or two you believe are ripe for investment, and that we will see a real drive towards over the next few years, what would they be and why?

I think the Agriculture space is a sector where, currently, not many PE firms have invested. It’s not easy to find the typical PE type of company in the industry, because, of course, agriculture remains a cyclical business. If you can identify a company with an agile business model that allows you to ride the risk of a commodity cycle, I think that could well be an interesting one to watch. Ultimately, the African population is growing massively, and today, Africa imports a lot of its food. While that will undoubtedly continue to some extent, I feel there is going to be more and more opportunity for good quality local produce as populations on the continent continue to grow. The influence of new technologies in this industry may also have a role to play in its profitability.

The other sectors’ I’d suggest, which are perhaps a bit easier to access – and a rather more obvious choice – would be private education and healthcare. In Africa, as soon as people have a bit of money they want to secure the well-being of their families, which often means moving their kids away from the public and into private sector education, and also securing private healthcare. Unlike in the UK and Europe, where the difference between the public and private sector is marginally disproportionate, in Africa, it’s astronomical. The quality of care or education in the public sector is terribly low, so there is going to be massive demand for quality and affordable education and healthcare for the up-coming generation. Consequently, businesses within these sectors will require enormous amounts of capital. They are also sectors, to this day, which are not as highly regulated as others – in comparison with financial services, for example – so good entrepreneurs will be able to make strong returns.

What more can Mauritius do to promote itself as a PE hub for Africa?

I personally think Mauritius needs to move away from just being seen as a platform. Everybody knows you can access very good accountants and good administrators, and all that works well in Mauritius. What we now need is to move the value-added chain forward, and to attract real PE managers to operate from Mauritius. I’d like to see the Mauritian authorities do much more to promote the jurisdiction as a great place to locate your businesses operating model, and not just as a platform.