Runa Alam is something of a private equity pioneer. Alam co-founded Development Partners International, which she calls the first pan-African private equity firm, in 2007. London-based DPI’s clients now include the $9.3 billion Missouri State Employees’ Retirement System and International Finance Corp., the private sector development arm of the World Bank Group. In a region where private equity general partners complain about a paucity of exit opportunities, DPI has managed eight initial public offerings and six corporate sales.
Alam, 55, a Bangladesh-born U.S. citizen who holds a BA in international and developmental economics from Princeton University and an MBA from Harvard Business School, decided early in her career to work in economic development from within the private sector. She set her sights on Africa in 1999, when she became a Washington-based director of American International Group’s AIG African Infrastructure Fund.
DPI’s deep familiarity with Africa’s business networks has been crucial to its success, Alam says. The firm’s other co-founder, Miles Morland, launched Blakeney Management, a London-based asset manager focused on Africa and the Middle East, in 1990. Ninety-five percent of DPI’s 23 staff are of African heritage.
What makes Africa an attractive emerging-markets region?
First, it has 54 countries. In a pan-African fund, just because one country has problems doesn’t mean that you can’t get the fund invested, and very well. Second, African currencies don’t track entirely with each other. Francophone Africa is pegged to the euro. Many of [the 15 nations in the Southern African Development Community] have a big component of the South African rand. East Africa also has different baskets. So when the currencies in emerging markets generally went south, it was less the case in our portfolio. We’re diversified across Africa, so we get a natural hedge.
Our investment thesis centers on companies that benefit from the emerging middle class, which is a big thesis in Africa. The region is maybe ten years behind Asia or Latin America. About 300 million people are considered solidly middle class in Africa, and that number is growing every year.
We always look for best-of-class in each industry; we don’t do start-ups or turnarounds, so a lot of the risk is sucked out. They’re growth companies. For example, in our first fund we had nine companies, and they were all cash flow positive or profitable.
Private equity is an industry that is based on growth. Africa, especially with this thesis of the emerging middle class, is a very attractive market for private equity. And the growth happens in our time frame — anywhere from three to seven years.
For example, we’re invested in Ghana’s CAL Bank. We came in at less than book value, and in 2012 the company grew by 200 percent, in 2013 by 77 percent and last year by 60 percent. Those numbers are not unusual for Africa.
And then you look at exits. We’ve not had problems exiting. Last year we sold our insurance company in Nigeria, called Mansard, to AXA. There are strategics coming in, there are more and more financial buyers, and there is the possibility — we have done it before — of exiting off a stock exchange. You can do it on a local exchange — there are 24 — or do a listing in London or Johannesburg. That’s becoming more common.
What investment risks does the region present?
You always have to think about commodity cycles in Africa. When oil and mineral prices were generally high, the continent benefited. Having said that, there are more commodity importers than exporters in Africa. Even with oil prices and a lot of the minerals down, there are still countries that are growing very fast and benefiting because they’re net importers of those commodities. But broadly speaking the continent does very well in the up commodity cycles.
When you invest it’s best to think about products that are defensive. Consumer products, especially basic consumer products, tend to be fairly defensive. Insurance, banking, pharmaceuticals, manufacturing of processed foods and soaps and detergents, education, logistics — the distribution of supply chain products and parcels — and cellular phones: These are all must-haves within an economy.
The other thing you have to be prepared for when investing in Africa is the need to know your companies well and follow them over time. It’s important to have that because operating in the African environment can be very difficult. You have infrastructure constraints and many other factors that make it difficult to operate.
Has the Ebola crisis affected what you’re doing in Africa?
We didn’t have any investments in Sierra Leone, Guinea or Liberia, so it didn’t affect our portfolio at all. But the sale of Mansard was in the middle of the Ebola crisis. The 30-person team from AXA in France and other countries had no problems coming into Nigeria. It’s a commercial asset, they were interested in buying it, and the deal got done.
Are institutional investors such as pension funds, endowments and sovereign wealth funds getting more active in Africa?
We have quite a few pension fund investors, both in the U.S. and Europe. Africa is now on the radar screen of traditional private equity investors, without a doubt. We’re not seeing [institutions] make direct investments; we’re seeing them co-invest with us.
The other interesting thing is that the pension fund industry is developing in Africa. The regulations are changing to allow [African pension funds] to come into private equity, so that will be a big theme over the next five years.
What are the region’s long-term growth prospects?
Growth over the last decade has been, on average, around 5 percent. Certain countries have been faster: Angola at one point was growing at 8 percent; Nigeria at 8 percent; Ethiopia, 10 percent. Ghana for a period of time was somewhere between 8 and 14 percent.
It’s important to note that we are in a changed world with the decline in oil and certain mineral prices. Prices are reconfiguring who will grow and who won’t. I think some of the oil-importing economies will continue to grow fast and may start growing faster. If you look at Ethiopia, there’s oil exploration going on there, but they’re not oil exporters yet.
What are some especially promising sectors and companies?
I think insurance will be a very interesting sector. Take a look at Nigeria, Africa’s largest economy. It has, depending on whose numbers you look at, 150 to 180 million people. Insurance is less than 1 percent of GDP. However, the country has laws that cars have to be insured, and companies with a certain number of employees have to be insured. The industry is poised for very large growth; that may be one of the reasons that AXA has come to Nigeria. But that thesis holds true for many countries in Africa.
I don’t think banking has stopped being interesting, especially retail banking. In East Africa you have retail banks, but you don’t have that in many other parts of the continent. In West Africa there are corporate banks and trade finance banks but very little entry into retail banking. That will continue to be a big theme.
The same is true in health care. Products like pharmaceuticals, both generic and branded, will see huge demand. We’re very excited about our pharmaceutical company in Algeria called Biopharm. It has a strong management team and a very large pharmaceutical market, and it’s entering into licensed manufacturing with some of the globals. Africa hasn’t had India-type growth in pharmaceuticals yet. This company could be one of the leaders.
Private universities are fairly new in Africa, but the government universities are often full. There is a huge number of high school students graduating whose families have entered the middle class. They may not be able to afford to send their children to Europe and the U.S., but they can afford $6,000 tuition at a private university, which is the standard in these countries. So you’re going to see growth of private sector–led education throughout the continent.
How has investor interest in Africa changed since you started building expertise there?
I am observing more interest in Africa than I’ve seen in the past 15 years. It’s not just from private equity investors and funds but also from multinationals. We’re seeing global companies that are interested in buying our portfolio companies and want to partner with us to buy companies.
I think the feeling is the market is developed enough that people know there’s money there. There are consumers there. Now is the time when we’ll see the development of the pan-African companies that will be the winners in the next ten to 20 years.