Q&A: A Diamond In The Rough

May 9 2008 | 12:37pm ET

Newly-formed hedge fund shop Insparo Asset Management this week raised a $125 million fund to invest in Africa, which has become the favored new frontier for hedge fund and private equity managers alike.

Just last August, South African investment firm Pamodzi Investment Holdings launched what was billed at the time as Africa's biggest p.e. fund, the $1.3 billion Pamodzi Resources Fund, to invest in the resource and resource-related sectors, primarily in South Africa and across sub-Saharan Africa.

FINalternatives recently spoke with Tom Gibian, CEO of Emerging Capital Partners, an Africa-focused p.e. firm, about the firm’s own experiences in Africa and why he thinks the region will prove to be a good bet for alternative firms for years to come.

FINalternatives: Tell us about Emerging Capital Partners.

Gibian: ECP is focused on the private equity space in Africa. We are the first private equity firm to raise more than US$1.2 billion to invest in companies across the African continent and have participated in 50 transactions since we first started investing in 2000.

FINalternatives: What changes have there been on the political and economic fronts in Africa, and how have those changes been beneficial to firms like yours?

Gibian: The demonstration effect of countries such like China and India has begun to change the political and economic climate of Africa. Over the last 10 years, many African countries have seen the success of China and India and have used them as models.  This has resulted in fewer restrictions on capital, and economies that are less socialistic and increasingly free-market, private sector driven. 

African leaders have generally recognized that the private sector offers a way to alleviate poverty, and they realize they need to move more in that direction in order to keep from falling further behind.

FINalternatives: What obstacles have you faced as a foreign investor, and what needs to be done to overcome those hurdles?

Gibian: The initial obstacle was finding the investors that would enable us to create a significant fund and maintain a proper investment team. We created a pool of limited partners that was led by the development finance institutions, which allowed us to gather a significant amount of resources and begin to build our track record.  Now we have a loyal and diverse group of investors, which also includes pension funds and endowments.  About half of them have invested in more than one of our funds, and the majority of them have an interest in actually developing Africa and helping to build businesses with western-style governance that can operate into perpetuity. 

FINalternatives: Why did you choose Africa, as opposed to another developing region?

Gibian: Africa shows great long-term value. The economy is expanding and inflation is low.  Sectors such as telecommunications and finance have enjoyed positive reforms, and many African currencies are becoming stronger.

Africa is also a place where the demand for capital far outweighs the supply, which enables us to put our capital to work in very productive ways.  Of 50 investments made by ECP funds, we have achieved 18 complete exits for approximately three times the amount invested.

FINalternatives: There's been a lot of noise made from p.e. funds and hedge funds about Africa as the “new frontier”. What’s attracting the attention?

Gibian: Actually, investors are looking at Africa for all the right reasons.  It is a very large and diverse place, with 53 different countries, and various political environments, opportunities and challenges.  Beyond resources, there is a viable and developing public market that has out-performed the world markets and has grown five times in recent years.

Also, returns are uncorrelated with other global markets, so Africa offers an interesting opportunity for diversification.   

FINalternatives: Are there certain sectors that you currently like, or is the firm opportunistic in all of its investments?

Gibian: We have many investments in telecom, natural resources and financial services, but ECP generally takes a non-sector approach by investing in a wide variety of industries. We are very diversified so we are always looking for opportunities that make sense, regardless of the industry.

The culture of Africa is very entrepreneurial, so we look at how the company is currently being run and how we can improve its operations and corporate governance. 

FINaltenatives: Is there a particular country or industry that is just too unstable to invest in at the moment?

Gibian: There are not necessarily countries that we will not consider investing in.  There are some companies in countries that have higher political risk, like Sudan, Chad, Zimbabwe and Somalia, or those that are not as open to outside investment.  Looking at the fundamentals of businesses, we try to avoid companies with such risk.  However, as conditions in those countries improve, we look forward to doing business there as well. 

FINalternatives: What is your outlook for the region?

Gibian: More and more investors are going to look to Africa.  Since the region is more on the radar than at any other point in the past, we expect there will be more competition but that ECP will continue to lead the space.  Africa has gone from a pre-frontier market to a frontier market and is rapidly growing.  This is all part of a building process, and it won’t be done just by ECP.

by Hung Tran

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