Q&A private


appear to go hand-in-hand with frontier markets. But in recent months, Africa’s nascent private


equity’s next challenge Y


ou could be forgiven for thinking Africa and private equity an odd pair. Leveraged buy- outs, price tension and dual-track exits don’t


equity industry has attracted greater interest – spurred along by a struggling European market. It’s a different form of private equity, though. There’s lim- ited access to debt capital, often soaring purchasing price risk, and corporate social responsibility (CSR) considerations that go beyond even the best environ- ment, social and governance (ESG) policies. IFLR spoke with Zain Latif, founder of TLG


Capital, an investment firm focused on sub-Saharan Africa, about the dos and don’ts for private equity firm’s looking towards frontiers.


IFLR: Which of TLG’s target countries and sectors do you see becoming more attrac- tive for PE investments? Latif: One place with plenty of value and opportuni- ties is Uganda. The east African countries tend to be quite exciting, of course Kenya is fairly developed and has always attracted capital. But the countries around it – Uganda, Tanzania, and even Rwanda, even though obviously being much smaller – are places of interest, as that’s the natural growth story. We look at Uganda in particular because the


country has identified oil coming into its economy over the next few yeas. As that comes, it could change the landscape. Even though we don’t focus on oil and gas, we are quite interested in the services supporting that sector.


IFLR: Previously you’ve noted that insurance is a sector to watch – why is this? Latif: Insurance is something that I think can only grow in the region. In Africa and other emerging markets, it tends to be an instrument that people don’t necessarily trust. But this changes as the mar- kets become more developed. For example, insurance per capita in Nigeria is $5 whereas in sub-Saharan Africa its about $150. When you consider that South Africa is at $1,000 per capita, you can see the scope for growth. There is an incredible market there, but right now it’s too small to be scalable. For it to really take off, the industry needs better balance sheets, bet- ter funding, and better capitalisation


IFLR: Frontier market investments are most frequently associated with infrastructure or other projects. Do TLG’s target markets have the legal and business frameworks to support private equity investments? Latif: Generally no, and firms will always struggle if they don’t recognise the local landscape in which they work. In my view that is always a big issue. Private


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equity is a big word and needs to be adapted to the area of focus. In the west it’s very much leverage and debt finance based with a healthy exit market. In Africa you don’t have leverage, access to capital is quite difficult on the debt side, and the capital mar- kets are very nascent as best. Also, inflation in some of these counties means local debt rates can be as high as 30%. You can’t build a business if you are borrow- ing money at that level. Private equity isn’t seen as a financing opportuni-


ty, and you need to structure them a little more cre- atively than handing over an equity cheque.


IFLR: For a fund looking to build a business in a frontier market, what are the headline issues to consider when structuring the investment? Latif: You need to be very careful about exchange


rate risk, currency risk, and the legal enforceability of these assets. What we like is regular cash flow, so structures like convertible instruments and prefer- ence shares for example, where cash can be drawn out of the business on an annual basis.


IFLR: What about sales processes in frontier markets – are auctions, bilateral negotia- tions, or other methods more common? Latif: Obviously targets of a certain size tend to have an auction process, but for the others we focus very much on relationship-based agreements. We need to know the person we are working with, and that they are the type of person we want to work with, and through those mechanisms we eventually decide to invest.


IFLR: Are the exit possibilities different, or more limited than in a developed market? Latif: That’s always a difference. Initial public offer- ings (IPOs) for example aren’t a very realistic option. Which is why I feel very strongly that unless you grow to a certain size where you can be acquired by a bigger firm, it’s important to put money into instru- ments that let you cash back. This gives you a little more flexibility with regards to exit. If you are earn- ing interest of say 12% on your instrument every year, your return is decent enough for you to keep it going.


IFLR: Private equity’s efforts regarding CSR, ESG and even impact investing are becom- ing more visible. Do these considerations take on a whole new meaning when invest- ing in a developing economy? Latif: It is important simply because investors look for it and give it a lot of credit, and it’s something to be very careful about in Africa. It is particularly important for us because we are very healthcare


About the author Zain Latif, TLG Capital Zain Latif is the principal of TLG Capital, a firm that focuses on frontier markets. Latif was an executive director at Goldman


Sachs in the new markets division focusing on Sub-Saharan Africa across all products. He joined Goldman Sachs from Merrill Lynch where he was involved in originating and executing a number of groundbreaking emerging market transactions in Africa. Prior to that, Latif spear-headed the special


situations African effort at HSBC which culminated in the inaugural debt/equity hybrid structure for a leading Nigerian financial institution that was widely reported. He has a Masters degree in Finance achieved


at the age of 19 from Cass Business School, City University in London.


focused. It’s such a sensitive area and many of the drugs and treatments you are providing are needed by, but not affordable to many. You need frameworks in place to take care of that.


We have clinics that offer subsidised drugs and treat- ments. Community-based programmes are needed to show the benefit that comes with the commercial objective. Otherwise things can get a little hot around the collar if you are seen to be making excessive returns without benefitting the region.


IFLR: What are the most common miscon- ceptions about investing in Africa? Latif: It’s ironic that people think it’s the land of opportunity. It’s true that there are a lot of growth possibilities and interesting opportunities. But you have to be careful about how to approach them. People sometimes get very excited about the potential that is there, but to structure investments to make them work, be profitable, not be hit by inflation, and position yourself to actually get money out of the country are important considerations that come with the interesting opportunities. And these aren’t always things that people take into account when making investments.


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