2021 Annual - (released February 2022)
SA's quarterly Private Equity & Venture Capital magazine
Investing with the end in mind
by Lize Lubbe
Value addition strategies to maximise return on capital and impact.
Private equity in Africa is about much more than ‘buying low and selling high’. Investing in businesses with strong strategic fundamentals (market, company, management, financials) is just the starting point. Value addition over the investment horizon has become a key focus for private equity fund managers globally, and particularly on the continent. The uncertainty that all companies lived through over the past two years has demonstrated how navigating through rough seas to grow a business can be both extremely challenging and exceptionally rewarding. Value creation as part of portfolio management at Phatisa has been characterised by the following themes, which we have dialled up over the past two years.
1. Plotting the journey to your destination
Determining the strategic goal, as well as the growth strategy to reach this goal, is critical. Of similar importance is alignment around this growth strategy between all shareholders and the management team, even before the investment is made, as conflicts can be very difficult to resolve later. This strategic plan should focus on building the business for exit, including growth strategies, tailoring the business for potential buyers at exit, and reducing downside risks identified during due diligence. It is vital to have a 100-day plan in place, laying out the first immediate actions required post investment, to kickstart the growth. Bringing in industry experts as advisers or as non-executive directors to support the management team can be very helpful at this stage. Reviewing and, if needed, refreshing the strategy on an annual basis ensures that the business is still on the right track and provides the opportunity to course correct along the way, especially as the macro-economic and industry contexts evolve.
2. Having the right captain and crew on board
Building the right senior team, who can scale themselves as they grow the business, is probably the most important success factor in private equity. A well-rounded team with complementary skills and diversity is equally important. We have seen that the appointment of a strong CFO as part of this team is critical to the growth journey. It is also vital to think about succession planning early in the investment horizon, and then building a management team who can run the business post exit. Incentivising the management team as part of the equity structure from the start is also critical to ensure alignment between management and investors.
3. Capturing the wind in your sails
Identifying and capitalising on macro-economic and industry tailwinds supports business growth in the long term. It is important to create the capability to filter through all the data and noise, and then distil this down to key insights that help to shape a view of future trends and current realities that will prevail. Industry experts within the private equity team or external experts appointed as advisers or as non-executive directors can support the management team when incorporating these in their growth strategy.
4. Weathering the storms
In our experience, resilience and being nimble are critical success factors for private equity in Africa because of the significant impact that external political, macro-economic or industry-specific events can have on a business. Our approach at Phatisa is to get all hands on deck to support our management teams in navigating the storm, by drawing on our own teams’ experience. In these cases, a diversity of skills within the private equity team, for example, individuals with operational and/or turnaround experience, can be very helpful.
5. Running a tight ship
We have seen the positive impact that good corporate governance, systems and processes can have on a business’ growth – as well as exit value. It is critical to align on this as shareholders and with the management team before the investment is made. Then kick the investment off with an action plan around scalable systems and processes, typically led by the COO or CFO – all without taking anything away from the entrepreneurial nature of the business. This includes risk management, ERP and accounting systems, policies and processes, including an environmental and social management system. Risks identified during the due diligence process, as well as possible risks that can arise at exit, should be mitigated proactively. Board composition in line with best practice is also vital. This includes appointing non-executive directors and ensuring diversity and balance of skills. All these elements are important lifeboats during difficult times, and assist with a smooth exit process in time.
6. Flying the impact flag
At Phatisa, we believe in the value created by building social and environmental initiatives into our growth strategy. This is not just about ESG, which typically focuses on downside protection, but includes impact projects that create value. For example, research has proven that improving gender diversity within management and leadership teams leads to higher return on investment. As a result, we have committed to improving gender diversity by implementing best practice gender policies in line with the 2X Challenge in all our investments. Social and environmental considerations have become increasingly important for all stakeholders, especially in the private equity industry, and can no longer be ignored.
Investing in private equity in Africa is not plain sailing. At Phatisa, we believe that a continued focus on these themes – starting before investment, and throughout the investment horizon until exit – supported by the right team, will maximise return on capital and impact.
Lubbe is a Principal at Phatisa.