From Goldman to frontier private equity

By Carolyn Cohn

LONDON (BestGrowthStock) – Zain Latif has swapped a career in investment banking for a niche start-up, and $100 million-plus deals in Africa for tiddlers of $3 million.

Once a banker at Goldman Sachs, Latif last year took the plunge to set up a private equity firm which sports a headcount of five.

From an apartment in a smart block in London’s West End, between budget clothing store Primark and chain restaurant Ask, Latif and his team at TLG Capital have invested in three companies in the past half-year in frontier markets — Uganda, Ghana and Cambodia.

Frontier markets are typically regarded as markets where market capitalization, liquidity and market-making are lower, not only than in developed, but also than in the bigger emerging markets.

But what if these countries do not, or barely have, their own stock exchanges or bond markets?

One of few ways to invest in these deep frontiers is through private equity — buying a stake in a local company, helping it to grow, and then achieving an “exit” either through selling it on to a bigger firm, or turning it into a listed company.

Bigger players like Latif’s former employer Goldman tend to overlook these tiny deals.

“An investment bank will do nothing less than $100 million, five to six deals a year if that, and you are restricted to three countries — Nigeria, Kenya, Angola, the commodity plays,” Latif told Reuters.

“We are looking at small and medium-sized businesses at a size of $3-5 million. We will go down to half a million.”

TLG is attracting money from private investors in the Middle East and Europe, and none of the countries in which it has invested so far even make it to the MSCI Frontier Markets index, against which many frontier market funds will be measured.

Its first three investments are in a pharmaceuticals plant in Uganda making anti-retroviral and anti-malarial drugs, a cancer center in Ghana and a Cambodian company running cruises along the Mekong river.

One of TLG’s pipeline projects is in the healthcare sector in Liberia, still recovering from a 1989-2003 civil war.


Last year less than $1.5 billion was invested in private equity projects in sub-Saharan Africa, one of the main regions for deep frontier markets, compared with around $3 billion in each of the previous two years, according to data from the Emerging Markets Private Equity Association.

The figure for sub-Saharan Africa compares with over $22 billion invested in private equity in emerging markets globally last year, and $43 billion in the United States.

But private equity investment in sub-Saharan Africa has risen from $651 million in 2003, while in the United States it has fallen from $59.2 billion in the same year.

Liquidity issues are a particular constraint in frontier private equity markets, where the way to make real money is, after grooming a company, to sell on the stock to what will be a relatively small pool of buyers.

It’s hard to do business, but the flipside is that if your investments pay off the returns are high.

CDC, the development finance arm of the UK government and the biggest investor in private equity funds in Africa, made an average annual return on investments of 16 percent over the past five years.

“If we over the medium term can achieve in the teens, that’s an attractive return and that’s possible,” said Richard Laing, CEO of CDC.

The way to get into these markets is to be on the ground, say Latif and other private equity managers.

TLG is adding two new staff, and all of its future projects will involve employing someone locally.

“We go on the boards, our value-add is providing the strategic review,” said Latif.

Local staff from private equity firms will advise companies on how to do their accounts, how to stick to international standards of corporate governance and transparency, and help make them presentable for sale to multinationals.

Transparency is an issue in countries often considered a byword for bribery and corruption.

Laing at CDC tells a story from a few years back of a Bangladeshi power station manager going to the port to pick up some imports.

“It will probably take two days because we do not pay bribes,” the manager told him. As Laing says, business takes longer if you won’t pay bribes, because you have to wait while your local official enjoys lunch with someone who does.

Of 47 sub-Saharan African countries in Transparency International’s Corruption Perceptions Index 2009, 31 scored less than 3 out of 10, indicating that corruption is seen as rampant.

These countries include Kenya and Uganda, although Ghana shows a slightly better performance.

“Fifty percent of the value of a company in Africa is based on its presentation, financial governance, corporate transparency,” said Latif. “People pay extra for that.”

Aureos Capital, an emerging markets private equity firm with $1.2 billion under management, has nine offices in Africa, including Zambia, Ghana and Senegal.

“Many of these countries do not have good intermediaries, investment bankers, advisers, accountants — it is not available at that level of sophistication,” said Aureos chief executive Sev Vettivetpillai. Aureos’ local staff help fill that gap.


Private equity investors like TLG Capital and Aureos are concentrating on the needs of a growing middle class in frontier markets, with fast-moving consumer goods, real estate and healthcare among sectors in focus.

“Take milk — 10 years ago there would be one product to buy, today people want choices,” Aureos’ Vettivetpillai said.

Even so, individual African markets are too thin to allow small companies much room for expansion, and the aim is to turn local businesses into regional ones.

“Kenya alone may not be attractive,” said Vettivetpillai.

“But if you put Kenya, Tanzania and Uganda together, you have a sizeable market.”

There are no quick bucks in private equity, and that’s even more the case in the delicate maneuvers involved in frontier markets.

Investors are likely to be locked in for 10 years, compared with six or seven years in European private equity, but if they stick around they can make 30 percent on their investments.

“In these markets you have to hold, you have to have the patience, you have to stay with it to achieve those returns,” said Vettivetpillai.

And it won’t always be possible to make those stellar returns or the elusive sale or listing, the exit. Growing the company may have to be enough.

“We are going to try to get individual exits on each asset, the reality is it’s going to be difficult,” said Latif, who is looking for a 10-15 percent annual return on his investment, regardless of whether he succeeds in selling or listing the company.

“If investors get that, they are supremely happy. Where else would you get that cash return in this low interest rate environment?”

Stock Investing

(Editing by Sara Ledwith and Ian Jones)

From Goldman to frontier private equity