When it comes to deal sourcing, Africa is no different from other regions in the world – investment practitioners on the continent encounter numerous friction points when sourcing investable opportunities. The reasons for this are both general and specific to Africa. We have listed five challenges the African investment community faces below, and we invite thoughts from industry practitioners.
Private equity firms in Africa often demand proprietary deals to gain a competitive edge. This sounds ideal at first glance, but when you realise that most intermediaries are only able to source deals from their confined geographic and social networks, then it’s little wonder that investors tend to see the same handful of deals. Traditional deal origination tends to be limited by geography and the professional networks of the investment professionals and their firms.
Visibility and Knowledge of Relevant Deal Flow
More often than not, Africa-focused intermediaries position themselves as generalists, with the aim of attracting more client transactions. In our view, this strategy deters potential clients – both buy-side and sell-side – from identifying and connecting to the right intermediary with the requisite capabilities and network to successfully execute a transaction. This catch-all strategy is also a key contributor to the time-wasterphenomenon, as the inability to execute deals due to limited sector knowledge tends to lead to delays and a lot of time wasted.
Another challenge facing African dealmakers is time wasters. The phrase is commonly used to refer to clients, brokers and investors who often act without authority or knowledge, and therefore fail to deliver. We believe that most of this time wasted comes from not connecting the right deal to the right investor. Time is also wasted when middlemen are involved unnecessarily, particularly those who promise introductions to that one investor contact you do not have access to, in a deal.
While data on Africa’s macroeconomic performance has improved recently, there is still a large gap in reliable data relating to private companies. Without solid data, it is incredibly tough to complete valuations and peer comparison. This is why one tends to find many African companies being compared to international peers for a valuation, therefore leading to mispricing transactions and missing the nuances of the local market opportunities.
From conversations with practitioners in Africa, we realised that a significant proportion of the investment community relies solely on conventional web applications such as Microsoft Excel, Outlook, and Legacy CRM for financial modelling, deal tracking, and internal and external communication. While these applications are functional, there are increasingly smart and networked platforms, which now provide the industry with more efficient and effective tools for deal origination and processing.
The combination of the above challenges makes the investment process in Africa labour intensive and extremely expensive. The firms who are able to remap their value curves the quickest are likely to be the winners in the coming digital age of Africa’s investment ecosystem.
At Orbitt, we think it is important to develop new ways of connecting Africa’s investors, intermediaries, and companies, coupled with market-specific tools and resources, that provide an excellent platform for successful deal-making across the continent.