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Investment Opportunities in West Africa: An Interview with Cheikh-Souleymane Diallo, Senior Manager at AfricInvest

23 March 2017
Giada Vercelli

West Africa is increasingly identified as an attractive destination for investors across all economic sectors. Its growing population of over 300 million and abundant resources continue to drive steady economic growth. Nevertheless, geopolitical instability may affect investor perception. Cheikh-Souleymane Diallo, Senior Manager at AfricInvest, discusses investment opportunities and challenges in the region with Giada Vercelli, ahead of the Euromoney Côte d’Ivoire Conference 2017.
Giada Vercelli: Let’s start with your outlook for the growth in the region. West Africa is a growth region. Which sectors have you found particularly interesting?

Cheikh-Souleymane Diallo: As we are a generalist fund, we can invest in many sectors. We believe that the hospitality sector has strong potential in Côte d’Ivoire. We recently finalised an investment in Azalaï, an African regional hotel group, which owns a property in Abidjan. We also have a strong appetite for fast moving consumer goods (FMCG) because of the population growth and rising middle class, especially in the city of Abidjan. We particularly like FMCG businesses focused on either transformation of goods, or retail trade. The financial sector also has great potential. Banking penetration is still low in Côte d’Ivoire, at around 23%, compared with much higher rates in developed countries across Europe. Moreover, mobile penetration exceeds 100% in this city and we are seeing new forms of money payment through mobile. Apart from that, new insurance legislation should strengthen the net worth of companies in that sector.

Giada Vercelli: Let’s look at the West African stock exchange, with 43 listed companies. 30% of these are banks and insurance firms, but the largest market capitalization is in the telecoms sector. What is driving the appetite for banking and insurance in the region? Is it related to the Fintech revolution?
Cheikh-Souleymane Diallo: While it is true that banking sector companies have the highest valuations on the stock market (sometimes more than 3 times book value), this is more a result of history, rather than the promise of Fintech.

Last year, we celebrated the 20th anniversary of our stock exchange. Over the last two decades, the market has gone through a number of changes, but there is still a long way to go to reach a liquid and diverse marketplace. At the beginning, the listing process was created to facilitate the privatisation of government stakes in some companies. Soon after, multinational affiliates got involved, listing the minimum requirement. Over the last decade, regional African companies have become more active on the exchange, seeing it as a source of capital for regional expansion. Most of the companies at the forefront of the regional expansion trend are active in the banking sector, including names such as Ecobank Group or Bank of Africa. Over the past two years, four out of six IPOs were banking sector-related: Bank of Africa Senegal (December 2014), Bank of Africa Mali (December 2015), SIB –Attijariwafa affiliate in Cote d’Ivoire (July 2016) and Coris Bank (Oct 2016). Moreover, we are expecting the introduction of NSIA Banque this year.

So in a sense, I believe that the stock market reflects the economic structure of our region. However, when we look at the investor make-up, around 30% are international institutions and 20% are small investors. The former is looking for yield and return (above what their market can offer and BRVM is has performed quite well), while the latter is trying to make the most of their savings and has begun to register interest in the stock market. Consequently, we do not see the rise of Fintech as a key driver of our regional stock market, but I believe it will occur in the coming years.

Giada Vercelli: Let’s consider the role of private equity in the region. Is private equity a driving force for companies to eventually gain access to the capital markets or a competitor impairing the development of capital markets in the region?

Cheikh-Souleymane Diallo: Private equity is a powerful instrument that can assist companies in gaining access to capital markets. Our role is to support our partners in their strategic decisions, including fund raising and institutionalising. During our investment period which generally ranges from three to five years, we work hard to increase sales, but we are also looking to add value in many other areas. We upgrade governance, IT systems and overall organisation of the company. We also work very closely with management teams to provide quality and transparency in the reporting and to familiarise the company with investor requirements. This is a key point to gain access to capital market and to prepare for a listing.

Sometimes inviting private equity participation is the last step for a company before listing, especially as PE partners can provide important assistance in negotiating debt with local banks and DFIs.

At AfricInvest, we have invested in 140 companies and already realized 77 exits, of which 11 have been done through IPO.

Giada Vercelli: In other countries, such as those in East Africa, the legal framework is more developed for private equity. Can this framework be replicated? What should the West African countries do in order to improve PE’s participation?

Cheikh-Souleymane Diallo: Generally, the English speaking countries in Africa such as Kenya or Nigeria have been in touch with the PE industry for much longer than French-speaking ones. Thus, some common PE products such as stock options, preferred shares, redeemable shares or even a vanilla product such as obligation already exist and are often used by PE players. We have not reached this stage of development in West African countries yet. In Côte d’Ivoire for example, if you want to provide a loan to a company, you must have a banking licence. One of the factors that can explain this difference is the size of the economies. Let’s take the example of Nigeria, whose GDP is around USD485m. It is no surprise that in a country of such economic size, there are more eligible prospects for PE investment compared to the rest of West Africa. Accordingly, Nigeria currently accounts for about 45% of PE transactions in West Africa (ECOWAS). In Kenya, it is not only the size of the economy, but the fact that financial sector more broadly (banks, insurance companies) has become developed and attracted international investment, and with this has come the development of the private equity industry.

Economics are evolving in West Africa and we are well on our way. Political stability, infrastructure development and population growth will help to strengthen private sector and drive more PE transactions.

Giada Vercelli: Are the difficulties mostly related to the provenance of the companies listed or rather to their size?

Cheikh-Souleymane Diallo: The main difficulty for listing a company is not related to its size or its provenance, it is market capitalisation. International investors, who are market makers, are really only interested in stocks with a minimum of market capitalisation of USD100m, which usually implies a certain degree of maturity of corporate structure and size. Nonetheless, if we look at a smaller sized companies, the private sector in Côte d’Ivoire offers many companies that could be eligible for the stock-market, if it weren’t for the need to have a larger market cap. The main difficulties are related to low market awareness and visibility.

In addition, some of the stock market’s listing requirements are not easy (and can be costly) for SMEs to implement. It is a long-term process that requires time, organisation and money. Our regional stock market is trying to facilitate listing of SMEs by creating a compartment dedicated to small companies. As I said before, there is a growing number of small investors who are investing in the stock market and who are not necessarily attracted by large volumes. If the requirements for SMEs were adjusted somewhat, I am deeply convinced those small investors will strengthen their position in the stock market.

Giada Vercelli: Due diligence is costly. Not all investors have the capabilities and the talents to do their own. How can you ensure the quality of your SMEs investment?

Cheikh-Souleymane Diallo: At AfricInvest we are a team of more than 60 professionals with more than 150 years of experience in PE, with many different professional backgrounds. We have among us engineers, bankers, lawyers and auditors. The most important point is that we have a strong local presence to understand market risks and have developed expertise in many sectors throughout our wide portfolio. We always capitalise on our internal resources to conduct due diligence, but from time to time rely on specialised consultants to help us evaluate our potential investments. You are right that due diligence is costly, but far less costly than taking on undue risks.

Giada Vercelli: If the local capital markets are not deep enough, what can be done to reach out to alternative solutions? Can emerging financial sectors such as green bonds or Islamic finance that respond to international standards offer a viable solution?

Cheikh-Souleymane Diallo: International investors need to asses risk of all kinds, and the main difficulty is the distance between investors and SMEs. As you mention, there are a variety of solutions that are evolving, including crowdfunding. Some companies have succeeded in raising money on the local market from a large number of people who each contribute a relatively small amount. However, to gain attention of small investors you need to be well-established and I think this sort of funding has a future in our economy which already has some experience in small-scale financing. It is important, however, that the government regulates these opportunities to preserve interests of small investors.

Cheikh-Souleymane will be speaking at our Euromoney Côte d’Ivoire Conference in Abidjan next week, on Tueday 28th March. For more information about the conference and to download the agenda, please visit the event webpage here.

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