KKR (NYSE:KKR) recently made its first foray into African investment with a stake in Afriflora, an Ethiopian flower producer supplying sweetheart roses to Europe. All in all, though, KKR is somewhat late to the party. The Blackstone Group (NYSE:BX) ventured into Africa 10 years ago, and in 2012, the Carlyle Group (NASDAQ:CG) was one of the first alternative asset managers to open a Sub-Saharan fund.
Who will gain the upper hand on the continent? If you ask me, Blackstone is far and away the leader of the group. Here's why -- and why you should care.
Blackstone started early
Blackstone was one of the first to arrive on the scene in Africa -- a critical differentiator for the fund.
The fund's successful development of a Ugandan energy project -- which had gone basically nowhere in nearly a decade prior to the firm's arrival -- is no small feat. The continent is not an easy place for outsiders, more so because of the immense regional differences between nations. Expertise and relationships take time to develop, and Blackstone is far ahead of the others in terms of time spent in the region.
Where did this all begin? Blackstone and its competitors are notable beneficiaries of the post-crisis era. Because institutional investors started favoring the top crisis-era funds at the expense of their competitors, fewer managers are now attracting more capital. This means that keeping returns strong and finding places to deploy extra capital are top priorities for large private equity shops, which are increasingly diversifying away from their classic buyout activities.
As Hamilton "Tony" James, president of Blackstone, put it, "You're forced to cast your nets a bit wider and find things where the space isn't so crowded." Blackstone has put its money where its mouth is. Ten years ago, buyouts represented 50% of the firm's assets; now, they're less than 25%.
Of course, their competitors have made similar moves, but the added expertise of a decade of business in Africa will go a long way toward smoothing future projects.
All three of these funds have experience in energy, which is a major area of growth in Africa. As Sean Klimczak, a senior Managing Director at Blackstone, put it last year, Africa's grid is the size of Spain but serves 20 times more people.
The need for energy can be felt across the continent. Even in well-developed South Africa power outages are not uncommon (we just had one for several hours last week).
Thus, the potential for development is enormous, and Blackstone again has an experience advantage.
Only Blackstone has dealt with pirates, countless development organizations involved in infrastructure projects in the region, local ethnic tensions, and of course the complex relationships between local governments and leaders. The fund is working on replicating the project in other countries, including Tanzania and Rwanda -- and the Philippines and India.
By comparison, KKR's experience establishing its own oil company and buying mineral rights, or Carlyle's venture (that produces power from construction debris) -- while impressive in their own right -- seem somewhat underwhelming.
Don't underestimate Africa
You might point out that, even though private equity investment increased 43% in the region in 2013, there was still only $1.6 billion in inflows. These are the early days, yes, but don't underestimate its growth potential.
The growth rates of Sub-Saharan African economies are the envy of the world. Ethiopia's annual growth rate has topped 10% on average in the past eight years, while Rwanda's topped 8% in the past decade. These rates are not uncommon.
Energy is a major infrastructure need, but "growth" is much more than extraction industries. Today, two-thirds of economic growth in Sub-Saharan Africa is being driven by consumers. This means that the scope of potential investment opportunities targeting the rising middle class is only expanding.
The markets are smaller, more fragmented, and subject to many complications you wouldn't find in the U.S. or Europe (Blackstone's Uganda story is a great example). But the potential payoffs are worth the legwork. While I think Blackstone has a major competitive advantage in the region, I can't wait to see what all these funds do in the years to come.
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