Fusion stays limber in shifting Africa

Private equity demands flexibility in dealing with changes to economies, credit markets and deal opportunities. In Sub-Saharan Africa, those demands are amplified.

Kenya-based Fusion Capital, the private equity affiliate of Fusion Investments, has adopted an unusual approach since its launch in 2006, avoiding a rigidly defined investment thesis as it invests in underpenetrated geographies like Kenya, Rwanda and Uganda. And if recent deal activity provides any indication – the firm has called down nearly a third of its $150 million fund since launching last year – the firm is not at a loss for opportunity.

“These are not mature markets; they are changing very rapidly. This means that, for a typical five-year PE investment period, the landscape you are investing [in] may be markedly different at the end of the fund from what it looked like at the beginning,” chairman Phil Goodwin said.

“You may find you are doing growth capital type deals, often with large debt components and yield-based returns, possibly at low-ish average size; by the end, you may have a mix including MBOs, you may be taking more pure equity positions and you may have found people to leverage your deals more cheaply.”

Modest targets

Limited partners in the firm’s 2011 Fusion African Access fund granted a broad mandate that allows the general partner to invest in senior debt, mezzanine and equity in addition to other instruments. Through Fusion African Access, the firm invests in small to medium sized enterprises in East Africa, with an emphasis on transactions at the small end of the market. The firm operates well below mainstream private equity’s radar; typically investing between $250,000 and $5 million per deal.

The firm hasn’t limited its efforts to the African Access fund. In April, Fusion joined with Kenya’s Ministry of Industrialisation to launch a credit facility that will provide funding to small or medium sized enterprises.

“I think it’s difficult to find senior lenders. Which is why we think there’s a good opportunity for people like us who can provide mezzanine,” Goodwin said.

The focus on the lower end of the market has its merits. Africa’s private equity market is evolving in a world that has been scarred by the financial crisis, Goodwin says. With that in mind, the industry is unlikely to develop on the backs of leveraged buyouts, as it did in the US and Europe over the past thirty years. In the Sub-Sahara, those multi-million or billion dollar equity checks don’t exist in volumes that would attract the interest of many larger funds.
And Goodwin speaks from experience. Prior to launching Fusion with small market specialist Luke Kinoti in 2006, he held management positions at 3i, Montagu and HSBC.

“The danger of a highly focused approach is, when you find a company that meets those criteria, you have to do that deal,” Goodwin said, adding that by focusing on the smaller end of the market, the firm is gaining exposure to a greater number of investment opportunities. “We’ve actually looked at our rivals fundraising documents, and looked at their criteria, and found that there are only 11 companies in Kenya that fit that criteria … There just isn’t that type of opportunity.”

That lack of buyout opportunities may be one reason the region remains a relatively untapped market. The Sub-Sahara has lagged behind its counterparts in the developing BRICs when it comes to private equity penetration. In 2011, private equity investment totaled only 0.09 percent of the region’s GDP, according to Emerging Markets Private Equity Association Data. Even so, that is an improvement of 2010, when that total was 0.06.

“It’s the last frontier,” Goodwin said. “It can be quite difficult for someone like myself, who’s been doing it for 25 years, who has a set idea of how private equity works.”