For private equity firms in Africa, achieving successful exits is now more important than ever. Why now? Fundraising for PE firms in Africa and across numerous emerging markets has been particularly tough over the last three to five years. While the investment and exit volumes and values for PE rose to all-time highs globally, this was not necessarily the case in Africa.
PE firms have not been under as much pressure to put new capital to work and, in other instances, may not have had capital available for new investments. What capital was available may have been set aside to further invest into existing portfolio companies, whether to make bolt-on investments or to weather the ‘storm’ caused by the impact of COVID-19. PE firms in Africa were and have rightly been more focused on creating value in their existing portfolio companies and getting them ready for an exit.
The economic environment became tougher towards the end of Q1 2022 when compared with Q1 2021, due to the Ukraine-Russia war and the rise in interest rates in developed markets, to levels not seen for many years or even decades. Given this uncertainty, the few possible IPOs being considered have been placed on ‘pause’, waiting for an IPO window to open. The level of interest of trade buyers from developed markets has also reduced, with international PE firms more cautious on the deployment of capital. As noted earlier, local PE buyers have limited ‘dry powder’. For these reasons, the buyer universe is, in our view, more challenging than in 2021, and preparation for an exit is thus more critical than it has probably ever been.
PE firms in Africa need to show more successful exits to demonstrate their abilities in value creation, and show a track record of healthy returns to raise capital for new funds.
What exactly is ‘‘Exit Readiness’’ and how can this be best done in these ever-changing times?
The good news is the ‘Exit Readiness’ process has not changed. Rather, it is the environment around it that has changed. Because the environment is so different, PE firms need to re-examine the full range of assumptions around the portfolio companies that they are looking to prepare for exit. We view ‘Exit Readiness’ through five main topics.
Who are the most likely buyers?
Ideally, one should identify five most likely buyers for the portfolio company. Those thought to be the most likely buyers pre-COVID could quite easily be different post-COVID. PE firms need to rerun their buyer screenings to identify those with both the appetite and firepower to pursue a deal. PE firms should create a bespoke series of equity stories that make sense for each buyer, or buyer type, and approach the exit process with increased flexibility and creativity.
What is the equity story?
The current market uncertainties have resulted in an increased dependency on data-driven decision making. PE firms should consider re-writing the equity stories within the current environment, and that expected in the near to medium term. Sellers should consider preparing scenario planning to reassure buyers that they’ve thought through all the potential scenarios and summarised this into a well-developed forecast and plan that provides a clear picture of what is expected to happen, albeit with the flexibility to adjust as required.
Information needs and buyer questions
Identify all the information requirements of all potential ideal buyers. What are the likely key questions that these buyers would have? Information and data required for an exit process can be time consuming to prepare and collect. Periodically refreshing documents will reduce the ‘heavy lift’ required once an exit process is launched. Having a ‘permanent’ virtual data room (VDR) will enable the company to run ad-hoc and confidential exit enquiries. Leading VDR providers have also developed best-in-class lists of information required per sector, transaction type, et cetera, which could be valuable. Clear and simple tracker tools will ensure visibility of progress and accountability for closing information gaps.
Timetable for preparation
‘Exit Readiness’ will enable the preparation of a detailed exit plan starting from c. 18 months before an actual exit occurs. Importantly, it also reduces the risk of the significant workload required for an exit process negatively impacting the normal day-to-day responsibilities of the management team and distracting them from executing on their operational agenda and strategies. Below is a picture illustrating the performance risk under a normal exit process versus that including an ‘Exit Readiness’ process.
Alignment of stakeholders
‘Exit Readiness’ enables all key stakeholders to become aligned and ready to undertake the exit process. We refer to this alignment as the diamond with four key stakeholders for which alignment is critical. These four stakeholders are the sellers (PE and other shareholders), the management team, advisors and the buyers.
Our annual divestment study shows these aspects of exit preparation make the biggest difference to value:
- Identification and “fixing” of key risk areas. Tactics to deal with open or closing out of value eroding issues.
- An exit strategy to address the equity cases for each of the most likely buyers.
- Evidenced forecasts supported by operational plans and consistent KPIs – at the level of detail required to make them credible to buyers.
- Planning for the right due diligence to support operational, commercial and tax/legal/regulatory aspects of your plans – so you get value for them.
- EY support through ‘Exit Readiness’ helps you make choices, plan and prioritise, to ensure that business as usual continues alongside the exit.
Three final messages to make your ‘Exit Readiness’ a hugely valuable process:
- Prepare for a sale before you need a buyer
- Take a buyer’s point of view
- Prepare, prepare – and prepare some more
Graham Stokoe is an Africa Strategy and Transactions Partner and Africa Private Capital Leader | EY
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication
DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com
