Deal-making resumes for Africa's Adenia, but PE firm eyes return to normal

The second in a series of articles looking at how emerging market private equity firms fared through the pandemic.

When the pandemic hit, pan-African buyout house Adenia Partners Ltd. and its portfolio companies weathered macro trends familiar to the majority of managers regardless of geography — companies operating within some sectors took a hit, while others benefitted as restrictions and lockdowns were imposed.

For example, Adenia's portfolio company Quick Mart Ltd., a Kenyan supermarket chain, grew sales 38% in euro terms in 2020 compared to 2019 while the sector was flat during the period, said Adenia's managing partner, Alexis Caude, in an interview. However, its pan-African earth moving equipment distribution business Kanu Equipment Ltd. was immediately impacted when mines were shut down for two months.

Government subsidies and financial stimulus across Africa have been limited during the pandemic. Instead, governments aimed to maintain employment levels, and companies were prohibited from letting staff go or putting them on furlough, Caude said. "I think it's definitely a different way to handle the crisis than in Europe, basically, where lots of public money has been [pumped] in the system. It's not the case in Africa."

Since March 2020, there have been roughly 3.6 million reported cases of COVID-19 to June 14 across the African continent with just under 90,000 deaths recorded, according to World Health Organization data as of June 15. The data suggests the official number of cases is roughly 0.26% of the 1.37 billion population of Africa.

But Caude is cautious on the official numbers due to reporting deficiencies. He gives the example of Tanzania, which has not reported any coronavirus cases to the World Health Organization since May of 2020.

The incomplete case reporting turned into challenges for some portfolio companies, such as bricks-and-mortar supermarket chain Quick Mart, which has had millions of customers through its doors. Online purchasing is limited due to cost issues and last-mile logistics, he added. "Formal addresses are usually still not precise enough to allow widespread use of online delivery."

"We could put in place temperature monitoring, making sure that the employees were wearing masks, testing them regularly. All those things, we were able to implement them very quickly," Caude said, adding that some LPs contributed money for COVID-19 testing and prevention.

Despite these issues, by July of 2020, travel resumed and the recovery has been "quite strong" across Africa, in part because of its young population, Caude said. Some countries still have restrictions in place, like Nairobi, where there is a curfew.

Adenia's portfolio companies have recovered and their valuations are above pre-pandemic levels, Caude said. The general sentiment today across Africa "is that the crisis is more or less over," he added.

Deals and exits

During initial lockdowns last year, the firm reversed its due diligence process for new deals, opting instead to agree "more or less" on price and deal structure virtually before meeting management and talking to clients, suppliers, and in some instances a target company's competitors. It also gave the firm time to see how those businesses were recovering, he said, adding "time is usually the best due diligence."

Adenia is closing on three transactions following its recent acquisition of Africa Biosystems Ltd, a distributor of life sciences and clinical diagnostics equipment in East Africa, earlier this month. The company saw a significant increase in sales due to the ordering of COVID-19 tests and equipment, according to Adenia.

The other three expected deals are an electrical products and renewable energy solutions provider in South Africa, a corporate catering company in Morocco and West Africa, and a telecom tower business in Central Africa.

Although sector agnostic, Adenia typically takes a majority stake and prefers businesses where the prices of goods and services are driven by the market and have strong pricing power. "We won't go in an airport concession or those kind of businesses that are heavily regulated and subject to potential corruption practices," Caude said. "[Across] the continent, you can have some currency issues, you can have political stability issues. So you need to have businesses that are sufficiently strong to resist these headwinds when you encounter them."

In terms of exits, in 2020 Adenia sold Mauritius paint and coating manufacturer Mauvilac Industries Ltd. to AkzoNobel. In April this year, it exited Côte d’Ivoire power security solutions provider ADEMAT SA to Africa and Middle East-focused private equity firm SPE Capital Partners.

Further in 2021, the firm expects two exits — a pharmaceutical distributor and an outdoor advertising space company — from its €96 million Adenia Capital III.

The firm, whose first fund began by investing in Madagascar and Mauritius, added locations in Accra, Ghana; Abidjan, Côte d'Ivoire; and Nairobi, Kenya — and recently opened offices in Morocco and South Africa. Its exclusive focus on control investments requires an on-the-ground presence to monitor portfolio companies, Caude said.

Asked whether the pandemic resulted in permanent changes for Adenia, Caude said employees at the firm were already comfortable working virtually before the pandemic, given the widely dispersed country offices.

"The only thing that I missed is getting more on the ground and meeting more people, so the thing that I will try to do is resume my travel activity as much as I can in 2021," Caude said.

A spring back to the old in-person meetings is crucial for Adenia, because "that's the way control [stake investing] works in our environment," he added.

"Private equity in Africa is less structured than in Europe or the U.S. You don't have [an investment memorandum] that you receive every day that you analyze. You need to talk to people, you need to be on the ground, so I think we have the right approach, and we need to be back to the 2019 world where we can be on the ground and travel and do our job the best we can."

Fundraising virtual and in-person

The firm is set to hit the fundraising trail for its fifth buyout fund.

Team members will try to travel while fundraising due to the importance of meeting people face to face, Caude said, but at the same time "people who know us, I think we can do that virtually."

There was a range of LPs in Adenia Capital IV, a €230 million vehicle that closed in 2018. They included Axian Venture Investments Ltd, CDC Group PLC and the European Investment Bank Group as well as family offices and high net worth investors mainly from Africa and Europe.

Caude believes his firm can demonstrate a track record through its transaction activity across Africa through four funds, which will in turn support Adenia's fundraising.

"Convincing new people virtually will obviously be more difficult. And probably, we will start our first close with the existing base of LPs, where we have stronger relationships, and they know us well."

Read the first of our series, in which Chris Freund, founding partner of Vietnam's Mekong Capital characterized pandemic times as business as usual in the country, here.