The current muted growth environment in Africa presents a unique opportunity for private equity (PE) managers to demonstrate their expertise and generate value-add without the momentum of a commodity upswing, or a booming Chinese, investment-driven growth trend.
Tough economic times call for cost-cutting and, in the investment sector, bigger cuts are usually required. Africa’s PE managers are proving how resourceful they truly are by doing just that and, in some instances, generating growth above market rate.
Here are seven ways PE managers on the continent have handled the recent tough times, lending lessons for times to come:
When profitability is high and expansion is rapid, non-core divisions of a business can be left unnoticed. These divisions could be running at a loss due to a lack of resources, or it could be considered an opportunity for new growth in the future.
However, managers have taken to restructuring these non-core operations, even selling some, with the intention of concentrating their resources on their primary business functions. Manufacturing plants can choose to close down non-performing factories in order to reduce overheads while volume demand is low. ‘Trimming the fat’, and if possible, generating some cash in the process, is a great way to give core business units a much-needed boost.
Balancing pricing is a difficult business; too low and your margins are eaten away; too high and you lose market share to your competitors. A good manager knows when it would be more worthwhile to increase prices, even if it means a slight decline in volumes. Instead of only focusing on the output, PE managers also scrutinise the market to source better-priced inputs that increase margins without affecting their affordability. More creative strategies include the bundling of high and low margin products to improve overall profitability. And, of course, if you can push your higher-margin products over the lower-margin products, then you are winning. In conjunction with a change in pricing strategy, an increase in marketing spend is highly recommended to maintain contact with the public through these changes.
The external macroeconomic environment is outside of your control, as is consumer demand, to a large extent. If poor macroeconomic conditions have temporarily depleted your order book or project pipeline, look rather to the things you can control. Take the time while things are slow to assess the efficiency of your internal systems. One of the most common ways to do this is through capex in technology and training. We have recently seen a number of PE companies investing in automating certain administrative functions and adopting new enterprise resource planning systems, improving overall operating efficiencies and thereby reducing overheads. While these areas of corporate management are often not a priority when business is booming and people are busy, taking the time to put better systems in place will amplify the company’s recovery as the market turns upward.
Having a big debt can damage a company beyond recovery when the revenue line dips and margins squeeze. While PE managers are highly resourceful when it comes to finding lending partners, they can equally assist in the restructuring of such debt if the tables turn.
In an environment where customer demand is uncertain and revenues and margins are declining, the risk involved with expansion may be too high for a company to bear. In a high growth environment, retail businesses could open 10 new stores annually and have no trouble surviving the start-up phase of each store, where earnings may be negative for some time. However, when the customer is known to be under strain, it may be best to put expansion plans on hold and rather deploy cash through refurbishment of existing premises. The same applies to all industries considering expansion, whether it be a new local office, restaurant, hotel, or even a manufacturing plant.
Consolidate while it’s cheap
A low growth environment, similar to the consolidation phase of an industry cycle, makes mergers and acquisitions an attractive solution to generating growth. If there is the opportunity to merge with or acquire a competitor, supplier or distributor, the benefits of the horizontal or vertical integration will pay off substantially when there is a recovery in market conditions. What’s more is that, during the decline in a growth cycle, pricing will be at its most favourable for the buyer.
Pick the pockets
Healthcare in North Africa; basic food and beverage in East Africa and West Africa; payment processors in Southern Africa. Research has shown how good PE managers are at identifying high growth industries within a predominantly slow macroeconomic environment. These ‘pockets of growth’ show resilience and deliver exceptional top line gains that contradict the negative sentiment on the continent.
Crucial in the above tactics is that the PE manager holds a controlling stake in its investments. This helps the manager to action changes in strategy quickly, as company management will likely hold a more tentative stance on operational shifts.
Junior Associate, RisCura
*This article originally appeared in FAnews on 21 June 2017.
For media enquiries, please contact Nabelah Fredericks via email or on +27 21 673 6999.