Vincent Nderitu
Senior Investment Manager Re & Infrastructure , Fusion Capital

Diana Gichaga looks at exit situations in Frontier Markets like East Africa. This article closes with an outline of Fusion’s approach, which is designed to optimise the opportunity for profitable, well-timed exits.

Mary Mankone
Legal & Compliance Officer, Fusion Investment Management

Diana Gichaga looks at exit situations in Frontier Markets like East Africa. This article closes with an outline of Fusion’s approach, which is designed to optimise the opportunity for profitable, well-timed exits.

Ruth Muli
Operations Manager, Fusion Capital

Diana Gichaga looks at exit situations in Frontier Markets like East Africa. This article closes with an outline of Fusion’s approach, which is designed to optimise the opportunity for profitable, well-timed exits.

Cynthia Kenyanya
Chief Accountant, Fusion Group

Diana Gichaga looks at exit situations in Frontier Markets like East Africa. This article closes with an outline of Fusion’s approach, which is designed to optimise the opportunity for profitable, well-timed exits.

John G Msafari
Fusion Advisory Board Member , Fusion Group

Diana Gichaga looks at exit situations in Frontier Markets like East Africa. This article closes with an outline of Fusion’s approach, which is designed to optimise the opportunity for profitable, well-timed exits.

Apparently, those three innocuous words are the bottom line, when it comes to judging whether or not you are an investment manager worth backing. At least, this is a question which we are almost always asked by those investing in our private equity funds.

This question can make an investment manager in a Frontier Market such as Africa feel very uncomfortable. By definition, a Frontier is a frontier. If you are amongst the first into a market, as it develops, you will have very little historic track record to point to. Exits will have been few and far between.

Those who have had an exit will admit (if they are being honest) that it was perhaps flukey (not part of a demonstrable trend), or at least unusual. Others may point to large numbers of exits, but happening in other markets (for example in Europe or the US, and not Africa). Still others will exaggerate their track-record to investors when it comes to exits, implying that it was all part of a carefully planned strategy, when (in reality) it had been as much a surprise to them as to anyone else involved in the situation!

Investors know they need exits. This is page 1 of chapter 1 in the “How to Invest in Private Equity” handbook. But, they need to think about what they really mean by this question. They also need to have the intellectual courage to follow the logic of the answers they receive.

In shule ya gumbaru (a term used in Kenya for further education undertaken by adult professionals) they go to great lengths to dissuade you of the notion that past performance is an indicator of future performance. Of course, all investors should know this, as it is another lesson from Chapter 1 of the Handbook. However, they often forget it, when it comes to evaluating exits.

Many of Fusion’s early investors are seasoned European Private Equity professionals, so they know a thing or two about exits. Those who were around at the time know that, for example, the UK private equity firms which launched in the 1980s could point to almost no track record of exits. The fact is: the UK was a frontier from this point of view at the time, and you either believed in it or you didn’t. Those who did believe in it made vast amounts of money in the long bull market associated with the Great Leveraging, which lasted (with some blips) from approximately 1992 to 2007. The same sort of thing could be said about Tech stocks – almost no exits to speak of, then a flood.

So, and hoping not to labour the point, the fact that you have had no exits does not mean you will get no exits. Hume was right: the past is not an easy guide to the future.

Looked at from the other point of view: the fact that you have had lots of exits does not mean that you will get any in the future.

At Fusion, our approach to exiting private equity investments is:

1. We don’t buy equity in anything unless we believe it is capable of delivering a good exit. This might be because it is a fast growing company which will attract the interest of an international company looking to come into Africa. Or it might be a business which will be an attractive IPO on a local market.
2. We make sure we have the contractual rights to push the exit event through, when the time comes.
3. Wherever possible we make our investments self-liquidating – for example a real estate development which will turn into cash when the property is sold, or a loan which repays on an agreed schedule.
4. We make half our return from interest payments – so we are not so reliant on exits.
5. We actively manage our investments to an exit event – whether that is a loan repayment or other form of realisation.