Even Africa Offering Generous LBO Returns

Not even Africa is off limits for finding big buyout returns.

Pan-African growth equity firm Emerging Capital Partners scored a pair of lucrative exits in the last two months, the most recent being the sale of Societe Internationale de Plantations D’Heveas, a rubber maker with operations in Ghana and the Ivory Coast.

ECP, a Washington D.C.-based LBO and growth capital firm, made a $14.8 million minority investment in the already public company in March 2005, with equity coming from its first fund. It then helped the company complete an acquisition of Michelin’s plantations in Nigeria in exchange for a 20 percent stake and also guided it toward a secondary offering.

ECP sourced the deal through an office in Abidjan, the Ivory Coast’s commercial capital, where it keeps tabs on the largest businesses in the region. The firm has 25 professionals in six offices, five of which are on the African continent. Its investment professionals have passports from 15 different countries.

At the time of the investment, civil war had heightened the perceived risk of investing in the Ivory Coast, said ECP Chief Operating Officer Hurley Doddy. But Societe Internationale de Plantations D’Heveas was located in the south of the country, close to ports, so ECP believed the flow of exports wouldn’t be disrupted, he said.

ECP’s analysis of the rubber industry was crucial—and simple—for the deal. Demand for rubber worldwide, mostly for cars manufactured for the Chinese and Indian markets, was increasing, while ECP forecasted rubber production would remain flat over the next few years, Doddy said. The rubber market also has a natural barrier to entry because it takes seven years to grow rubber trees.

The investment went according to plan. In 2006, the company sold nearly 83,000 tons of rubber, up 45 percent from 2004. Net income more than doubled during the same period, to $27.4 million from $12.9 million.

Upon its exit, through secondary sales of shares between January and May on the Euronext Paris exchange, ECP made 3.4x its original investment. It garnered $49.8 million from the deal, including dividends.

“ECP thinks there’s a disconnect between the growth story going on in Africa and how investors perceive it,” Doddy said.

ECP’s first fund raised $407 million and seven of 14 investments have been exited. That fund, whose portfolio includes companies operating in 25 different countries, is on track to return 2x, according to ECP. The fund’s average hold period has been about two years for companies.

The firm’s $523 million second fund, with 10 investments in its first 18 months, is already nearly 60 percent committed.

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