Frontiers: a new breed of private equity

Author: Danielle Myles | Published: 28 Nov 2012
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Zain Latif
You could be forgiven for thinking Africa and private equity an odd pair. Leveraged buyouts, price tension and dual-track exits don’t appear to go hand-in-hand with frontier markets.

But in recent months, Africa’s nascent private equity industry has attracted greater interest – spurred along by a struggling European market. It’s a different form of private equity, though. There’s limited access to debt capital, often soaring purchasing price risk, and corporate social responsibility (CSR) considerations that go beyond even the best environment, social and governance (ESG) policies.

IFLR spoke with Zain Latif, founder of TLG Capital, an investment firm focused on sub-Saharan Africa, about the dos and don’ts for private equity firm’s looking towards frontiers, and the most common misconceptions about investing in Africa.

The full interview will appear in IFLR’s 2012 Foreign Direct Investment Guide, which will be available next month at In the meantime, below are some of the highlights from our chat with Latif.

IFLR: Frontier market investments are most frequently associated with infrastructure or other projects. Do TLG’s target markets have the legal and business frameworks to support private equity investments?

Latif: Generally no, and firms will always struggle if they don’t recognise the local landscape in which they work. In my view that is always a big issue. Private equity is a big word and needs to be adapted to the area of focus. In the west it’s very much leverage and debt finance based with a healthy exit market. In Africa you don’t have leverage, access to capital is quite difficult on the debt side, and the capital markets are very nascent as best. Also, inflation in some of these counties means local debt rates can be as high as 30%. You can’t build a business if you are borrowing money at that level.

IFLR: What are the headline issues a fund must consider when structuring an investment in a frontier?

Latif: You need to be very careful about exchange rate risk, currency risk, and the legal enforceability of these assets. What we like is regular cash flow, so structures like convertible instruments and preference shares for example, where cash can be drawn out of the business on an annual basis.

IFLR: Are the exit possibilities different, or more limited than in a developed market?

Latif: That’s always a difference. Initial public offerings (IPOs) for example aren’t a very realistic option. Which is why I feel very strongly that unless you grow to a certain size where you can be acquired by a bigger firm, it’s important to put money into instruments that let you cash back. This gives you a little more flexibility with regards to exit. If you are earning interest of say 12% on your instrument every year, your return is decent enough for you to keep it going.

Check next month for the full interview