African entrepreneurs are the buzz. Private equity sees these savvy developers and thinkers as potential partners. But these entrepreneurs should not overshadow another reality of Africa’s economic boom: African family-owned companies are growing up.
Family-owned companies – defined loosely as a business in which a one family owns 50-plus percent of the business – accounts globally for more than 70 percent of all companies. The story is not different in Africa. Accounting for around an estimated 75 to 85 percent of the business across Africa, family-owned companies remain the essential backbone to most African economies.
Passive observers are more familiar with the dynamics and successes of the larger family offices in Africa – the Kenyattas (family of Kenyan President Jomo Kenyatta with interests in the hotel, dairy, media and banking), Dos Santos (family of Angolan President Eduardo dos Santos with interests in telecom, banking and oil & gas), and Motsepes (family of South African billionaire Patrice Tlhopane Motsepe with vast interests in mining). Yet it is the relatively smaller family-owned businesses that pass under the radar that offer the greatest insight into Africa’s changing business landscape.
Unique familial interrelationships define small family environments that can range from business-conducive to paternalistic to argumentative all in one day. Sibling rivalry, family conflict and outright nepotism are rampant in some family-owned companies, says the Managing Director of a major Africa-based private equity company, such that a negotiated deal can sour through the malicious act of one sibling.
But, continues the Managing Director, do not think conflict means you can choose sides and win. The family-owned businesses run on familial sense of trust and collective ambition. This unspoken understanding is great in spurts but can be a downfall in the long-term.
A lack of corporate governance and industry best practices periodically undercuts the long-term success. The absence of a succession plan can have detrimental effects particularly if the business has generally endured under paternalistic leadership.
The Private Equity Opportunity
Weaknesses are opportunities, specifically in the private equity space, where the absence of a long-term growth plan implies an opportunity to create one.
Inter-generational issues, including differences in thinking and leadership successions, create a void for crafty and innovative investors to build multi-facet management teams that fairly allocate power and leverage the strengths of siblings.
Occasionally – or often, depending on what investor you ask – some children prefer to cash out the business and pursue other dreams. Departures often create an opportunity to provide an equity kicker to encourage existing management to stay on and grow the business for longer-term rewards.
But it always requires constant hands-on management of relationships. At the stage of exit, contracts generally ensure completion but selling a business is easy until the moment you actually have to sell it. Consequently the introduction of putting share back to families on exit – defined as the investor selling shares back to the family – at a higher price has significantly increased in recent years, particularly in the absence of well-developed African stock markets for IPOs.
All the challenges and concerns spoken for, success stories are more the reality than failures. Family conglomerates, such as Dangote (family of Nigerian billionaire Aliko Dangote with interests in cement, industry, real estate, telecom, oil & gas, and banking ), Sawiris (family of Egyptian billionaire Onsi Sawiris with interest in construction, industry and telecom) and Ackerman (family of South African Raymond Ackerman who pioneered the expansion of the large Pick N’ Pay supermarket chain in Africa), are more common, albeit on a smaller dollar scale, and more rampant than any African aficionado can detail.