Carlyle’s Africa fund is a prime candidate for a GP-led secondaries process

Emerging market GP-led deals are rife with difficulties but Carlyle’s name and the dynamics of the secondaries market suggest a deal can be done on its Africa fund.

In 2014, The Carlyle Group held a $698 million final close on its debut Sub-Saharan Africa fund, becoming the biggest name up to that point – and since – to launch a fund dedicated to the region. Last week, sister publication Buyouts revealed the firm is back, seeking an undisclosed amount for its sophomore vehicle.

It’s been a bumpy five years for Carlyle’s Africa team. Its former co-head, Marlon Chigwende, left in 2016 to form Arkana Partners, leaving Eric Kump in sole charge. Deployment and harvesting have been slow. Fund I is 70-80 percent invested, holds 12 assets and has made one exit, a minority stake in agricultural logistics firm ETG in 2015.

In light of this, it makes sense that the Washington, DC-headquartered firm is thinking about liquidity options for its LPs. It recently approached secondaries buyers about acquiring stakes from limited partners in its debut Africa vehicle and making a stapled commitment to the newly launched successor.

The 2012 fund has more than $500 million in remaining net asset value, Secondaries Investor reported. Its performance is not reported separately but aggregated with that of Carlyle’s South American buyout fund, Europe Growth fund, Asia Growth fund and several others, which have collectively returned 2.4x since inception.

Even without the specific challenges faced by Carlyle’s fund, an African GP-led process is a tough ask. Investor sentiment has dampened since 2014, when the ‘Africa Rising’ narrative of a rapidly growing consumer class and flourishing entrepreneurial culture was in full flow. Blackstone and KKR have pulled back in recent years, citing difficulties in putting large amounts of capital to work. In 2017, Carlyle broadened its remit from sub-Saharan Africa to include North Africa, PEI reported.

But as Peruvian private equity firm ENFOCA demonstrated at the start of 2018 with a successful $950 million restructuring, in the right circumstances emerging markets secondaries deals – big ones, anyway – are doable. The same drivers that led to the creation of the GP-led market in Europe and North America exist in these markets, only accentuated: potentially good assets in growing but volatile markets that need longer than 12 years to reach fruition. If you believe in the story that underpins the fund, it can trump shorter term, practical considerations.

Speaking on a panel at last week’s IFC/EMPEA conference in Washington, an executive director at a global investment bank said her firm had done several emerging markets deals, including Asia. She emphasised the importance of being hands-on in crafting deals and having the patience to wait for exit windows.

“It takes a lot of work on our part, to restructure the terms and to create a package that will hopefully work. That’s where the value comes in and that’s how we are able to get these 10 percent discounts,” the executive director said.

An African GP-led deal will represent too great a risk for many. At this stage, we don’t know whether the Carlyle process will continue. If sufficient interest can’t be generated for a straight tender offer for LP stakes, don’t be surprised if a fund restructuring – with assets transferred to a continuation fund – is also explored. With an estimated $77 billion in dry powder awaiting investment in secondaries, there should be a deal to be done.

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