South African fund of funds Sango Capital Management will be back in the market with its fourth flagship fund by the end of the year. The fund is targeting $250 million – more than double what the firm raised for its 2018-vintage predecessor.

Johannesburg-based Sango makes both fund commitments and direct investments in Africa’s mid-market and has received commitments over the years from university endowments and foundations, pensions and family offices from the US and Asia. It has also begun deploying more capital into tech-enabled growth and venture.

Affiliate title Private Equity International caught up with Richard Okello, co-founder and partner of Sango Capital Management, off the back of the 2024 African Private Equity and Venture Capital Association conference in April to discuss fundraising trends in the domestic PE industry and how a more robust secondaries market is needed.

Sango - Richard Okello
Richard Okello: LPs have become more mindful about re-upping

What are the biggest trends in African private equity?

Africa’s private equity industry is starting to mature. Stronger teams are emerging out of the last decade, which has seen a lot of turmoil, volatility and unprecedented currency pressures. Yet, while we have stronger teams, we also have a bunch of weaker teams that are likely [to] be phased out – that is, the weakest teams are unlikely to raise future funds and some may have their unrealised tail-end funds liquidated in the natural order of things.

Second, the global liquidity pressures we’ve seen in the past two years also exist in Africa. We are not isolated from exit and liquidity issues, but there’s clearly a focus across GPs to drive exits, notwithstanding the current environment. There is pent-up pressure for assets – some of which should have been exited around the covid pandemic – to be divested now. and we expect to see a lot of liquidity generation over the next year or so.

Third, there’s a growing need for a secondary market. It’s a natural part of the maturity of any PE industry. While there is an existing secondary direct market, there’s a need for a secondary LP-interests market to develop so that limited partners can have additional tools to manage their portfolios. Development finance institutions in Africa are recognising this, which means the way they engage their fund managers has to evolve.

The way data is reported also needs to evolve as LPs have different objectives and allocation targets. We are encouraged by the progress we see being made by the industry in this area.

Where is the African private equity industry right now in terms of exit activity?

There are more GPs using partial exits to deliver some liquidity to their LPs. They’re looking at their portfolios and assessing which assets could be sold (partially or fully) today. Partial exits in select assets can enable funds to protect assets that should be held longer and which can generate higher returns. We also see a number of funds exiting assets which may have plateaued in order to recycle that capital to drive more overall fund upside.

Continuation funds are happening on a limited case-by-case basis. It’s actually more of a conversation that happens around the end of fund life for a small handful of funds – it is not baked into side letters. LPs have become more mindful about re-upping and extending funds that are not going anywhere. It used to be that general partners could raise Fund I, then Fund II and III without clear performance justification: that season has come and gone. Many LPs now are basically telling GPs they need to have a certain DPI ratio before they come back to market.

What are you seeing in LP selling activity?

A growing number of LPs are actively selling their positions much more now than they did in the past. The key challenge for secondary sales is that this market does not have a large organised volume of buyers. In North America, price discovery in secondary LP interests is a relatively more transparent process. In the African market, LP interests price discovery is still a dark pool, so most LPs sell down their positions bilaterally.

There is, however, a recognition by most investors that the market needs to develop from a bilateral market to large collection… where you’ve got large secondary buyers and sellers. Historically, the development finance institutions have been the largest investors in African PE, but they’ve also been the most reticent to sell stakes. That is changing significantly. There’s more willingness and proactivity now around selling [and] freeing up capital.

What will attract more outside buyers?

Outside buyers of LP secondaries – that is, non-domestic LPs and secondary players – are interested in African PE secondaries, but historically constrained by insufficient supply of LP interests in quality funds. That has changed in the last 18 months with the willingness of DFIs to sell more chunky positions. However, while volume of supply is a necessary condition for external buyers, it is not a sufficient condition on its own. The information asymmetry in LP interests will need to change as well. Why is it easy to price North American GP stakes or LP stakes? It’s because you know the names and you have reference points. That takes more work. So, the large players need to build up their understanding of the market in order to bridge that pricing information gap.

Richard Okello is co-founder and partner at Sango Capital.