Play the Game of Life
Ryan Petersen's Blog

Tom Barry, founder of Zephyr Management, one of the early pioneers of private equity in Africa, visited our course on Entrepreneurship in Africa this week. He spoke to us about his involvement with the first private equity fund in Nigeria, Capital Alliance, and the difficulties behind that fund's first investment.

Capital Alliance bought a 25% stake in GS Telecom, a business to business network solutions provider offering satelite connectivity for banks, mining and oil companies throughout Nigeria. Tom says one of the mistakes made on that deal was that the negotiators at both sides of the table spent too much time focusing on the percentage split of the pie, and not enough discussing whether their equity infusion would provide enough cash for the firm to truly prosper.

As it turns out, the business (renting satelite networking equipment) was far more capital intensive than they ever imagined. They had to constantly go back to the capital markets to raise more money--both equity and debt. Perhaps as a result of insufficient capital, and to the difficulty of the Nigerian business environment, the firm was not able to meet its original financial projections.

The firm got stuck at about $25 million in revenue for a number of years, and Capital Alliance did not exit their investment until nearly a decade later. Although they made a 3x return, the long time horizon and the high risk environment meant that the investment did not meet the required risk adjusted returns. But it was a great learning experience and a reasonably successful first foray into private equity in the Nigerian context. In the end, it would be enough to encourage investors that there were genuine possibilities and helped lay the ground-work for future successes.

As professor Murray Low says, private equity and venture capital is a lot like pinball. When you win, what do you get? More balls so you can play again!

Labels: Africa, entrepreneurship, Nigeria, private equity