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Michael Chu’di Ejekam Comments on the Compelling Appeal of Longer-Life Private Equity

Michael Chu’di Ejekam Comments on the Compelling Appeal of Longer-Life Private Equity

 

Michael Chu’di Ejekam, commercial real estate expert shares his insights on the recent Wall Street Journal article on the Atlas Partners Longer-Life Private Equity Fund which raised one billion dollars.

 

Michael Chu’di Ejekam, an expert private equity investor, provides insight on the emergence of longer-life private equity funds such as Altas.

In a recent article printed in the Wall Street Journal by Chris Cummings, it was reported that the emergence of longer-life private equity funds such as Altas recently hit a new benchmark by raising one billion dollars. Altas as well as other powerful groups, such as Blackstone and Carlyle, are working on similar longer-life funds. Longer-life PE funds allow managers to hold each investment for far longer than the typical 5-year hold period per investment and typical 10-year total fund life. In the Altas case, each investment can be held up to a whopping 17 years.

 

The typical “medium life” PE model has proven to be highly successful with attractive risk-adjusted returns, however, Michael Chu’di Ejekam believes the model can be optimized, particularly in emerging market like Africa. “Following my several years of PE investing in sub-Saharan Africa, I am convinced that longer term life funds would be an improvement on the PE model for emerging markets such as Nigeria” Michael Chu’di Ejekam explains.

“When a PE fund is compelled to exit after a 5-year hold period, though the returns may achieve certainly attractive 25+% gross IRR or 2.5 to 3 times multiple on equity invested, I believe tremendous additional value may be left on the table.” The expert demonstrated his point by saying, “Originating, executing and investment managing attractive investments is a challenging process – why be forced to sell/exit a highly attractive investment after only 5 years, only to be saddled with pressure to find another outstanding deal to originate to start the process over again?”

 

Of course, some other models have emerged to address the standard PE model challenges. For example, in the case when an arm of a PE fund family invests in greenfield deals seeking “opportunistic” higher returns, and the completed projects are transferred to “core” vehicles of the same fund family which are seeking lower, more stable, longer term returns. “It could be more powerful and efficient to have one fund vehicle simply hold the investment for the longer term”, said Michael Chu’di Ejekam. This is especially important in emerging markets, where the deal process is more challenging and deals could take years to originate and close in the first place.

 

There is also increasing investor interest and PE capital raised for Africa for example, therefore deals have become more competitive and could take years to originate and close. “After so much heavy lifting, why sell after only 5 years?” he asked. “I have been involved in a few highly successful full-cycle investments and exits – though the returns were highly rewarding and the possible carried interest/profit distributions exiting, the reality is that excessive additional upside was surrendered to the new owners.”

 

Charlie Munger, one of Warren Buffet’s longest serving colleagues is quoted as saying: “The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a lifetime, you are not being rational.”

“Why sell after only 5 years if you are already enmeshed within a great investment?” Michael Chu’di Ejekam continued. “Part of the answer lies in the reality that PE funds need to demonstrate exits/returns to potential Limited Partners (LPs) in order to raise fresh investment funds, and LPs are accustomed to the well-defined and tested cookie-cutter PE “medium life” model.” Of course, there is a desire to exit to realize profits so that carried interest distributions can be made – the perfectly reasonable lifeblood of private equity, from which Ejekam has benefited. Thankfully, there are other acceptable avenues to achieve this objective. According to the finance whiz, longer-life PE funds would be an improvement for for emerging markets such as Africa. He thinks it would be helpful if more potential LPs bought into the concept and support the investment strategies of managers with longer-term views.

 

Mr. Ejekam offered a few closing remarks. “The most successful entrepreneurs and investors in emerging markets such as Africa, hold longer term views. They do not think in 5-year chunks. They think in terms of decades. This is how to generate outsized returns.”

 

About Michael Chu’di Ejekam

Michael Chu’di Ejekam is an honors graduate of the Wharton School at the University of Pennsylvania, where he earned a BSc in Economics, with a concentration in Finance. His early days were spent on Wall Street, as an investment banker for Merrill Lynch, after which he moved into private real estate investments in New York, and then onto work with Nigeria’s Actis. During his seven-year tenure as their Director Real Estate for West Africa, he became known as a leader in the “retail revolution,” helping to bring multiple million-dollar malls into underserved areas throughout sub-Saharan Africa.

For more information about us, please visit  michaelchudiejekam.com.ng

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Longer term life funds would be an improvement on private equity – Chudi Ejekam

Real estate expert and private equity investor, Michael Chu’di Ejekam has shared insights on the Atlas Partners Longer-Life Private Equity Fund which raised one billion dollars.

In a recent article printed in the Wall Street Journal by Chris Cummings, it was reported that the emergence of longer-life private equity funds such as Altas recently hit a new benchmark by raising one billion dollars. Altas as well as other powerful groups, such as Blackstone and Carlyle, are working on similar longer-life funds. Longer-life PE funds allow managers to hold each investment for far longer than the typical 5-year hold period per investment and typical 10-year total fund life. In the Altas case, each investment can be held up to a whopping 17 years.

The typical “medium life” PE model has proven to be highly successful with attractive risk-adjusted returns, however, Michael Chu’di Ejekam believes the model can be optimized, particularly in emerging market like Africa. “Following my several years of PE investing in sub-Saharan Africa, I am convinced that longer term life funds would be an improvement on the PE model for emerging markets such as Nigeria” Michael Chu’di Ejekam explains.

“When a PE fund is compelled to exit after a 5-year hold period, though the returns may achieve certainly attractive 25+% gross IRR or 2.5 to 3 times multiple on equity invested, I believe tremendous additional value may be left on the table.” The expert demonstrated his point by saying, “Originating, executing and investment managing attractive investments is a challenging process – why be forced to sell/exit a highly attractive investment after only 5 years, only to be saddled with pressure to find another outstanding deal to originate to start the process over again?”

 

Of course, some other models have emerged to address the standard PE model challenges. For example, in the case when an arm of a PE fund family invests in greenfield deals seeking “opportunistic” higher returns, and the completed projects are transferred to “core” vehicles of the same fund family which are seeking lower, more stable, longer term returns. “It could be more powerful and efficient to have one fund vehicle simply hold the investment for the longer term”, said Michael Chu’di Ejekam. This is especially important in emerging markets, where the deal process is more challenging and deals could take years to originate and close in the first place.

 

There is also increasing investor interest and PE capital raised for Africa for example, therefore deals have become more competitive and could take years to originate and close. “After so much heavy lifting, why sell after only 5 years?” he asked. “I have been involved in a few highly successful full-cycle investments and exits – though the returns were highly rewarding and the possible carried interest/profit distributions exiting, the reality is that excessive additional upside was surrendered to the new owners.”

 

Charlie Munger, one of Warren Buffet’s longest serving colleagues is quoted as saying: “The ‘know-nothing’ investor should practice diversification, but it is crazy if you are an expert. The goal of investment is to find situations where it is safe not to diversify. If you only put 20% into the opportunity of a lifetime, you are not being rational.”

“Why sell after only 5 years if you are already enmeshed within a great investment?” Michael Chu’di Ejekam continued. “Part of the answer lies in the reality that PE funds need to demonstrate exits/returns to potential Limited Partners (LPs) in order to raise fresh investment funds, and LPs are accustomed to the well-defined and tested cookie-cutter PE “medium life” model.” Of course, there is a desire to exit to realize profits so that carried interest distributions can be made – the perfectly reasonable lifeblood of private equity, from which Ejekam has benefited. Thankfully, there are other acceptable avenues to achieve this objective. According to the finance whiz, longer-life PE funds would be an improvement for for emerging markets such as Africa. He thinks it would be helpful if more potential LPs bought into the concept and support the investment strategies of managers with longer-term views.

 

Mr. Ejekam offered a few closing remarks. “The most successful entrepreneurs and investors in emerging markets such as Africa, hold longer term views. They do not think in 5-year chunks. They think in terms of decades. This is how to generate outsized returns.”

USD$254bn hospitality market in upward swing as investors plan 30,000 additional rooms

Michael Ejekam, Director, Real Estate in Actis,explained to BusinessDay in an interview , USD$254bn hospitality market in upward swing as investors plan 30,000 additional rooms.

Michael Ejekam, Director, Real Estate in Actis : In the course of the next few years, investors shall be putting additional 30,000 rooms into Nigerian’s growing hospital industry which, a couple of years ago, was estimated to be worth $49.9 billion with $203.7 billion in untapped potential and $253.5bn market size.

By the last count, about 20 hotel groups with 34 brands will be making this happen as part of renewed interest in, and growth of hospitality industry in Sub-Saharan Africa, especially Nigeria, which presents investment opportunities in key sectors given its sheer size and potential.

“Africa is booming and with this growth, the continent’s cities are experiencing an influx of residents in search of work and better standards of Living”, says Abimbola Olashore of Lead Capital Plc, explaining that the Eurozone crisis and slowdown in growth have weakened advanced economies from their strong position as investment destination.

“It is Africa’s potential to offset the sluggishness in more developed markets that’s appealing to global players, explains Andrew McLachlan, Carlson Rezidor Vice President for Africa and Indian Ocean Islands.

“What has really happened is that post the economic crash in 2008/2009, the rest of the world has really woken up to Africa,” says McLachlan, adding, “there’s been such good news coming out of Africa from a GDP growth point of view, showing better telecommunications, improved security, political stability, and improved airlift; it’s really become a sort of new scramble back into Africa.”

Analysts say the present trend is driven by travel and business, also noting that Africa, particularly Nigeria, is a growth phenomenon of the 21st century. “Whereas the rest of the world is growing at 3.3 percent, Africa at 5.5 percent, Nigeria’s GDP is growing at approximately 7 percent”, Michael Chu’di Ejekam, Director, Real Estate in Actis, explained to BusinessDay in an interview.

Because of these opportunities, from Lagos and Kigali to Nairobi and Johannesburg, the world’s best known hoteliers are targeting Africa’s growing urban centers to benefit from a rising number of business travelers and a huge undersupply in available rooms.

Patrick Fitzgibbon, Hilton Worldwide’s senior vice president of development for Europe and Africa, notes that “there’s a growing demand in these capital cities because they are the centers of business, of government and of commerce –all of which have hospitality needs”.

The Nigeria market remains a focal point for Africa-bound foreign investments and this is understandable from the standpoint of the country’s demographics, fast-paced urbanization, growing middle class with strong spending power, rich oil resource and its status as a trading economy.

“Nigeria is strategic and key part of our consideration for further investment in West Africa. We are definitely looking to invest in Nigeria. Nigeria is a considerable focus to us. We believe in that country and it is just an accident of timing that we are not yet there. But surely, this is something we are looking closely at”, Ivor McBurney, Kingdom Hotel Investments’ (KHI) Vice President of Finance and Development Projects, told BusinessDay in Ghana.

KHI is a leading international hotel and resort real estate investment company headquartered in Dubai with focus on emerging markets. It has a balanced portfolio of hotel properties in upscale and luxury market segments and has built a diversified hotel and real estate portfolio with access to 18 operational hotels in 13 countries across four continents. The company’s strategic hotel partners are Four Seasons Hotel and Resort, Fairmont Raffles Hotels and Resort, Movenpick Hotels and Resort, Swissotel and Intercontinental.

With investment in North Africa (Egypt and Morocco) and Sub-Saharan Africa where they have invested in Ghana, Kenya and Zambia, McBurney sees a great future for the hospitality market in Sub-Saharan Africa and, according to him, “the hotel industry in West Africa, given the level of economic development, is reaching a new level of luxury and sophistication; that is how I think the industry is going to develop in the near future”.

Nigeria: Claiming the African M&A crown

Nigeria: Claiming the African M&A crown

Nigeria is home to the world’s seventh-largest population (with 173 million inhabitants), which is expected to surpass Brazil’s by 2030. And with increasing disposable incomes and a GDP growth rate around the 6% mark for the last 10 years, it isn’t hard to understand why Jim O’Neill, former Chairman of Goldman Sachs Asset Management International, included Nigeria as one of the new wave of emerging economies, alongside Mexico, Indonesia and Turkey — the MINTs — that have massive growth potential and offer attractive international investment opportunities.

 

What are the five key boom drivers for Nigeria?

  1. Between 2008 and 2014, 105 M&A deals were completed in Nigeria. With more than two-thirds (70) of these deals completed between 2011 and 2014, the market is gaining momentum. Some of this growth is due to more domestic activity, but a large proportion is accounted for by international buyers and investors. A recent example is in November 2014, the Carlyle Group paid US$157m for a stake in Lagos-based Diamond Bank. Nigeria has seen compound growth of the value of foreign direct investment projects of nearly 20% since 2007, according to EY’s recent Focus on Nigeria report.
  2. Statistically, energy, mining and utilities (EMU) has been Nigeria’s most important investment area. In 2013 alone, there were six EMU deals valued at almost US$1.5b. In 2014, volume halved while value doubled, as the total of three EMU deals were valued at US$2.5b. This makes it the highest sector by both value and volume according to Mergermarket data. Deals in 2014 included Singaporean Temasek Holdings’ acquisition of Seven Energy for US$150m in April. This deal activity follows the liberalization of the power market in 2013, which acted as a tool for driving Nigeria’s growth. In a market that produces less grid electricity than the Republic of Ireland, and where — according to consulting group Adam Smith International — 50% of the population receives no electricity at all, the country’s lack of power infrastructure has hampered economic advancement. Adam Smith International estimates that US$70b of investment is needed to bring electricity supply to the same levels as Brazil and South Africa, leading to a sector ripe for further corporate finance activity.

Yet, while the energy sector offers investment potential, the development of a reliable power network is opening opportunities in other sectors. “The privatization of the power market and the establishment of new distribution companies create a lot of opportunity in Nigeria for investors,” says Michael Chu’di Ejekam, Real Estate Director at the Lagos office of private equity firm Actis. “If power becomes less of a risk for developers, for example, Nigerian growth could reach up into double digits.”

  1. Underpinning opportunities in Nigeria is the population’s growing affluence. In EY’s 2013 Africa Attractiveness Survey, Nigeria’s population was given lower-middle income status. While oil and gas FDI projects account for the largest share of FDI capital (52%), according to the EY Focus on Nigeria report, a breakdown by number of projects suggests a greater diversity by sector. Technology, media and telecommunications (TMT) accounts for 24%, retail and consumer products for 21% and business services 8%. MTN, the pan-African mobile telecoms operator, illustrates the growth in consumer spending on TMT. It recently announced a near 10% increase in subscribers to 207.8 million, with Nigeria registering a 20% increase in numbers.

 

“Nigeria reflects the trend seen in many other African countries — an economic diversification and steady emergence of consumer spending power,” says Michael Lalor, Head of EY’s Africa Business Center. “We have already seen a surge of investment into service sectors such as telecoms, financial services and consumer products. As African economies continue to grow and develop, we also anticipate growth in private investment into infrastructure —particularly power and logistics — and manufacturing, with the automotive sector, for example, having already experienced strong growth over the past five years.”

  1. “The large population with increasing disposable income means that two sectors in particular will shine,” says Azevedo. “Fast-moving consumer goods, where we are now seeing a lot of investment by large companies, and M&A as they acquire local operators; and financial services, as people increasingly seek financial inclusion.”

Real estate is another sector to benefit. “Back in the 1990s, the middle class was severely reduced, but now it is surging back,” says Chu’di Ejekam. “In 2000, just 34% of households had discretionary income. In 2020, this is forecast to be more than 50%, demonstrating a fundamental shift. These households are now able to spend on retail and housing.” More than 25 new shopping malls opened across Nigeria in the last four years, with up to a further 60 in either planning or construction phase.

  1. A large number of expatriate Nigerians are now returning home (there are an estimated 15 million people in the Nigerian diaspora), boosting local talent. One of the areas attracting returnees is oil and gas. Reforms to the industry stipulate that international oil companies (IOCs) must work with local companies, sparking fast growth of home-grown oil companies. Many of the IOCs are selling assets. For example, Shell’s Nigerian subsidiary disposed of its 30% interest in Oil Mining Lease 24 to Nigerian company Newcross Exploration and Production. These companies need capital to expand and are tapping international capital markets as a result. Nigerian oil group Seplat, for example, raised US$500m in a London-Lagos IPO in April 2014, which valued the company at US$1.9b. Its listing success is something of a trailblazer for indigenous oil companies looking to consolidate the market.

Not all boom: the challenges of business in Nigeria

Despite the market’s promise, Nigeria is not an easy country to target. Lack of infrastructure can hamper companies’ growth prospects, and instability in the northeastern region deters some investors.

In addition, corruption is still a major issue in Nigeria. The country was ranked 144th out of 177 in the Transparency International Corruption Index, with 44% of respondents admitting to paying a bribe in Nigeria. Investors and corporates need to take caution and understand the risks of operating in a country that is still in the nascent stages of economic development.

The country is also exposed to oil price fluctuations — as oil accounts for 70% of Nigeria’s export revenue and 35% of its GDP, according to OPEC. However, as the country’s economy diversifies, exposure will reduce. “We are already seeing the growth of other businesses, such as agribusiness, services and light industry,” says Azevedo. “The development of these sectors means the government will have to ensure the country has basic infrastructure for growth.”