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While fund managers may influence public policy geared towards improving the investing environment, they make a more significant impact by improving portfolio companies’ governance standards. This is because the resulting improved performance is transmitted to other corporate entities and entrepreneurs emulating them to replicate success.
With increasing acceptance of private equity capital, the probability of best practices being adopted greatly increases.

An improved investment climate is viewed as a key component of fostering economic growth and reducing poverty. Studies have demonstrated the positive correlation between good governance and economic growth. “Accelerating growth and poverty reduction requires governments to reduce policy risks, costs, and the barriers to competition facing firms of all types – from farmers and micro-entrepreneurs to local manufacturing companies and multinationals” (World Bank, 2005). While reducing public sector governance risk in developing countries is important, private sector governance cannot be underplayed. The destabilising effect of deficiencies in corporate governance is counterproductive to economic development. The decisions, conduct and operations of private sector entities have serious implications, as observed in the 2009 global financial crisis.

The private sector’s role is increasingly viewed as a critical component of the development of emerging economies. Lobbying local authorities and improving corporate governance contributes toward improving the investment climate. Private equity funds, as a key component of a diversified financial environment, also play a vital role. As providers of capital to businesses in emerging markets, private equity funds play an active role. They work towards improving governance standards to optimise the management of and return on investments made, which, in turn, fosters greater investment flows to the economies concerned.

The Reform Dividend in Challenging Environments

As seen in Table 1, from the 2011 World Bank Doing Business Survey, sub-Saharan Africa pose challenging operating environments.

However, this snap shot hides the true picture of the trend on the continent. After implementing structural adjustment programs in the 90s, governments today acknowledge that while a stable macroeconomic environment is necessary to accelerate growth, it is not sufficient. Governments recognise the role played by the private sector and have, as a consequence, become more receptive to creating business-friendly environments. Evidence can be seen in countries like Rwanda, a global leader in business regulatory reforms as recorded by Doing Business in 2008/09, which attracted around USD 1.1 billion in investment, 41% more than in the previous year, in the midst of the global economic crisis (World Bank, 2011). Despite such improvements, substantial progress still needs to be made to transform the continent into a preferred investment destination.

While funds may be limited as catalysts for influencing change in public governance, they are beneficiaries of the changing environments, as evidenced by new and renewed investor interest in funds dedicated to the region. According to the Emerging Markets Private Equity Association (EMPEA), between 2006 and 2008 sub-Saharan private equity funds raised USD 6.2 billion and invested USD 7.7 billion, which was substantially higher than at any point in history, showing further evidence of the reform dividend (EMPEA, 2010).

Further, private equity funds can significantly impact the investment landscape within an economy through their activities. This can happen either directly through consultation with stakeholders, through portfolio companies or indirectly as members of private sector groups, like the African Venture Capital Association.

The Acacia Fund1 experience illustrates improved local regulations through consultations with stakeholders. It formalised private equity in Kenya by obtaining government recognition for private equity as a distinct financial instrument. This formed the basis of new regulations for venture capital, introduced by the Kenyan Capital Markets Authority.

Moreover, as mentioned, private equity fund managers can also improve quality standards through lobbying via a portfolio company as experienced in Kenya, where legislation governing building codes and standards was positively influenced and changed. An area where safety standards had not been adequately addressed was the sale of structural steel for buildings. Prior to 2009, the sale of structural steel was done “by piece” and not “by weight”. Without a defined safety standard policy, the weight consistency would vary, and some manufacturers would deliberately undersize, compromising the structural integrity of the steel. Athi River Steel Plant, a steel recycling company that is part of Aureos East Africa Fund’s portfolio, along with a number of concerned sector participants, lobbied authorities to change the selling method. In 2009, the Kenya Bureau of Standards gazetted the new standard of selling by weight.

Private Sector Governance Leading the Way

“The governance of companies is more important for world economic growth than the government of countries”. These words of James Wolfensohn, president of the World Bank 1995-2005, emphasise the importance of the governance of corporate entities in today’s world. Over and above, the macroeconomic consequences of failures such as Lehman Brothers,2 the private sector plays a larger role in our economies than ever before. Globalisation and deregulation have opened up growth opportunities for companies but also increased complexity and risks. These opportunities and risks are not limited by size or geography. African businesses are also subject to the same reward/risk issues, with small- and medium-sized enterprises from Kenya to Senegal yearning to expand from a single-country presence to regional/pan-regional operations. As a result, management of these operations has become even more complex and can no longer be the preserve of a principal/owner.
The key feature of sound governance is that it produces better resource allocation outcomes as a result of better management of resources. This reduces corporate risks, increasing access to finance, and attracts larger investments into these companies. Many research projects have shown that sound governance practices are essential to establishing an attractive investment climate.

The Leadership Role of PE Fund Managers

Fund managers play a vital role in the governance culture of investee companies, as they are an important aspect of the value creation process. While most fund managers understand the importance of strong governance, this should not be taken for granted. Empirical evidence from emerging markets has shown that investors place a high premium on well-governed companies, resulting in better exit values. Fund managers are especially interested in governance because it promotes value creation, which otherwise could not occur.
The other point to note is governance, only forms the “G” in Environmental, Social and Governance strategy. There also has to be a strong emphasis on environmental and social practices in order to build great businesses, lower risks and reduce potential liabilities throughout the life of the investment, right through to exit.

Good Governance, Beyond the Words

“No process of box ticking will overcome the fundamental dysfunctionality of a board of directors flowing from inadequate expertise on the part of directors, an over-compliant board, or an excessively dominant chairman or CEO. The functionality of a board cannot be achieved solely through prescriptive rules, but requires the right mixture of personalities, expertise, commitment and leadership” (Robins, 2006). Being on a Board of Directors of the investee or establishing a subcommittee in itself does not constitute improvement. Well-known governance failures at WorldCom,3 Enron4 and Lehman Brothers all occurred with company boards in place.
Sound governance involves more than compliance with a set of rules. It is about taking steps to ensure that the organisation enhances efficiencies. To illustrate, given the nature of risk facing a bank, numerous specialist board sub-committees are required to assess and manage each risk factor. A general services business does not face the same level of risk, so it would not require the same level of oversight.

Striking the balance between practicality and effectiveness is the key. Having worked with numerous businesses across various sectors, fund managers are well positioned to know what works given the business and market conditions. So as companies commence their journey of scaling up, fund managers can match internal controls and governance structures with the complexity of the business. Good governance is about going beyond the basic measures required to sustain success. It is about paying real attention to building the organisation’s culture and capability. It is about ensuring that the leadership has all the modern managerial disciplines in place, and that a clear, concise strategy has been developed and agreed by the board, and is implemented by management. Progress must be monitored and measured against a set of well-defined and agreed matrices.

Technical Resources for Staying on Track

Improvement is nothing if it cannot be measured on an ongoing basis. In addition, performance indicators also have to capture more than just financial indicators. To steer a company in the right direction, the board needs to ensure that there are processes in place enabling relevant disclosure on matters such as adequacy of internal controls or assessing the level of risk a company is taking.
The increasing complexity of managing businesses means that a larger amount of information is required to ensure correct and timely disclosures. This has serious implications for how data is gathered and processed. To remain relevant, companies have to look at enhancing their management information/reporting systems and align them with the performance and sustainability objectives of the business. The cost implications and skill requirements may be out of the reach of typical medium-sized firms in Africa, which is why fund managers utilise dedicated technical resources to fill the gaps that may exist in portfolio companies. This gives portfolio companies’ access to cost-effective and appropriate solutions.


1 Established in early 1997, with a total committed capital of USD 19.6 million, the Acacia Fund made equity and quasi-equity investments in well-managed Kenyan SMEs which demonstrated strong potential for growth. By the end of January 2003, the fund had invested USD 15.6 million in 18 companies. The fund has taken minority stakes in businesses across a diverse range of sectors.
2 Before declaring bankruptcy during the financial crisis, in September 2008, Lehman Brothers Holdings Inc. was the fourth-largest investment bank in the USA.
3 On July 21, 2002, telecommunications giant WorldCom filed for bankruptcy protection in one of the largest bankruptcies in United States history, after Executives perpetrated accounting fraud. The WorldCom scandal is regarded as one of the worst corporate crimes in history, and several former executives involved in the fraud faced criminal charges for their involvement. Most notably, company founder and former CEO Bernard Ebbers was sentenced to 25 years in prison.
4 At the end of 2001, it was revealed that Enron Corporation, an American energy, commodities, and services company based in Houston, reported a financial condition that was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud, known as the “Enron scandal”.


REFERENCES / EMPEA, 2010. Private Equity in sub-Saharan Africa, Insight Special Edition, November. // Robins, F., 2006. Corporate Governance after Sarbanes-Oxley: An Australian perspective, Corporate Governance, Vol. 6, n° 1, 34-38. // World Bank, 2005. A Better Investment Climate for Everyone, World Development Report, 2005. // World Bank, 2011. Making a difference for entrepreneurs, Doing Business 2011. // World Bank, 2011. Making a Difference for Entrepreneurs, East African Community, Doing Business 2011.