Champions of Free Enterprise
Bullish On Harare
Daniel Fisher, 11.04.10, 11:40 AM EDT
Forbes Magazine dated November 22, 2010
Paul Tierney is out to increase the flow of capital to places formerly inhospitable to investor money.
You could spend a lot of time looking for a professional investor who would advise you to put money in the Harare stock market. Or you could just ring up Paul Tierney. "Zimbabwe is a pretty straightforward place to buy stocks," he says.
The tall, athletic financier who runs Development Capital Partners in New York is aware this sounds crazy. Here is a country that abandoned its currency last year in the wake of hyperinflation on a level not seen since the Weimar Republic. "It was an extremely dangerous place to own anything for more than a nanosecond, but it's getting better," says Tierney.
So much better that Tierney is putting his own considerable funds into Zimbabwe and all across sub-Saharan Africa. He's pursuing returns he thinks will exceed U.S. markets by at least 15 percentage points but also hoping to spread the message that the free flow of private equity and venture capital to bright entrepreneurial firms in Africa can be a superior alternative to the traditional development funds funneled through the likes of the World Bank.
For now he's making smaller investments that hold the potential for extremely high returns but asserts there is potential for investments of up to "hundreds of millions of dollars." Africa has good risk-adjusted returns in general, depending on the country. He invested in a cellular-tower company in Nigeria and stocks in the Harare bourse through Imara Securities, a Botswana firm he owns a piece of, but he avoids South Africa in part because of the laws requiring local partners.
One entrepreneur he's backing is an Ethiopian and McKinsey & Co. alumnus named Yonas Maru (who was also a student in Tierney's class on emerging-markets entrepreneurialism at Columbia Business School). Maru cofounded Bandwidth & Cloud Solutions, a Kenyan telecom firm that bought a slice of bandwidth on the undersea fiber-optic cable from Nairobi to Abu Dhabi. It plans to offer a variety of online services to businesses in Kenya, a country poised for growth in back-office and call-center operations.
With a young, fast-growing workforce, the African subcontinent has a baseline economic growth rate three times that of the U.S. and Europe and holds the potential for 30% to 40% returns on capital. Foreign capital investments are a trickle compared with the rest of the world--only $2.7 billion flowed into sub-Saharan Africa last year, most of it to South Africa, according to Prequin--but the money is building businesses that will employ Africans and accelerate the rise of the middle class. Cronyism and kleptocracy are waning in many countries, and midsize companies are starting to realize that they can sell to a strategic buyer for a better price with cleaner books.
Investing in Africa is allowing Tierney to test some of his theories about development aid. He grew up in Oak Park, Ill., the son of a General Foods executive, and worked in Chile with one of the first Peace Corps teams in 1964, helping campesinos make a living off of the tiny farm plots they were given in a land reform. Tierney didn't know much about farming. Neither did the armies of economic-development experts and central planners trying to transform countries like Chile into industrial democracies.
"Economic development was done by government, and government hired people who were smart, ambitious and had fancy degrees," says Tierney. "Collectively, they couldn't find their way to the bathroom."
Discouraged by mainstream economic-development thinking, Tierney used a Ford Foundation scholarship to attend Harvard Business School instead of a policy hub like the John F. Kennedy School of Government. "I was a traitor to the discipline," he says, pursuing a path he thought would create more jobs.
He made his fortune in the 1980s harassing undervalued companies as one of the three founding partners of activist hedge fund Coniston Partners. The Coniston trio used significant blocks of public companies to slowly squeeze management to make shareholder-friendly changes. Each partner made tens of millions of dollars within months through its successful campaign in 1987 to break up travel conglomerate Allegis into United Airlines, Hertz and Hilton International.
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Tierney stepped off Wall Street in the 1995 to work with U.S. professional soccer and pursue his love of bicycling and high-altitude climbing. He's also served for 20 years as chairman of Techno Serve, a nonprofit with a staff of 800 who impart advanced production techniques to business owners. Techno Serve has 200 people detailed to the coffee industry alone, using a $50 million grant from the Gates Foundation to help small farmers increase productivity and the quality of their beans. Mention the "fair trade" movement, which encourages the affluent to buy more expensive coffee to pass on higher payments to growers, and Tierney grimaces.
"We're not part of the fair trade movement," he says. "We think what's fair is what the market dictates. What's fair is being able to compete on a global basis."
Tierney's is one of a crop of private equity funds slaking the thirst for capital among African entrepreneurs. The two biggest are Kingdom Zephyr, a joint venture between Saudi Prince Alwaleed bin Talal and New York's Zephyr Management, and Helios Investment Partners in London. Helios was founded by Tope Lawani and Babatunde Soyoye, both Africans and veterans of the $47 billion buyout firm Texas Pacific Group. With $1 billion under management, Helios has averaged a 40% internal rate of return on its investments over the past four years. (TPG's returns have been lackluster in comparison.)
"If you read USA Today and think Africa is about famine, corruption and war, you are not likely to invest," says Lawani, who has degrees from MIT, Harvard Business School and Harvard Law. "If you look at fundamental indicators, the African economic performance is superior to most of the rest of the world."
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Helios has invested in a Ghanian telecommunications-tower company and last year put $150 million into buying a South African outdoor-advertising firm previously owned by Clear Channel Communications ( CCU - news - people ) and Independent News & Media, an overleveraged Irish conglomerate. Lawani says the business, operating in 13 countries across Africa, has $30 million a year in operating profit and can easily double revenue over the next three or four years. With the capital markets still stunted, investors like Helios are unlikely to get their money out through an initial stock offering. A sale to a larger African, Indian or Chinese firm is likelier, until more European and U.S. buyers begin wading in.
"I don't invest in Africa because I see myself as the next Mother Teresa," says Tierney. To be safe, most of his investments are structured with stock ownership and dividends flowing into offshore accounts. "I see good investments with good risk-adjusted rates of return."
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