Flight for Permanent Capital (magazine cover story)

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As Africa’s private equity industry moves towards its next level of maturity, the quest for permanent capital is, for some, leading to a metamorphosis away from traditional fund models.

While the industry has been consumed in recent times with debates about the longevity of the Africa rising story, some quieter parts of the market have been debating the suitability of the traditional private equity model for the continent.

As with most strategies, Africa’s private equity model has historically been adopted from global standards in largely an unaltered form. The global model traces its roots back to the US in the late 1940s, when Georges Frederic Doriot – considered the father of modern day private equity – set up American Research and Development Corporation (ARDC). The firm was the first asset manager to accept money from sources other than wealthy families.

It was, however, in the 1960s that the US-based ARDC-type model was used as the basis for the common form of private equity fund that is in use today. At this time, private equity firms organised limited partnerships to hold investments which would see their backers lock up capital for at least 10 years.

These traditional private equity models have seen companies across the world enjoy capital that offers them secure funding, for longer terms than traditional bank borrowing. For Africa, this has been even more appreciated, where banks are more wary of lending to private companies. The traditional private equity model has, however, had its critics. While the primary criticism for the model globally is the lack of liquidity, for Africa, and indeed a good number of emerging markets, the challenge is the limits imposed by the 10-year lifespan.

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