FORUM: Opportunities and risks in frontier market private equity


Jake Cusack, chair of EMPEA’s Frontier Markets Council and a managing partner at CrossBoundary, moderates a discussion with fellow EMPEA members on opportunities and risks in frontier market private equity between Hurley Doddy at Emerging Capital Partners (ECP), Leith M. Masri at Foursan Group, and Thomas C. Barry at Zephyr Management, L.P.

Cusack: Why do frontier markets appeal to the private equity (PE) industry – both from a general partner (GP) and limited partner (LP) perspective? Why are PE fund managers launching standalone frontier funds or allocating more assets to frontier markets within existing emerging-markets strategies?

Doddy: African frontier markets, such as Ethiopia and Republic of the Congo have historically seen less investment despite their large populations. The relatively unexplored nature of these markets can be attractive to investors because there is less competition and because access to largely untapped markets carries the potential to deliver significant returns with proven business models. Often, investments in frontier markets are made as a part of an existing regional or pan-African investment strategy, rather than within a standalone fund because they can be accessed from companies based in more established economies, such as South Africa or Kenya. This more diversified method promises greater risk control, especially with a GP that has local investment professionals on the ground, with a deep reach into African markets and insights into the region’s local economies. Standalone funds have also been raised for certain frontier countries, but they tend to be small.

Barry: Frontier markets appeal to both GPs and LPs because they contain niches of high economic growth. Many businesses in frontier markets do not have strong competition, so those market places can be opportunities for experimentation and innovation. In a globalised economy, a business headquartered in a frontier country can be a regional or global competitor. Scale, which is so important in an industrial world, can be achieved in the cloud in a digital economy. Consequently, businesses in frontier countries can be globally competitive. LPs perceive frontier markets PE as an opportunity for high growth returns, diversification from other markets and the only equity option because listed markets are usually not an alternative either because they are small or non-existent.

Masri: The appeal of frontier markets to GPs and LPs begins with the opportunity to generate strong returns investing ‘off the beaten path’, often in assets that are under the radar or not part of the geographic remit of mainstream investors. This is enhanced for some players by an impact or ESG angle, where the investments are contributing meaningfully to the development of certain communities or economies. Frontier market investing is most often about achieving growth for portfolio companies, as opposed to extracting cost savings, depending on multiple expansion or other traditional PE levers for creating or achieving value. For GPs, it can also be an opportunity to invest in one’s home market or region, where they believe they can more meaningfully, economically and otherwise, spend their energies and build their careers. For other GPs, it may not be their home market but a new market that holds greater potential and excitement for them than more traditional markets. In the case of LPs, investing with frontier market GPs is a way to expand their investing horizons by having talented managers be their eyes and ears in a market that they do not know well. LPs may be interested in access to that market, either for investment purposes and overall diversification, or as a future potential operating geography, depending on the investing LP’s core business.

Cusack: Are there unique challenges given the shallower and smaller nature of frontier markets, i.e., smaller fund and deal sizes? In the context of smaller funds, how do you address the challenges of good gross performance at the investment level, but potentially challenging net performance once fund management and transaction costs are taken into account?

Barry: Frontier markets’ deal size is small, reflecting the size of the local economy. In addition, most of these markets do not have a tradition of M&A and buyouts. Most transactions are minority, growth capital. Consequently, the average size of investment and the resulting fund size are small; usually well below $100m. Therefore, this asset class is not attractive to GPs whose compensation is solely related to assets under management. I believe that a new compensation framework is appropriate to incentivise managers to participate in small but economically dynamic frontier economies. A further challenge is lack of divestment options. Many frontier markets do not have stock markets which have material trading volume nor local institutional investors. Therefore, divestments are cross-border to strategic buyers or international investors. Standalone frontier market funds have investment logic, however the size may be too small to be a viable business entity. Alternatively, in regional or global funds, frontier market investments are so small that they can be immaterial.

Masri: Smaller funds can sometimes provide challenges, as can large funds that cannot be deployed effectively. This ‘Goldilocks principle’ is important in achieving attractive returns by matching a sensible fund size against the universe of opportunities in the target frontier market. In the case of small funds, their size may also restrict them to acquiring ineffectual minority stakes, whereas the GP is more likely to be an effective investor and achieve better returns if they are able to acquire significant minority or majority stakes where they can exercise certain controls and maintain protections that are often enshrined in shareholder agreements. GPs of smaller funds can also be challenged to maintain strong teams, due to the economics afforded by the fund size. Another factor that can be a challenge in certain frontier markets that are less familiar with PE is the lack of understanding around how PE funds operate, such as the J-curve, the difference between gross and net returns, multi-year LP commitments and drawdowns on an as needed basis, among others. The GP has to carefully navigate challenges and communications with those investors that have limited or no experience previously with PE.

Doddy: One of the main challenges of frontier markets is their size, in relation to their risk profile. Deal sizes in more mature African markets, such as Kenya or Nigeria, are usually around $30m to $250m but for frontier markets, deal sizes are often smaller. However, a local GP with a regional platform strategy doing deals with companies that have the potential to scale across emerging markets and into frontier markets can achieve the returns and exit options that investors seek. For these investors, investing in frontier markets presents an opportunity to develop an effective, diversified investment strategy.

Cusack: What are the key drivers of economic growth in frontier markets, and how are PE funds identifying opportunities that can tap into these growth factors, such as urbanisation, increased consumer spending and technological advancement, among others?

Doddy: The same factors that drive emerging market growth on the continent can be applied to frontier markets in Africa. Across Africa, there is a predominantly young population which is on the cusp of entering the labour market, and a growing middle class with increasing levels of disposable income. There is also increasing urbanisation, and consumer industries continue to grow and garner interest from both African as well as foreign investors. PE funds typically tap into these growth factors by bringing in first world models that have already proven themselves in developed markets. This allows for quicker access to the market without reinventing the wheel.

Masri: There are some common themes across frontier markets, but perhaps the most important for companies operating in those markets is the focus on growth, either in a portfolio company’s home country or into foreign ones, especially if the home market is small. Given the often dynamic nature of companies in these markets, it is usually the case that they have significant opportunities for growth. Technology also frequently plays a very important role in modernising and growing portfolio companies, whether it is focused on internal improvements such as finance and HR, or on targeting external goals like market penetration and customer acquisition. Some of the greatest opportunities for value enhancement, growth and new ideas come from marrying technology that is new to a portfolio company with experience and business models often built over decades.

Barry: Each frontier market has its own drivers which could be export led or internal demand driven. In respect to attractive frontier markets, there is no common economic factor. However, there is a common factor in the host governments assuring transparent economic transactions, appropriate regulation and a level playing field for foreign investment. Therefore, the fund manager needs to study the particular aspects of the domestic economy which are attractive and competitive. It is essential for the fund manager to have investment personnel ‘on the ground’ to navigate the nuances of cultural and business differences. The global digital economy means that a digital business can be located anywhere, making frontier markets more competitive and attractive.

“It is essential for the fund manager to have investment personnel ‘on the ground’ to navigate the nuances of cultural and business differences.”

— Thomas C. Barry

Cusack: How do risks in frontier markets differ from those in emerging markets? How should these risks be reflected in the investment process, including risk/return targets?

Masri: For the markets we operate in, we do not find a common set of risks present in comparison to emerging markets. For other frontier markets with unusually high risk levels, stemming from, for instance, poor transparency, a weak regulatory environment or an economic system that significantly impairs PE investing, adjustments would need to be made to deal with structuring and exit planning, among other things. In terms of geopolitical risks for certain markets, these are very challenging to plan for.

Barry: Risks in frontier markets are both macro and micro. The macro risks relate to the health of export and end markets and global trade patterns. Other macro risks are economies of scale, which might not be possible, and lack of strategic acquisition partners due to the small size of the domestic market. Micro risks are the presence, or not, of transparent financial transactions, predictable regulations and open competition. Competent, experienced management is a constant challenge in frontier markets. This challenge requires greater portfolio operating involvement by the fund manager. A major risk is lack of divestment options. All these risks should be factored in the valuation of new investments.

Doddy: The relatively tapped and less competitive nature of frontier markets can make them particularly attractive, but frontier markets are undeniably riskier because there are generally fewer regulatory safeguards to protect investors when investments go wrong. Local capital markets are also less developed, making them less liquid and riskier from an exit standpoint. Comparatively, emerging markets have seen more government intervention over the last decade, including economic and structural policy changes, which have supported sustained development, particularly in industries like agriculture, infrastructure, transportation, real estate and financial services. Harmonisation across economic trading areas has also allowed firms to access markets more easily. A significant way to mitigate frontier market risk is to invest with a PE firm that has a strong local presence with extensive networks and a strong understanding of the regions’ regulatory and policy frameworks.

Cusack: How would you characterise current asset valuations in frontier markets? Is there a gap between buyer and seller expectations, and how do gaps differ by sector or geography? Further, are there any unique methods fund managers need to adopt when valuing potential opportunities in frontier markets?

Barry: The valuations in some frontier markets reflect the counterparts in emerging or developed markets. Therefore, valuation expectations by the entrepreneur are high. The increased risk factors in frontier markets suggest a lower valuation is appropriate. There is a ‘valuation spread’ between the entrepreneur and private equity investor. This gap may be addressed through valuation adjustment mechanisms to adjust for actual future results compared with predicted results. Other mechanisms are preferred returns, liquidation preferences, enhanced governance rights and divestment rights. The most important factor in valuations is the relationship between the fund manager and the entrepreneur. If the entrepreneur is convinced that the fund manager can provide value to the business, the two sides should be able to negotiate mutually satisfactory terms and conditions.

Doddy: Assets in frontier markets, typically, have growth prospects that are attractive to investors but there are reasons they are frontier markets. In Africa, this may be because they are small economies like Rwanda or because of a history of government control or instability. There, companies often have little to no serious competition and there is first mover advantage potential. This allows firms breaking into these markets to achieve better pricing for their acquisition assets. Valuations tend to be a bit lower in these markets as there is less competition, but due diligence costs can be more expensive and time consuming.

Masri: At times, the exercise of valuing can be more challenging in frontier markets due to a shortage of information or comparative transactions. We have found that the use of an earn out structure can go a long way toward bridging pricing gaps between buyer and seller, especially as PE continues to gain traction in frontier markets and the use of creative structuring tools becomes more common. One common advantage in relation to valuations that frontier markets tend to benefit from over other markets is that there is less potential for very expensive pricing in frontier markets as a result of frothy stock markets or too much dry powder chasing the same deals. Quite the opposite may be true in smaller and cash-poor frontier markets, since there are very few PE and other investors, which can help to keep valuations grounded to reasonable levels.

Cusack: How have economic policy and investment regulations impacted frontier markets investment? What frontier markets have actively courted PE through economic liberalisation, reduced barriers and an increased openness to foreign investors? Where is investment potential stymied by regulatory barriers?

Masri: The regulatory environment and, more generally, economic policies are critical to the success in any market of the PE industry and to the ongoing development and maturation of that industry. Most frontier market governments, if they are forward looking, are constantly working to improve the investing climate for domestic and foreign investment, a small subset of which is represented by PE capital. An important role played by PE players is to be quicker to react and better at sourcing opportunities in such markets, and matching those opportunities with investors who would not usually be looking to invest in a given market directly but are willing to back PE managers to do so. The direct investments of a PE fund can also catalyse co-investment from LPs or third parties to play an important role in the investment landscape of a frontier market. And when a PE fund successfully exits, it is a further validation of the efforts of policymakers at enhancing their economic environment. Finally, GPs in frontier markets often play an important role in actively lobbying to change laws and regulations to improve the investing landscape.

Doddy: In recent years, African governments have increasingly recognised the potential of PE investment to unlock regional economic growth. As a result, many of them have implemented business-friendly policies and reforms. For example, Kenya, Nigeria, Namibia and South Africa recently made changes to the asset allocation rules of their state pension funds to facilitate private sector growth, allowing pension funds to invest up to 15 percent of their assets in private companies. In some regions, regulatory obstacles continue to impede investment in particular sectors. For example, in Ethiopia, foreign investors are banned from investing in the telecoms and financial services sectors. This is one example of why it is essential to have a thorough understanding of the various commercial and legal landscapes when investing. Nonetheless, headway around the harmonisation of the investment and business landscape has already been made in East, West and Francophone West Africa, where regional trade linkages continue to provide opportunities for portfolio company expansion. Regional communities, such as ECOWAS, SADC and the EAC, ensure there is an expanding marketplace, where companies with a pan-African platform investment strategy can target industry champions with a view to expanding across the region, allowing for years of top line growth across borders.

Barry: Frontier markets’ governments can proactively attract or repel PE by regulations, currency controls, foreign ownership limitations and facilitating divestment alternatives. The biggest issue is financial transparency. The regulations in the UK and US on corruption have prevented many investments in frontier countries. Another vexing issue is business-government oligopolies. In too many countries, the practices of government and big business are to restrict or eliminate competition.

“At times, the exercise of valuing can be more challenging in frontier markets due to a shortage of information or comparative transactions.”

— Leith M. Masri

Cusack: To what extent are you seeing an increase in secondary buyouts as an exit route? What factors are driving this trend?

Doddy: While a majority of successful exits in Africa in 2016 have been strategic sales to operators, secondary buyout deals to PE firms and other financial buyers have, since 2013, been steadily increasing, according to the African Private Equity and Venture Capital Association and EY’s latest exit study. In 2016, secondary buyouts in the financial services, industrials and consumer goods and services accounted for the largest share of secondary buyout deals between 2007 and 2016. The rise in popularity of secondary buyouts is correlated with a maturing African PE industry. With funds holding assets for an average of six to seven years, combined with a bumper year for fundraising in 2015-2016, there have been more deals between firms, with more medium-sized funds buying out smaller funds to spend the dry powder. Secondary buyouts are often seen as providing a smoother, speedier and less disruptive exit route while still delivering returns to investors through a competitive bidding process. Often, this type of exit deal allows a PE firm to acquire an asset that they are genuinely interested in growing and presents a smoother operations take-over at management level, as the portfolio company will already be accustomed to PE firm processes. For the exiting company, it is an equally beneficial scenario as they will be dealing with a professional buyer that can adequately assess the company’s risk profile, ensuring greater certainty at final close.

Barry: Secondary buyouts are beginning to be a factor in emerging markets. Although size and frequency are small, I expect secondary buyouts to grow rapidly. The trend is accelerating because international and emerging markets’ PE funds have secured capital commitments well in excess of the natural deal flow. Recycling PE investments is well accepted in the developed world and is now evolving in emerging markets. I am not aware of any material secondary transactions in frontier markets, although I expect the same evolution to occur as more capital commitments are secured than the deal flow will support.

Masri: We see secondary buyouts on occasion in our markets but they are still not frequent. In frontier markets with an increased amount of PE activity and dry powder, they are more of a factor.

Cusack: Do you expect to see increased prospects for PE investment in frontier markets in the years to come? Where, in terms of sector or geography, do you expect the greatest opportunities in the near future? What role do you expect these markets to play in shaping the future of the global economy?

Barry: Interest in frontier markets is growing. I expect the emphasis to be on those countries which have a large internal market or whose economies are enhanced by resource exports which exaggerate the economy. The first step is the extension of global or emerging market funds into an occasional frontier market investment. The problem is that the frontier market investment size may be disproportionally small with insufficient fund impact. The issue of compensation for GPs is the challenge. The current compensation system based on assets under management will limit the growth of active participants because the capital deployment in frontier markets is modest. I suggest that a compensation plan based on investment results, not assets under management, would address this problem. Until this issue is addressed, I expect the number of participants will remain low.

Masri: We do expect to see those markets that have had little PE activity in the past continue to witness increased activity. However, for many markets that have already witnessed multiple cycles of PE investing, we expect that ebb and flow to continue, albeit that the market overall will grow along with deal and fund sizes. Geographies with strong demographic trends should continue to witness great opportunities and growth prospects and various industries will benefit from those trends, including food and beverage, healthcare, education and service industries, among others. Given that frontier markets often do not have the same level of legacy infrastructure or industrial continuity as other markets, such frontier markets can play an important role in developing innovative solutions or business models and operate as the testing grounds for certain industries, such as renewable energy, water and agriculture, generic pharma, environmental solutions and others.

Doddy: The major frontier markets in Africa should continue to present opportunities for years to come, and investors with knowledge of these markets and their distinct characteristics will continue to see promising deal opportunities. East Africa and Francophone West Africa enjoy a particularly positive macroeconomic outlook, having established themselves as regional hubs, and we expect they will reap the accompanying investor windfall that goes with this status. Continued regional integration across Africa is also likely to benefit frontier markets such as Ethiopia and the Republic of the Congo, with populations of 102 million and 82 million, respectively, which will likely see increasing capital injections in the medium term as investors diversify their investment strategy to include these markets. We also expect foreign investment to continue to power the growth of businesses in African frontier markets as more African pension funds and private wealth management firms with local market insights invest in and contribute to the opening up of frontier markets.

“The major frontier markets in Africa should continue to present opportunities for years to come, and investors with knowledge of these markets and their distinct characteristics will continue to see promising deal opportunities.”

— Hurley Doddy

Cusack: What final piece of advice would you give to PE players in terms of pursuing opportunities while mitigating risk in frontier markets? Where are perceptions about risk in frontier markets furthest from reality?

Masri: PE investing in any market benefits from creative sourcing of opportunities, solid deal structuring, enhancing value at portfolio companies and well-timed exits. It is no different in frontier markets, though it may take greater patience and time to build a pipeline of opportunities and proprietary deal flow, and it often requires a greater proximity to the investments to yield the required return. While reputational issues are important to PE players wherever they may be, they are even more critical to frontier market GPs given the fewer number of players and the smaller markets they operate in. As such, frontier managers have to work hard to build and protect their reputations in markets where reputation for value creation, fair dealing and transparency is as important as track record.

Doddy: Despite promising opportunities in Africa, barriers to the continent’s frontier markets are still significant, with investors requiring greater standards of strategic sophistication for fund managers to mitigate risk and maximise returns. Frontier markets typically require local bases to source deals, conduct due diligence, execute transactions and to work closely with portfolio companies. PE firms in developed markets, such as the US or Western Europe, can rely on significant market data, plentiful debt financing and active intermediaries to help find and close deals. Strong GPs investing in frontier markets need to have a combination of international experience, local knowledge and persistence to execute in sometimes turbulent markets. The real challenge in frontier markets is to identify and understand the opportunities. As a company, you need to dedicate significant resources to understanding where to go to next and to identify new sectors that will benefit from the trends in more established markets on the continent. This is a critical part of developing exit strategies and ultimately in achieving above market returns.

Barry: The biggest challenge in frontier markets PE is ignorance of local opportunities which is translated into a perception of risk. The host government should institute investor-friendly regulations and publicise them. Also, local governments need to ensure a level playing field through strong regulations which promote open competition and financial transparency. The GP must be ‘on the ground’ with investment personnel who are active in the community and culturally sensitive. The team needs to be actively involved in the businesses to mitigate business risk. The fund manager needs to be proactive in seeking divestment options which, most likely, will be cross-border while having staff on the ground who are actively involved in the business.


Jake Cusack currently serves as the chair of the Frontier Markets Council for EMPEA and is co-managing partner of CrossBoundary, a frontier market investment firm. Mr Cusack has substantial transaction experience throughout Asia and Sub-Saharan Africa and has previously written for the New York Times, Wall Street Journal, Forbes and Harvard Business Review. Mr Cusack has an MBA from Harvard Business School, a MPP from Harvard Kennedy School and a BA from the University of Notre Dame. He can be contacted on +1 (646) 856 9071or by email:

Hurley Doddy is a managing director, founding partner and co-CEO of Emerging Capital Partners (ECP). Mr Doddy is responsible for providing overall leadership and strategy for the firm, including management of the investment staff. With 30 years of private equity and finance experience, Mr Doddy provides a breadth of finance and transaction experience and is active in all phases of the investment process. He serves on ECP’s executive committee and on the funds’ investment committees. Mr Doddy also serves as a member of EMPEA’s Africa Council.

Leith M. Masri is a founding partner of Foursan Group, a private equity specialist investing in the Middle East region. Established in 2000, Foursan manages funds that invest in a range of geographies and sectors. Mr Masri received his JD and MBA from Stanford University and a BA in Economics from Harvard University, and is an attorney admitted to the New York Bar. Mr Masri serves as a member of EMPEA’s Middle East Council. He can be contacted on +962 6 562 4562 or by email:

Thomas C. Barry is president and chief executive of Zephyr Management, L.P., an investment management company which he founded in 1994. Prior to founding Zephyr, Mr Barry was president and chief executive of Rockefeller & Co., the investment management arm of the Rockefeller family, from 1983 to 1993. He received an MBA from Harvard Business School in 1969 and an undergraduate degree from Yale University in 1966, where he majored in Latin American Studies. Mr Barry serves on EMPEA’s board of directors and Frontier Markets Council. He can be contacted on +1 (212) 508 9400 or by email: