African PE deals slide in 2015 as fund raising grows

April 2016 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

The global economic and geopolitical landscape has been in a state of flux over the last few years. The increasingly volatile global environment has negatively impacted economies and key industries worldwide, leading to job losses and corporate bankruptcies aplenty.

Though no country has been immune to the effects of the stuttering global economy, Africa in particular has experienced a significant amount of uncertainty over the course of the last two years. Gross domestic product is likely to have risen just 3.8 percent across sub-Saharan Africa last year, falling to the lowest level since 1999, according to the IMF. The Middle East and North Africa region probably saw growth of only 2.3 percent, the IMF notes, the second-worst level of growth recorded in the area since 1995. Much of this stunted growth is a result of the readjustment required of companies thanks to the persistently lower commodity prices recorded since 2014.

Yet, in spite of this volatility there remains a burgeoning appetite for private equity (PE) funds in Africa, according to a new report from the African Private Equity and Venture Capital Association (AVCA). PE fundraising across the continent is flourishing, with the total value of PE funds rising from $1.9bn in 2014 to $4.3bn in 2015, based on final close.

The association notes that “a handful of large funds” completed substantial final closes in Africa in 2015. London-based Helios Investment Partners closed the first-ever $1bn-plus Africa-focused PE fund, at $1.1bn. Abraaj closed its sub-Saharan fund at $990m, while African Development Partners closed a $725m fund. Michelle Kathryn Essomé, chief executive of the AVCA, noted, “Our annual PE tracker shows that investors remain keen to explore opportunities in Africa through PE funds, providing further evidence of Africa’s untapped potential as an investment destination.”

Dorothy Kelso, Director of Research at the Association, said, “As PE in Africa matures, the report shows a resilient industry experiencing continued growth even as wider concerns about emerging markets impact the investment landscape. PE firms in Africa continue to inject capital in a variety of sectors from industrials to financial services mobilising local economies and creating jobs. Looking forward, Africa’s fundamentals including rapid urbanisation, a rising middle class population and more business-friendly policies from African governments will continue to provide opportunities of interest to PE investors.”

Consumer driven industries – the food and beverage sector in particular – are likely to continue to attract the most attention from investment funds, though infrastructure development, real estate and energy may also be viable investment alternatives, the report notes. The east and west of the continent have been the most eye-catching regions for investors and the AVCA does not see that changing anytime soon, given their increased stability.

A number of other sectors saw rising PE investment in 2015, including the IT space, the health sector, as well as a number of other commercial and professional industries.

However, 2015 was not entirely positive. Though fundraising across Africa has raised a considerable amount– US$16.2bn in total since 2010, which demonstrates global investor appetite for PE in Africa – the value of PE deals announced fell by 69 percent to $2.5bn, according to the AVCA. This marks the lowest level of investment in Africa since 2012. The number of deals over $250m in particular slumped alarmingly in 2015.

The wider African economy faced a number of difficulties throughout 2015 which impacted dealmaking activity. Currency depreciation, the collapse of oil prices and other commodities, the slowdown in China and the general volatility of the global economic environment have all combined to stymie dealflow. Despite this, deals below $250m “remained relatively stable” said the AVCA.

Richard Summerfield