Ethos Private Equity raises $800m African fund

March 2013 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

After two years of marketing and fundraising, Ethos Private Equity Ltd., South Africa’s oldest private equity firm, exceeded expectations in January when it announced it had raised $800m for its latest fund.

Ethos’ Fund VI is one of the largest Africa-focused private equity funds ever raised and it is representative of the continent’s growing attractiveness in the eyes of investors. Ethos, founded in 1984, had originally targeted $750m for the fund, however the total eventually raised surpassed that target by $50m.

Following a fundraising lull in the region, brought about by the global recession of 2008-09, there appears to be a new confidence in African private equity. Increasingly, more firms and investors are being attracted to Africa, the sub-Saharan region in particular, as the area’s burgeoning middle classes and rapidly expanding economies make it a fertile environment for investors. “The fundraising market has been tough. Investors are constrained but they are looking beyond the developed markets for pockets of growth and have identified South Africa as an investment opportunity. Due to its proximity, investors also recognise South African potential as a gateway into sub-Saharan Africa,” said Andre Roux, the firm’s chief executive officer.

Although the Johannesburg-based Ethos has declined to divulge the identity of individual limited partners within the new fund, it believed that the group of investors are representative of a fairly even split geographically. The firm did confirm, however, that while previous funds saw the majority of capital raised from North America, this fund saw money levied across Africa, Europe, North America, Asia and the Middle East. Sovereign wealth funds and Asian pension funds also contributed to an Ethos fund for the first time. “Asia is now an important contributor to our funds where previously we had no contributions from Asia,” Mr Roux said.

According to research from Barclays, Africa has emerged as the world’s second fastest growing region. The IMF forecasts that the GDP of the sub-Saharan economies will grow 5.7 percent on average in 2013. Indeed, the first nine months of 2012 saw private equity transactions in the region increase 19 percent, with 43 deals being completed. The region also boasts nine of the world’s 20 fastest growing economies. “In a world starved of growth, sub-Saharan Africa has become an investment bright spot. The consumer is clearly an important area of growth but that’s not just limited to retail, but to industrial services that serve the oil industry,” noted Mr Roux.

The attractiveness of the region has also been boosted by the global retreat from other emerging markets. As firms retrench from the former investment hotspots of Latin America, Asia and the Middle East, they are turning more often towards Africa.

In the last two years alone a significant level of funding has been raised in the name of Africa-centred funds. Helios Investment Partners raised the largest ever African fund in 2011, reaching a total of $900m. 2012 also saw US private equity firm Carlyle complete its first ever African deal when it paid $210m for a stake in a Tanzania-based agribusiness. Brazilian bank BTG Pactual also announced plans to raise an infrastructure and energy sector-focused fund of $1bn in 2012.

Although it is evident that interest in the continent on the whole is increasing, many of the region’s nations are still playing catch up (logistically speaking) with South Africa. The South African economy is considerably more mature than its neighbours and, as such, a great deal of investment from the fund is likely to be located within Africa’s largest economy. “South Africa has obvious advantages in the context of infrastructure and corporate governance. Investors see those as a huge plus in terms of tackling sub-Saharan Africa,” explained Mr Roux.

Although the firm expects to deploy the funds over the next three to four years, most notably in South Africa and East African nations such as Kenya and Tanzania, Ethos has been busy investing from its current fund. In 2012 the firm acquired South African corporate clothing and promotions company Kevro for $95m, and also invested an undisclosed sum in the South African construction company Waco International. Mr Roux noted that ordinarily the firm invests in medium to large business with an enterprise value of $100m to $450m.

Richard Summerfield