Is Africa still a land of opportunity for private equity investment?

July 2015  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

According to a recent report by the African Private Equity and Venture Capital Association (AVCA), between 2007 and 2014, $22bn in dedicated private equity capital was raised for Africa and 983 private equity deals worth a cumulative $34.5bn were completed – big figures indeed, and redolent of the existence of a healthy appetite for private equity investment throughout the continent.

Further evidence of the veracity of these figures is provided within the pages of Allen & Overy’s ‘Private equity in Africa: context, opportunities and risk’ report, released in April 2015, as well as EY’s ‘Private equity roundup: Africa’ published in 2014. Both reports suggest that the continent offers and will continue to offer attractively priced opportunities – especially in the fast-moving consumer goods space – and is poised to acquire the mantle of a private equity hotspot, particularly sub-Saharan Africa.

Clearly, there is an appetite for private equity investment in Africa, but a question does present itself: is this investment appetite inherently limited?

Identifying the appetite

So, to what extent is there an appetite for global private equity investment in Africa and, importantly, what are the factors driving recent levels of investment? The EY report, whilst recognising that the private equity landscape in Africa continues to be dominated by domestic and regional private equity firms, states that large global private equity firms are increasingly turning their attention to Africa with opportunities in sectors such as consumer, infrastructure, logistics, telecommunications and financial services proving particularly attractive to investors.

A good example of the significant amounts of international capital flowing into Africa is the Washington-based Carlyle Group’s Sub-Saharan Africa Fund, which reached $698m in 2014. This private equity fund, which closed $200m above target, has so far led to two major investments: the Tanzania-based agricultural commodity merchant, Export Trading Group and J&J Africa, a logistics company located in Mozambique.

“Factors driving increasing private equity investment on the continent include relatively strong economic growth by global standards, a general trend towards democratic governance across the continent, and positive demographic changes in the form of a young and growing population and an emerging middle class,” states Dorothy Kelso, director and head of research at the AVCA. “Many private equity investors are investing in businesses that support what is still a largely underserved middle class population.”

Additionally, new and existing players in the African private equity market are focusing on carving out niche investment strategies designed to give them a competitive edge on the continent, including green energy funds, impact investing and specialised investment platforms. All in all, a healthy private equity investment appetite, it would appear.

Obstacles to investment

However, in addition to a tough macroeconomic environment (some say the toughest seen in Africa since 2008), many obstacles lie in wait for private equity practitioners looking to invest in Africa. Such obstacles demand a significant adaptation to the business model often utilised, which predominantly involves the acquisition of minority stakes in privately-held companies.

In its 2015 report, Allen & Overy cites numerous difficulties, such as the need for investors to comply with local regulatory frameworks; increasingly robust international regulation including the UK Bribery Act and US Foreign Corrupt Practices Act; gaining access to local capital such as domestic pension funds, which is complicated by exchange controls, local content requirements and ownership restrictions; and the operational problems created by the existence of shallow capital markets at a local level.

“Our recent survey of Limited Partners investing in African private equity revealed that short-term political risks in some countries, a scarcity of talent and a weaker exit environment were deemed the biggest obstacles to private equity investment in Africa,” confirms Ms Kelso. “However, the relatively peaceful and successful election in Nigeria, Africa’s largest economy, has quelled some of the concerns about political risks on the continent.”

Future outlook

Despite a certain amount of criticism which contends that the relatively nascent African market has a tendency to embrace big deals that skew the numbers, many retain the view that Africa’s potential in terms of private equity investment in the coming years is strong.

“A number of large private equity funds have already achieved final closes this year, indicating that 2015 will be a bumper year for fundraising, and this will feed through to increased investment activity over the coming years,” believes Ms Kelso. “Private equity investment will continue to be targeted at fast moving consumer goods, infrastructure, and energy sectors.

“Sub-Saharan Africa (excluding South Africa) will remain the focus of private equity investors as they continue to look outside the relatively mature market of South Africa. In particular, East and West Africa are likely to continue to attract increasing levels of private equity investments. Overall, private equity activity in Africa should successfully ride the wave of any short-term global and local uncertainties, remaining firmly focused on the continent’s medium-to-long term growth potential.”

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Fraser Tennant