Private equity and sub-Saharan Africa – reasons to be cheerful

January 2013 | MARKET OUTLOOK 2013

Financier Worldwide Magazine

In many ways 2012 has been the year in which sub-Saharan Africa has come of age. Macroeconomic drivers remained positive as many other economies stagnated. Investor sentiment has increased as have the variety of structures and vehicles through which investments (both direct and indirect) can be made. 2012 saw many significant developments, including Abraaj’s acquisition of Aureos, Carlyle’s increasing focus on the continent, and KKR’s recruitment of ex-Helios partner Kayode Akinola, with a brief to source appropriate investment opportunities in Africa. South African firms (both financial and corporations) are increasingly targeting opportunities north of the Limpopo. Indeed, large corporations are now using South Africa as a gateway to the rest of the continent.

So what will 2013 hold? It would be blasé to simply reply with more of the same, but that is the likelihood. While by no means decoupled from the developed world, many African economies are projected to continue to experience strong growth in 2013. The following are a few thoughts for 2013.

First, fundraising will remain extremely tough. In part, this is driven by investors’ disillusionment with paying high fees and locking up funds for a very long time. Ironically, given such disillusionment is the result of dwindling returns and underperforming funds in the developed world, the traditional 2 percent management fee is far more important for funds investing in Africa. High transaction costs and the sheer number of countries to be covered, all with different systems and cultures, mean management fees are rarely a profit stream for sponsors.

Second, firms should expect more direct investments by development finance institutions and family offices. While the traditional long term, closed-ended fund is by no means dead, investors that can talk with their feet, will. Many investors with sufficient size to bear the costs are developing in-house expertise, particularly in relation to co-investments, and reducing commitments to third-party funds.

Third, more exits are likely. Historic funds need to show investors that, as well as sourcing good deals, they can exit and generate meaningful returns. Allied to this is the focus of the larger global funds on the continent in sectors other than financial institutions, telecoms, mining and oil & gas, making secondary buyouts a more realistic exit. Flotations on local markets – for example Actis’ listing of Ugandan electrical distribution company, Umeme, on the Kampala Stock Exchange – are increasing. Corporations are also focusing on opportunities.

Fourth, investing in small and medium size enterprises will remain tough, as is the case worldwide, but increasingly creative models and approaches (including exits) involving debt, equity, quasi-equity and other financial instruments (including guarantees) will help provide much needed funding.

Finally, opportunities in infrastructure will continue, driven by the demand created by increasing GDP as well as regulatory change, such as the ongoing power privatisation process in Nigeria.

As Danish physicist Niels Bohr said “prediction is very difficult, especially if it’s about the future” but, while by no means exhaustive, the above thoughts represent some of the opportunities and pitfalls to be aware of in 2013.

Hugh Naylor

Head of Private Equity

Trinity International LLP

T: +44 (0)207 997 7049

E: hugh.naylor@trinityllp.com

www.trinityllp.com

Hugh Naylor

Trinity International LLP