The fundamental precept of Private Equity (PE) is to transform a company and improve it, thus allowing it to achieve its full capability by enhancing its operational structure. This strategically targets gross revenue and increases portfolio effectiveness thereby increasing the profitability of the company in question. As such, emerging markets have become a key opportunity for global investors.
Following the 2008 international financial crisis and credit crunch, PE firms have shifted towards emerging markets in search of growth. Back in 2008, Africa only accounted for a mere 4% of emerging market fundraising. It now accounts for over 10%. It is true that global macro interest has increasingly shifted back towards advanced economies in recent months, as emerging markets have suffered from weak economic and political environments.
However, Africa remains fundamentally strong, and it has witnessed the continued development of its PE industry. More specifically, the prospects for the development of Africa’s PE industry are bright. Interest in Africa has never been more important, and the benefits that PE brings such as financial discipline, access to capital markets, for capital growth and corporate governance have never been more apparent.
Enter Foreign Investors
Thus, PE’s impact on the continent is only beginning to be felt and the next decade promises to be rich in opportunities. The continents’ growth trends are steady, for example, many African countries are currently sustaining their longest periods of growth since their independence around 50 years ago. Moreover, a healthier macro environment, the results of both the commodities boom and stronger quality of life indicators for Africa’s 1.1 billion population have contributed to the continent’s growth.
Finally, a shift in FDI from the primary sector to the tertiary sector has allowed Africa to remain a top investment destination as investors’ attitudes begins to mature. Since 2000, the sub-Saharan economy has grown more than four-fold, with growth driven by investments in infrastructure, the services sector and agricultural production. Two significant trends are gaining further momentum; on the one hand, there is an increase in intra-regional investment within Africa and, on the other hand, there is an increase in the diversity of industries in which investments are flowing, allowing them to go beyond the primary sector.
Fundraising On The Continent
Africa has markedly benefited from investors’ increasing risk appetite for emerging markets. Fundraising for the continent has significantly increased during the past two years. According to a study by EY:
“Last year saw a series of successful closes including: Abraaj’s Africa Fund ($990m), Helios Investors ($1.1bn) and DPI’s African Development Partners II ($725m).”.
This clearly illustrates investors’ confidence in the long-term potential of the region. Moreover, an important number of Africa-focused funds are still in the process of raising capital with leading fund managers such as Investec Asset Management and Vantage Risk Capital leading the cohort.
“These funds, as well as others, range from around $250m to $1,200m and include but are not limited to infrastructure, real estate, growth and buyout funds.”
The African Private Equity and Venture Capital Association (AVCA) claimed that the total deal value of completed African transactions in 2014 and 2015 hit high records. The biggest deal was the $3.2bn of capital raised for IHS Nigeria Ltd to acquire additional telecommunications infrastructure. According to EY:
“Although the deal is yet to close, IHS secured funding from a series of investors including Goldman Sachs, Emerging Capital Partners and Investec Asset Management. Moreover, although some observers question the amount of investment opportunities available in the region, creativity and innovation in terms of sourcing and structuring are allowing PE firms to put their capital use.”
Over the last decade, Nigeria has become an increasingly attractive consumer market in addition to its status as the leading oil producer in Africa. The country is successfully developing a strong and diversified economy driven by strong demand in agriculture, services and manufacturing as well as exports to other sub-Saharan African countries and developed markets.
Similarly, Kenya is also performing well economically, and its growth prospects remain promising. The country is progressively becoming a technology and innovation hub and is also being targeted by foreign investors as a springboard to other rapidly growing consumer markets in East Africa. By now, most investors are clearly aware that Africa’s investment opportunities go well beyond extractives.
Given the expansion of both fundraising and transactions over past years, the number of investment possibilities has increased. Developed markets benefit from better environments for M&A activity, and more robust IPO markets allow faster exits for PE firms. Conversely, exits across many emerging markets have been less efficient, due to challenging macroeconomic environments.
“Despite this, the 2016 joint report by EY and the AVCA portrayed how 2014-2015 saw an increase in exits from businesses in the financial services, health and retail sectors with four countries accounting for over two-thirds of PE exits, namely, South Africa, Egypt, Nigeria and Kenya (10%)”
Despite substantial evidence pointing to the contrary, Africa still continues to endure the decade-long perception that the continent suffers from economic stagnation, political instability, conflict and extreme poverty.
Fortunately, a more optimistic narrative has appeared, one that investors have ignored up until now for the most part. Underinvestment is being countered by a rapidly growing middle class as well as rising consumer power. Moreover, increased investments across a range of different industries is now paramount and an increasingly important driver of modern Africa’s economy within which PE plays a crucial role.
PE firms are investing in an increasingly broad portfolio of businesses. Additionally, to just capital, they can help companies prepare and execute well-defined strategies while providing financial, operational and governance expertise.
However, it remains true that volatility will continue to be an inherent part of Africa’s investment landscape. Nonetheless, the firms with local market knowledge and dense networks will be best-positioned to benefit from one of the most attractive opportunities in the global economy.
Despite the macro volatility, PE firms have continued to deliver greater added-value over public market returns due to strategic and operational advancements. Finally, PE firms have also increasingly helped their portfolio companies expand geographically as well as be exposed to external management and PE firms’ networks.
Despite the obvious challenges, Africa’s growth story is real, and evidence has come to prove that Africa remains one of the regions with the most potential if the right conditions are met. African governments should try to encourage the growth of their capital markets and stock exchanges to provide greater liquidity, security and access which investors crave, and allow broader networks and market connections to provide firms with one of the most promising opportunities in the global economy.