Private equity activity on the rise in Africa

 Africa looks set for a bright future on the private equity front with activity on the rise, according to a recently released report which predicts that around a billion dollars could be invested in the next 5 years.

Private equity activity in Africa will inject billions of US dollars of sustainable investment over the next five years with deals growing from a low base equivalent to 0.18 percent of Africa’s gross domestic product (GDP) in 2016, the report reveals.
According to the research – ‘A growth engine: Trends and outcomes of private equity in Africa‘ – every 0.01 percent increase will mean US$200 million more investment and could easily reach US$1.1 billion over the next 5 years.
The report reveals a number of interesting trends about investment in Africa. Private equity investors in Africa tend to be distinct from other parts of the world, holding investments for longer than in developed markets and using less debt and improve corporate strategy and governance. Furthermore, they invest more in growth and job-creation, often scaling small businesses to a size viable for trade buyers.

Significant increase

The report, which was commissioned by Baker McKenzie and the Economist Corporate Network, revealed that private equity activity in Africa has increased significantly in the last few years. From 2010 to 2016, private equity firms invested around US$25.6 billion across a variety of sectors from consumer goods to financial services, communications health care and infrastructure.

Environmental Social and Governance (ESG) investing has also improved in Africa. Private equity companies and the limited partners investing in their funds, prioritize meeting acceptable ESG standards. Energy efficiency, staff training and qualifications, green-house gas emissions, highest standards of governance and best business practices, and litigation risks are some factors considered in ESG investing.

Private equity deals

More than 1000 private equity deals were concluded between the beginning of 2010 and the end of 2016 in Africa. Trends emerging included:
– The Southern Africa region accounted for around 30 per cent of completed transactions.
– South Africa, the largest and most sophisticated private equity market in Africa, accounted for 22 percent of concluded transactions by volume and 13 percent by value between 2010 and 2016.
– West Africa contributed one-quarter of the capital invested in African private equity transactions over the period.
– The East African region contributed 18 percent of private equity transactions, but just 8 percent of total deal value.

Most private equity companies based in East and West Africa expect to raise most of their investor funding offshore due to shallow pools of African institutional capital. Currency volatility, also remains a challenge to fundraising efforts, and to transaction execution in general. Investment returns have been negatively impacted by the strengthening of the dollar against most major currencies in Africa. However, even in tough commercial operating environments, general partners are generating above-average returns.

It was found that the low capital-market base is one of the contributing factors towards trade sales being a dominant form of exit for private equity investments. In the period 2014-15, trade sales accounted for 53 percent of Africa-based exits, up from 44 percent over the period 2007-13. However, a growing category of exit in the region is sales to other private equity companies and financial buyers.
In 2017, it is expected that 9 out of the 20 fastest-growing economies will be in Africa. Even in those countries that have experienced slow growth, there are still strong returns to be made.

The long-term opportunities across African economies for private equity are extremely robust and demonstrate long term value creation and returns,’ said Scott Nelson, a private equity partner at Baker McKenzie. “Returns can be far higher than in developed markets and at the same time private equity investors play a catalytic role in Africa. Investment in this sector tends to focus on growth capital, helping companies to improve governance and strategy, expand their footprint and contribute positively to the region’s broader commercial ecosystem.”

Source: Global Legal Post