Private equity continues to gain momentum in Africa after a 38% increase in 2014

(The Financial) – Private equity (PE) exits in Africa reached an 8-year high in 2014, and strong activity should continue as more companies enter the period where an exit becomes increasingly imperative, according to data from Ernst & Young and the African Private Equity and Venture Capital Association (AVCA).

The update to the 2014 Ernst & Young and AVCA study Broadening horizons: how do private equity investors create value? highlights a strengthening market for private equity exits in Africa. Private equity firms exited 40 companies between 1 January and 31 December 2014, a 38 percent increase from 29 exits in 2013, and the largest total since 2007, when there were 34 exits. The data, based on Ernst & Young research and statistics from AVCA, is released at the start of the 12th Annual AVCA Conference this week in London.

According to Sachin Date, Ernst & Young Europe, Middle East, India and Africa: “Africa’s exit opportunities have continued to improve as the market matures. While exits remain a chief concern for firms in the region, the question now facing many private equity firms in Africa and many other emerging markets is: ‘Does the calculus change in an environment of moderating and in some cases uneven growth adversely impacting the pace of investments?’ So far the answer has been no.”

Dorothy Kelso, Director, Head of Strategy and Research at AVCA, says: “With Africa’s investment landscape steadily maturing, it is promising to see the strengthening of the exit environment. It is also encouraging to note the broadening of exit routes over the past year with increasing options available for investors to realize value. The continued momentum emphasizes the enormous potential of African private equity, and with increased intra-African investment, we expect this is unlikely to slow down in coming years.”

Private equity is playing an increasingly important role in Africa’s growing economy. The past several years have seen a marked increase in investment activity, as local firms see more attention from global limited partners, and global funds dedicate new resources to the region in the form of talent and capital. As a result, the pipeline of potential exits is growing more rapidly than at any point in the region’s history.

Graham Stokoe, Ernst & Young Africa Private Equity Leader, says: “Showing healthy exits is an increasingly important issue for private equity in Africa. Last year proved that private equity firms could successfully exit their portfolio investments and return cash to limited partners. We expect this exit activity to continue increasing as there are still a number of companies that private equity invested in during the private equity investment boom in 2007 and 2008, and then there are a number of newer private equity funds that need to show increased exit activity as they raise second and third funds.”

Financial services remained the most common sector for exits in 2014 (20 percent). Health care was the second most-active sector in 2014 (18 percent), followed by personal and household goods (10 percent) and retail (8 percent), as increasing consumer expenditure made these sectors attractive to trade and private equity buyers.

Secondary buyouts accounted for nearly a quarter (23 percent) of exits in 2014, compared to 15 percent overall between 2007 and 2014, underscoring the increasing importance of PE-to-PE deals and the growing private equity ecosystem in Africa.

South Africa continues to lead in exits, with 42 percent of all activity between 2011 and 2014. The West Africa region was the second-most popular region for exits during that period (26 percent), while East Africa’s exit activity was 14 percent, increasing from 9 percent during 2007 to 2010 as the market matures.

Michelle Kathryn Essomé, Chief Executive Officer of AVCA, says: “As an association, one of our main objectives is to support the private investment ecosystem in Africa, informing investors and enabling a diverse and thriving business environment on the continent. We hope this study goes some way to challenge misconceptions sometimes held about Africa’s exit environment and showing that as an asset class, Africa private equity can deliver significant returns to investors.”