A recent report by law firm Allen & Overy paints an optimistic, yet realistic picture of private equity investment in Africa. And the main take away for most sources following private equity investment is that while there is a lot of money available, where to put that money is a different question.
The main problem, according to experts, is that there just aren’t enough large companies to take that money and the focus therefore is on smaller ventures.
Private equity firms raised $4.2 billion to invest in Africa last year, more than double the average for the preceding five years, according to data from the Emerging Markets Private Equity Association (EMPEA). According to the Financial Times, that accelerated further in the first quarter of this year, when a further $2.2 billion was raised, led by Helios Investment Partners, which closed the first-ever $1 billion-plus Africa-focused fund, and the Abram Group, which was a fraction behind at $990 million.
According to the Allen & Overy report: “private equity — with its combination of capital and management expertise — is a perfect fit for Africa. As the scale of Africa’s potential has become recognized among the investment community, private equity has provided an opportunity for those who want to both contribute to, and benefit from, Africa’s growth story.”
The report goes on to say that Africa’s potential is clear, but the ‘Africa Rising’ story will face rigorous testing in 2015. Headline growth remains strong, but African markets are facing arguably the toughest macroeconomic environment since 2008, with falling commodity prices and a strengthening dollar presenting challenges for governments’ fiscal management. Politics too will be scrutinized, with over a third of the continent’s population going to the polls in 2015. While the Nigerian result has provided a resounding boost to democracy in Africa, investors across the continent will continue to watch carefully for the impact of politics on both stability and the business environment.
The report found that more than half of all African private equity investment since 2007 had been in the telecoms, consumer and financial services sectors as the industry targeted the rising disposable incomes of Africa’s growing middle class.
But “given the scarcity of these opportunities on the continent, entry values for attractive assets have been pushed up”, the report noted.
The report said this scarcity was increasingly pushing private equity houses to move beyond their South African and Nigerian beachheads and hunt for deals in East Africa and further afield in the West of the continent.
According to the lawyers at Allen & Overy:
“The arrival of big international funds is a sign of confidence in private equity in Africa, although obstacles for practitioners remain. These include: weak and evolving regulatory frameworks; shallow capital markets; and a scarcity of big deal opportunities. Overcoming these obstacles, and adapting to the demands of doing business in Africa is at the heart of the challenge. For those with the appetite to take it on, the focus on big markets — Nigeria and South Africa — and traditional sectors — energy and mining –- are being bolstered and even overtaken by exciting opportunities in new markets in both West and East Africa, and a focus on telecoms, finance and FMCG as investors look to unlock the opportunity of rapidly rising disposable incomes.”
Click here to access the A&O report.
