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Private Equity in Africa part 1 – It’s not all doom and gloom

by Jon White May 08, 2018
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After recently attending Private Equity Africa’s 8th Annual Deals & Funds Review Seminar, it’s safe to say that there’s a lot of change on the horizon and this is a hot topic to keep an eye on.

Despite some slightly painful figures over the recent years, the outlook isn’t as gloomy as you may think. There was a lot covered and the evening provided many informative insights into the PE landscape. So over this mini-series of articles, we’re taking a deeper look into some of the issues, problems and forecasts for the sector that were tackled over the course of the evening.

To start with, it’s worth summarising the Private Equity landscape in Africa and how it has developed over the last few years.

The story so far

To cut a long story short, it’s unfortunate to say that the figures for PE in Africa have not been great; 2017 marked a downturn continuation that has been in effect for the last 5 years since the heady heights of 2013.

The geography has reeled from a series of macro socio-economic disturbances that have rocked some of the core beacon economies on the continent and have had a significant effect on PE’s appetite for investment, and indeed the sheer ability to invest.

In particular, falling commodity prices had a heavy impact on Angola, Nigeria and South Africa which, in each case, precipitated a recession and a subsequent tumbling devaluation of the currency. These overarching problems have had an exponentially negative effect on the African investment world. Casting a shadow over the buoyancy and optimism of the previous commodity boom that came twinned with the rapid expansion pace of mobile connectivity and debt forgiveness.

These continent-wide recessions twinned with the consistent issues associated with investing in Africa; i.e. ever-present problems with FX, lack of solid investment targets, the difficulty to find the right talent and a burgeoning of competitor regulation and jurisprudence. All of this continues to make it difficult for PE to gain a truly solid foothold on a continent reeling from an economic slowdown.

As a result, the stats on investment in Africa do not make for optimistic reading:

•    Fundraising dropped to a 9 year low of $724m (52.4% down) in 2017.

•    Final closures dropped 80%

•    Deal Value dropped 31% to $4bn – worth noting that $628m of this was contributed by one deal in Carlyle’s acquisition of Shell’s Gabon assets.

•    Deal numbers were also at the lowest since 2013 at 104 down from 151 the year before

•    Exit Values dropped to $0.5bn down 70% with problems in Nigeria and South Africa having a huge impact, keeping investors at arm’s length.

So, taking all this into account you could be forgiven for seeing this as pretty grim reading for the continents investment landscape.

However, it is perhaps not all doom and gloom and the prevailing sentiment in the room was that of a turn of the tide. It felt that, despite the numbers, there had been a significant shift in perceptions and, indeed, the overall approach of investors in Africa.

Looking forwards

There were some interesting indicators that things may be beginning to stabilise and improve as the sector has begun to look at different, more nuanced and sophisticated approaches to the African investment landscape.

Key among these trends was the feeling that the days of the all-encompassing “Africa” specialist were over. People are no longer willing to accept that being an expert in “Africa” in and of itself is enough. The specialist tack needed to approach each different country within Africa and then de-bundling that further into the different asset classes and sectors and how they perform in different areas not to mention the rise of new collective areas of regulation means that being specialist in “Africa” is now considered far too blunt an approach.

As such, GP sentiment is slowly, but surely improving and the LPS are on the hunt for specialists in their given areas. Regional specialist funds are showing a lot more promise than pan African attempts and as long as global LPs are being put off by continued and ever-present market turbulence, this specialist approach should continue to bear fruit.

In fact, small specialist funds are consistently doing well, both by sector and geography. Infrastructure focussed funds continue to perform, closely followed by energy, agriculture and Real Estate. In terms of where the deal value lay in 2017/early 2018 23% was in Business Services, 17% in Food & Agriculture and 14% in Industrials. Country-specific funds are working particularly well with Kenya, Mozambique and South Africa leading the charge despite the continued economic turbulence.

This trend of the specialist is hopefully laying the foundation for the return of the bigger generalist funds. There has often been a direct correlation of one setting the scene which then builds the investment architecture and sentiment for the other, and resulting in acting as a barometer for bigger and bigger deals coming over the horizon.

Added to this, there is no escaping the fact that there are some indicators of size and growth that cannot be ignored by the PE world for long. Africa is set to have the youngest population in the world by 2035, along with being the most urbanised population in the world by 2045. Although predictions vary, there is also a broadly accepted view that overall population could tip over 2.5 billion by 2050 with Nigeria approaching a similar population to the entirety of China by 2100!

These underlying demographic trends show that despite short/medium term falls in investment activity Africa remains a market that is hard to ignore due to the promise and scale of the continent. This new wave of the specialist sector and country funds are thus hopefully indicators that the sun is rising once again on the African investment world.

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