EY - Private equity roundup for Africa

Private equity roundup for Africa

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With a third of African countries growing at more than 6% annually, the continent has certainly arrived on the global economic landscape. Africa now accounts for many of the world’s fastest-growing economies, driven by an expanding middle class, improved business environments and increasingly stable political democracies.

The PE community in Africa is also entering a new level of maturity, as both global and local players are exploring opportunities beyond the already established South African market.

Fund-raising to remain strong

The US$3.3 billion raised in 2013 is more than double the amount raised in 2012 and the highest annual amount since 2007. This increase is in marked contrast to Latin America, China and India, which all recorded significant falls in fund-raising from 2012 (see chart).

Fund-raising in Africa and other emerging markets, US$b

EY – Fund-raising in Africa and other emerging markets

Sources: Preqin, Factiva, VCCEdge and Venture Intelligence

The outlook for Africa is equally strong. According to a survey by the Emerging Markets Private Equity Association, sub-Saharan Africa is rated the most attractive emerging market for general partner investment. The survey also reports that the continent is expected to see the greatest amount of new limited partner interest over the next two years.

The activity is attracting interest from larger PE firms. Although the landscape is dominated by domestic and regional groups, large global firms are looking to capitalize on opportunities in the consumer, infrastructure and resources sectors. The Carlyle Group, for instance, has opened offices in South Africa and Nigeria and is reportedly looking to open an office in East Africa.

Niche strategies make an impact

New and existing players in the African PE market are carving out niche strategies to give them a competitive edge.

Several PE funds are targeting the infrastructure sector. Africa needs huge investment in this area to meet the demands of its growing and increasingly urban population. Electricity and transport infrastructure are especially needed.

Green energy, particularly wind and solar, is also attracting investment. Actis and Lereko Metier have achieved very successful fund-raising in this area.

Resource-focused funds have also emerged. A slowdown in resource demand from China has created a window of opportunity to buy natural resources companies at relatively lower valuations.

Finally, impact investing is gathering attention. The strategy seeks to attain a positive social and/or environmental impact while generating a profit. LeapFrog Investments, International Housing Solutions and One Thousand & One Voices (1K1V) are key players in this area.

Transactions double from 2012

The aggregate value of African deals in 2013 was US$3.2 billion (based on data from the African Private Equity and Venture Capital Association, which includes follow-on investments). This is a significant increase from the US$1.6 billion in 2012.

South Africa has traditionally seen the largest slice of PE investment on the continent. However, there has been a significant shift in the last few years, particularly toward East and West Africa. In 2011-13, South Africa received 20% of overall PE investment in sub-Saharan Africa and 19% of deal volume (compared to 57% and 44% in 2008-10).

East Africa, which includes Kenya, Tanzania, Uganda, Rwanda and Burundi, is attractive because of increased cooperation between these five states through the East African Community, thereby facilitating cross-border activity. West Africa has an increasing number of middle-class consumers, which is also attracting investment.

Many PE investments go into businesses owned by families or entrepreneurs, and deal sizes remain relatively small. This presents a challenge to larger PE firms looking to deploy larger funds. As the African market matures, we expect more opportunities for firms to put money to work in larger deals.

Sectors linked to the rise of the African consumer, including those in the fast-moving consumer goods space, are particularly attractive to PE firms. Other active sectors include banking and financial services, energy and natural resources and media/telecom infrastructure.

Exits subdued but expected to increase

2013 was relatively subdued in terms of exit activity. External events, including uncertainty over US Federal Reserve policy, likely contributed to the quiet year.

The predominant exit route in Africa continues to be via trade sales. Many exits in 2013 occurred through mergers and acquisitions.

IPOs remain less frequent exit routes primarily because of the small size of stock markets beyond South Africa. However, given the size of some of the investees in the current African PE portfolio, we expect to see IPOs increase in the near to medium term.