Private equity value creation in Africa

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Africa is experiencing exceptional economic growth, a rising middle class and relative political stability – themes that make the continent an increasingly attractive investment focus.

A burgeoning, yet viable, private equity market has emerged. Although the market is in its infancy, key themes are already developing, including more robust exit activity than many might expect.

Exit activity and performance

Despite a misperception that exits are hard to achieve in Africa, we recorded 118 exits by PE firms between 2007 and 2012. In addition, many other sales occur privately.

We gathered returns data on 62 exits, which shows that strategic and operational improvements generated returns almost double that of the Johannesburg Stock Exchange All Share Index. It’s also encouraging that PE exits were relatively strong across all regions and not centered predominantly in the more developed South African market.

Financial services was the most active exit sector (23%), but other sectors such as food and beverage (9%) and telecommunications (8%) also made good showings, illustrating the rise of the African consumer.

Financial services most active sector, driven by growth in consumer

Source: How do private equity investors create value?: 2013 Africa Study, EY and AVCA, 2013

Local networks are crucial

Africa’s PE firms must build and sustain healthy local networks to ensure successful deal origination. Nearly half (48%) of the deals in our study were sourced via networks or relationships. The more mature South Africa market saw relatively fewer deals sourced this way, while other regions saw relatively more.

"Someone on our advisory board knew the CEO of the company."

Most firms (80% in our sample) take minority stakes in the businesses they back. To protect themselves, firms make extensive use of minority protection methods, including board seats, veto rights on major decisions and the rights to change management and/or auditors.

ESG improvements drive growth

A key part of PE’s value-add in Africa is improving the environmental, social and governance (ESG) policies of portfolio companies. This work improves company performance and gives potential future buyers more confidence that key risks are mitigated.

Developmental finance institutions (DFIs), the primary source for many of Africa’s PE funds, have helped drive improvements in ESG practices. The ESG agenda is so important that some African firms report dedicating in-house coordinators or committees to oversee risk and other issues in these areas.

Realizing value with strategic buyers

Strategic buyers overall are the most active acquirers of PE portfolio companies, accounting for about half of all exits. While local strategics continue to play a role, returns are highest for PE when selling to regional corporates—presumably because these buyers are looking for valuable footholds in new markets.

Given the degree of transformation and support required by portfolio companies, holding periods are longer (5.1 years) in Africa than in other parts of the world (4.5 years in both Latin America and the US; 4.1 years in Europe).

Finally, African PE firms are beginning to effectively use many exit practices common in other markets. The most important of these is ensuring management continuity or clear succession planning, measures that give potential buyers confidence in an environment where the pool of experienced teams is not deep.