Harvesting growth: the rise of private equity exits in Africa

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Africa’s economic development over the last few years has been impressive, with many countries across the continent starting to see the benefits of government and economic reforms and increased FDI flows. This, together with a steady rate of investment by, among others, development finance institutions (DFIs), has enabled the creation of a viable and vibrant private equity (PE) market as managers seek to capitalise on Africa’s strong economic growth rates. This is according to an inaugural joint study of private equity exits in Africa by the African Private Equity & Venture Capital Association (AVCA) and Ernst & Young entitled Harvesting growth (pdf, 2.6mb).

In Africa the PE industry is young but growing, the continent’s stock markets, other than the Johannesburg Stock Exchange are still very small and relatively illiquid and the intermediary networks remain far from complete across the region. As a result, a widely-held perception is that exits are hard to achieve and that therefore they are few in number. However, the study points to a higher level of exit activity than might be expected. Between 2007 and 2012, a total of 118 realisations by African PE fund managers were achieved. Africa’s PE firms are clearly demonstrating a good capacity of finding ways to realise value.

“This study gives a great opportunity to debunk myths about exit opportunities in Africa. Private equity in Africa which provides growth capital to African companies is uniquely positioned to take advantage of trends and to support further development of African economies,” says Michelle Kathryn Essome, AVCA chief executive.

One of the key means of finding the right exit partner is through the PE firm’s wide and varied contacts — a vital attribute in such a young market. The most significant form of exit is via trade sales, with regional trade buyers becoming a particularly important exit route since 2009. Africa’s markets are becoming increasingly pan-regional.

The study analyses 62 exits for which returns information shows that PE’s strategic and operational improvements are generating returns of almost double that of the Johannesburg Stock Exchange ALSI.

“There is no doubt that private equity exits are on the rise in Africa. Africa’s PE houses are committed to finding the right businesses and management to finance, working closely with management teams to improve governance and performance and identifying the best available exit route,” says Sandile Hlophe, Ernst & Young’s Head of Transaction Advisory Services, Africa.

PE exits and performance

PE exits show momentum across all regions, with a record of 118 exits by PE firms between 2007 and 2012 recorded. Also, encouraging is the finding that these exits are not entirely centered around the more developed market in South Africa. These account for less than half of PE exits (42%). Instead the remaining 58% of exits were spread across the different regions of Africa, where the industry is far younger than its South African counterpart.

2012 proved to be a good year for exiting PE investments. It saw 22 realisations, up from 18 in 2011 and 20 in 2010. In fact, 2012 was the best year for exits by number since before the global crisis in 2007, attesting to the resilience of Africa at a time of global uncertainty.

By sector, financial services was the most active exit sector in Africa, accounting for 23% of realisations by number. As the region’s economies grow and disposable incomes rise, financial services are becoming a more important part of the economic landscape and therefore attractive not only to PE investors but also to trade buyers looking for a foothold in new markets. The consumer theme is also reflected in some of the other active sectors by exit, such as food and beverage (9% of exits) and telecommunications (8 %).

Exit sample shows African PE outperforming public markets

African PE firms are not just making excellent headway with generating exits, they are making strong returns in the process – almost double that of the JSE ALSI. This is highly encouraging for the future development of the industry in Africa. DFIs, which have played a significant role in the creation of PE in Africa, have clearly identified the PE players with potential for generating positive returns. While DFIs will continue to provide a significant amount of capital and support, greater levels of capital are required from other investors for Africa PE to reach its full potential. The creation of local sovereign wealth funds and the continued development of pension funds in the region investing in PE are highly welcome.

Networks essential for origination in Africa

Finding the right opportunities to back is one of the key issues facing PE in Africa. There are few market studies or maps of local companies and opportunities and the intermediary infrastructure is not yet well developed. As a result, Africa’s PE firms must continue to build and sustain healthy local networks to ensure successful deal origination. Almost half of deals sourced in Africa in the study’s exit sample, are through private sellers, this is higher than in Europe and the US, where only 13% and 32%, respectively, come from private sellers. However, the figure is not as high as in Latin America. In Africa, deals sourced through private sellers are particularly prevalent in the under US$5m EV bracket, while a third of deals were sourced from corporates as carve-outs. Other PE houses were a relatively small (4%) source of deals for companies exited in 2007–2012, although we would expect these to increase as the market matures.

“Strong networks are essential throughout the lifecycle of an investment right through to exiting. PE firms added significant value through leveraging their networks by: bringing in additional skills and expertise; identifying acquisition targets; identifying further key customers / suppliers; identifying future partners and owners of the business; etc,” added Graham Stokoe, Ernst & Young’s Head of Africa Private Equity.

The study showed that companies that had access to PE firms’ networks posted over twice the returns than where they did not, or only had limited access to such networks.

Environmental Social and Governance (ESG) improvements key to driving growth in Africa

An important part of PE’s value-add in Africa is improving the environmental, social and governance policies of portfolio companies — possibly more so than in many other PE markets. Work in these core areas improves not only company performance, but also gives potential future buyers of these companies’ confidence as certain key risks are mitigated. In addition, it can also affect exit proceeds, particularly with regional or multinational trade buyers, which are more likely to pay a premium for businesses they consider to be well run.

The governance aspect focuses on initiatives such as compliance factors, bringing in independent non executive directors, putting in place solid financial reporting and protocols and ensuring accounts are audited etc, just to name a few. On the environmental and social side, Africa’s PE firms work with portfolio companies to improve areas such as health and safety, introducing labour initiatives, establishing community projects such as clinics and in South Africa, PE has been instrumental in bringing Black Economic Empowerment (BEE) shareholders into privately-owned companies.

Trade buyers are key to successful exits

Understanding the needs and growth strategies of local and regional trade buyers is at the heart of African PE’s exit success story. Trade buyers overall are the most active acquirers of PE portfolio companies, accounting for around half of all exits. Regional trade buyers have been the most significant type of trade buyer over more recent times. Between 2010 and 2012, they accounted for half of all sales to trade buyers by PE. This is an increase over the 2007 to 2009 period, when local trade buyers were more prominent. This indicates that markets on the continent are becoming more pan-African, aided possibly by the creation of intra-regional trade agreements. It also shows that regional corporates are increasingly looking for valuable footholds in new markets across Africa. It is also possible that PE firms are increasingly seeking out the potentially higher prize of exiting to regional players. Of the regional trade buyers, just over half came from South Africa (54%).


The study into African exits between 2007 and 2012 paints a picture of a young PE industry that has performed exceptionally well and laid strong foundations for significant future growth. PE is also very well positioned to take advantage of many of the favourable market conditions that Africa now displays.

Notes to Editors
About Ernst & Young
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At the African Venture Capital Association, our mission is to promote, develop and stimulate private equity and venture capital in Africa. Our members span a diverse range of private equity and venture capital firms, institutional investors, foundations and endowments, international development institutions, professional service firms and academic institutions.
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