Remarkable resilience across the African continent continues to drive geographic expansion in PE investment

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Despite the persistent global economic woes, Africa continues to flourish. In recent years economic growth rates have been well in excess of those in developed economies and above those in many emerging markets.

In the past five years the number of private equity (PE) firms has increased significantly in Africa, as had the number of new funds raised according to Ernst & Young’s Private Equity roundup-Africa (pdf, 952.9kb) . The report posts that the African PE landscape is evolving. Ten years ago, the Private Equity (PE) landscape was dominated by a handful of players from South Africa, and pan-African PE firms largely managed out of the US and the UK. Between 2006 and 2012, 81 PE funds that were solely or predominantly focused on Africa closed, and through the end of 2012, 45 Africa-focused funds were on the road targeting approximately US$12b. Despite a difficult 2012, the long-term outlook for fund-raising for the region remains strong.

“Recent fund closings of South African focused PE funds indicate that there is still strong interest from investors to invest in South African private equity,” says Graham Stokoe, Africa Private Equity Leader at Ernst & Young.

Furthermore with increasing confidence in African markets, PE firms are diversifying their geographical focus outside the more advanced economy of South Africa to other African countries such as such as Nigeria, Ghana, Kenya and Ethiopia.

PE penetration into Sub-Saharan region however still remains low

PE has however yet to achieve significant penetration into the Sub-Saharan region relative to developed economies and other emerging markets. Individual countries such as South Africa and Nigeria are coming closer to other emerging market penetration levels. As a percentage of GDP, PE now represents 0.12% in South Africa compared with 0.10% in Brazil, 0.14% in China, 0.33% in India, 0.08% in Russia, 0.75% in UK and 0.98% in the US, according to Ernst & Young and EMPEA research. Countries such as Ghana, Kenya, Ethiopia, Uganda, Tanzania, Zambia and Angola have fairly sizable economies that are less penetrated by PE and are therefore becoming increasingly attractive.

Deal sizes are relatively small but edging upward

Smaller investments characterise the African PE landscape, especially outside South Africa. The low average ticket size can be partly explained by the nascent stage of the African PE industry. PE firms willing to invest in the region can benefit from first-mover advantages by paying lower entry multiples than in other emerging markets.

Large number of SMEs, coupled with undeveloped financial markets should also help drive growth of PE

Although Africa has a large number of private companies, many of which require growth capital funding, the continent is significantly underpenetrated in terms of bank credit. Although economies such as South Africa and Egypt have more developed financial markets where credit is readily available, countries such as Kenya, Nigeria and Ghana still lag behind the emerging markets of China, India and Vietnam in terms of domestic credit provided by banking sector as a share of GDP. Low ratios in a fast-growth GDP environment generally result in those ratios rising quite quickly. Angola for example has seen the bank-credit-to-private-sector ratio rise from about 0.15 to 0.30 in the space of four years, demonstrating the huge growth potential for banking and capital markets as a PE investment focus.

The limited availability of capital from banks and public markets in most African countries means that private companies find it challenging to obtain the necessary capital to grow. Although access to capital has improved over the last few years, there are significant capital needs that PE can provide to support the growth of SMEs. PE investors can therefore act as key enablers, bridging the funding gap that is crucial for a growing private sector and broad-based economic growth across the continent.

PE firms invest in the growth of the African consumer

 A large proportion of Africa’s future growth is expected to come from its consumers. Total consumer spending in Africa is estimated to increase from US$860b in 2008 to US$1.4t by 2020. Even though there have been a number of PE investments in the consumer products sector, small deal sizes have meant that the aggregate value of investments in the last five years was only US$784m. PE largest benefit from consumer growth has come in its investments in African banking.

PE banks on African banking

PE firms have committed nearly US$2 billion to 57 deals in the financial services sector in the last 5 years, and PE’s interest in this important sector is expected to continue. With reform across Africa and rising incomes, banking assets in 16 key African countries are forecast to expand by 178% to US$980b by 2020, with deposits forecast to grow by 188% to US$766b.


Exit activity in Africa has been relatively flat between 2010 and 2012, averaging around 15 exits per year over the period. The most common exit route for PE firms from deals in Africa is via sale to strategic buyers, usually to local or regional buyers. As the PE industry in Africa matures, there will be a greater number of exits to other PE firms and to a lesser extent also to IPOs.

Way forward/outlook

PE investors should continue to see opportunities. Sectors benefiting directly and indirectly from the growth of the African consumer should continue to attract much of the investment targeted at the region, and markets outside South Africa will continue to gain a greater share of PE investment. Relatively low PE penetration and smaller entry multiples relative to developed economies and most other emerging markets mean that PE firms will be able to continue to make investments with limited capital input.

Stokoe notes: “With a large number of private companies requiring growth capital and limited availability of alternative funding, PE is well placed to be a significant enabler of growth across the African continent. In particular, we foresee Ghana, Kenya and Ethiopia becoming more interesting, although Nigeria and South Africa are still expected to continue receiving the most PE investment.” 

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Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 32 countries across Africa.