African Private Equity: The bright continent
Carolyn Campbell describes how Africa’s expanding middle class, rising GDP and government policies are fuelling opportunities for private equity
Private equity investment in Africa is on the rise. Traditionally, the continent’s abundance of natural resources, including mining and exploration, has been the driving force behind investment interest. But growing demand for telecommunications, infrastructure, consumer goods and financial services, has widened the range of opportunities for potential investors even further.
On top of this, some African countries, including Kenya, Nigeria, Namibia and South Africa, have changed the asset allocation rules of their state pension funds. This means that a certain percentage of pension assets – in some countries up to 15% – may be invested in private companies.
As a result, African investors are increasingly choosing to put their money in African private equity. As pension fund regulators and managers become more familiar with the benefits of private equity, the level of capital available to the private sector should increase. This local support should also advance the confidence of international investors.
Last year, a record $4bn (€3.7bn) was ploughed into private equity fundraising in Africa. The growth of the African middle class, rapid urbanisation, along with increased GDP per head, is creating a sizeable consumer class across the continent.
Demographic statistics suggest that Africa already has a larger middle class – earning the equivalent of more than $20,000 per year – than India. By 2030, it is forecast that more than half of Africa’s population will live in urban areas, up from one-third today. These trends, along with GDP growth rates in excess of 4-5%, all support forecasts of growth in the consumer goods and services sectors, which will open up investment opportunities.
Financial services, including banking and insurance, represent another key growth area. More than 300m of the world’s unbanked population lives in Africa, with 80% of the adult population still without access to simple banking services. Penetration rates across a wide range of basic banking and insurance products are low on a GDP-adjusted basis, which points to significant growth potential.
Growing disposable incomes mean that telecoms and associated industries provide good investment opportunities, both from a retail and infrastructure perspective.
Agribusiness provides another range of opportunities for private equity. Africa has the bulk of the world’s uncultivated arable land and many natural competitive advantages, but it only generates 10% of global agricultural output and accounts for less than 5% of the world agribusiness GDP. Most farming in Africa is small-scale, in part because farmers do not have access to the infrastructure that supports their counterparts in Asia and Europe.
In all emerging markets, apprehension about the number and quality of exit routes for investments remains high, and Africa is no exception. Although the industry has done much to encourage discussion about the benefits of private investment in Africa, it has not done enough to counter appropriately the perception that Africa has a weak exit environment.
But the figures speak for themselves. A recent study by the African Private Equity and Venture Capital Association (AVCA) revealed that 249 private equity exits took place in Africa between 2007 and 2014. Last year set a record for exits on the continent, with 40 announced by private equity firms. While South Africa continues to lead on exits, in the past few years there has been an increase in activity in other regions, such as east and southern Africa.
AVCA research shows that trade sales made up more than half (55%) of exits in 2014. In the long term there are plenty of other options for exits, including international equity markets, African equity markets and structured exits.
The overall exit process is made significantly easier and shorter when selling a transparent company with high standards in terms of environmental, social and governance (ESG) guidelines. Many investors have more stringent requirements relating to governance, track records, institutionalised back offices and reporting.
Investors seeking access to Africa’s emerging opportunities often want to do so with a trusted manager that has a strong track record and that employs international best practices.
In addition, investors that are looking at multiple ways to gain access to this market and want to explore investment structures beyond the traditional 10-year blind-pool fund. In recent months there has been an increasing focus on co-investment as a route into the market. Investment partnerships are particularly important for investors looking to tailor their portfolio and enhance performance.
Exposure to deal-making when co-investing alongside fund managers gives investors the opportunity to expand internal capabilities, acquire valuable experience in direct investments and gain exposure to geographies and industries to which they might not otherwise have access.
It also allows investors to strengthen their fund manager relationships and build up their knowledge of the deal process and execution capabilities on specific investments before making a commitment to a blind pool fund.
Many co-investors have not made significant prior investment in Africa and have chosen to work alongside fund managers to gain exposure and deepen their understanding of, and comfort with the developing investment environment.
One of the main advantages of investing with fund managers is the opportunity to tap into their knowledge of local business environments. A common misconception among private equity investors is the idea that Africa is a single uniform market. The African continent consists of 54 countries, all of which offer unique investment opportunities – as well as challenges. Understanding the on-the-ground angle is essential for any successful private equity investment.
The future is bright for private equity opportunities in Africa. African governments, realising the increasing potential of private equity investment, continue to implement business-friendly policies and reforms, as the changes in pension fund regulations show. Moreover, regional trade linkages continue to provide opportunities for portfolio company expansion.
Investor interest in the burgeoning African economy is growing and the potential for private equity knows no bounds. Broad growth areas across a diversified range of industries, together with firm support from governments, mean this is a great time to invest.
Carolyn Campbell is a managing director and founding partner at Emerging Capital Partners