The call of Africa: Stability returns amid strong macro

Private equity firms globally have done well from the “Africa Rising” story. Indeed, some of the world’s most prominent private equity firms have earmarked substantial sums for investing on the continent, including TPG (through its partnership with Satya Capital), KKR, Carlyle and Blackstone. Furthermore, Africa-focused firms including Development Partners International (DPI), Helios Investment Partners and Abraaj have all recently raised funds ranging between $725m and $1.1bn.

According to figures from Emerging Markets Private Equity Association (EMPEA), in 2015, private equity firms operating in the Middle East and North Africa region and sub-Saharan Africa collected a combined $4.3bn. And for sub-Saharan GPs alone, the $3.6bn raised represents the second highest total since records began in 2006.

Despite the encouraging fundraising figures, commentators are beginning to question if newly raised capital is being deployed quickly enough, and if hold periods are too long, meaning a lot of investment raised for the continent is yet to find its way back to LPs.

Furthermore, the recent turmoil seen in the oil & gas and commodities markets has taken its toll on African economies dependent on these industries and, in most cases, has caused serious currency slides. Given this changing backdrop, is African private equity still the land of opportunity it was once heralded as?

If you look at the amount of capital raised versus the amount needed there is still a deficit. There is no capital overhang in Africa, which there often is in other markets" – Doug Agble, 8 Miles

According to Runa Alam, CEO and co-founder of DPI, the Africa Rising story is here to stay: “I don’t think it is a one-year, three-year, five-year story – it’s about a generational shift. Nothing has changed. Look at the macro perspective and imagine it as a line; yes, volatility is causing that line to go up and down, but overall that line is going upwards.”

Doug Agble, partner and co-founder of Africa-dedicated GP 8 Miles, agrees the Africa story is more nuanced today but believes there is a long way for private equity to go: “Our sense is, if you look at the amount of capital raised versus the amount needed there is still a deficit. There is no capital overhang in Africa, which there often is in other markets.”

Ponmile Osibo, research analyst at the African Private Equity and Venture Capital Association (AVCA) highlights the need to look beyond the headline fundraising figures. Of the $4.3bn raised in 2015, he says just three funds raised $3bn of that. “Below that, we’re seeing a number of smaller regional funds targeting the SME sector. These regional funds are typically below $150m,” he says.

Osibo also points out that with more than 100 investors managing institutional-quality funds or currently fundraising, and 54 countries on the continent, this averages out at around two managers per country. “That number is skewed towards certain countries such as Nigeria, Kenya and South Africa, so there are significant unmet opportunities in a number of other countries such as Ethiopia, where certain sectors are opening up for investment, and Ivory Coast, which is returning to political stability, as well as the wider Francophone region,” he says.

Fulfilling fundamentals
The African private equity story is based on several fundamental factors, most compelling of which is the continent’s demographics. Africa’s one billion population is young (in some states, half or more of the population is under 25 years of age) and is expected to increase by more than 2% each year. The next key factors are privatisation, liberalisation and more democracy, which, according to DPI’s Alam, “all lead to investment and the development of companies”.

Another important fundamental is urbanisation, which creates more manufacturing and services. Says Alam: “People are buying more pharmaceuticals, accessing healthcare and education, using financial services such as insurance. As these industries are all private in Africa, urbanisation leads to economic development.”

Technology and how efficiently it has been adopted in Africa is another compelling play for private equity. “The cycle of technology usage is shorter in Africa because costs have come down, so it is more advanced. The second part of that is fewer incumbents, so technology can be leapfrogged. That combination of technology and lack of certain developments allows companies to fill gaps with technology more efficiently,” says Alam.

More specifically for private equity, 8 Miles’ Agble points to sectors with low penetration: “For example, in financial services one in eight people has a bank account in Africa. And of those very few are offered mortgages or credit cards or other retail banking products, compared with the UK where each customer may have several products. So there’s the penetration opportunity as well as the product diversification one.”

In tomorrow's instalment of our The Call of Africa series, unquote" will look at the continent's dealflow bottlenecks and the perceived risks for private equity.

Further reading

• UK / Ireland

South Africa: Down, but not out

• 10 Feb 2011

• GPs

GP consolidation in emerging markets

• 21 Feb 2012

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