The call of Africa: Risks and opportunities

Click here to read the first instalment of our series on the opportunities and challenges for private equity players investing in Africa

While it seems clear there are myriad opportunities in Africa, questions are mounting over actual amounts deployed. Indeed, according to EMPEA figures, in sub-Saharan Africa, $4.3bn was raised in 2014 against $2.1bn deployed; and in 2015, $3.6bn was raised against $1bn deployed.

For Runa Alam, CEO and co-founder of DPI, the battle between amounts raised and amounts deployed is a theoretical one. In practice, the opportunity to transact appears plentiful. “Dealflow is better than we’ve ever seen. We typically don’t use auction processes so we don’t see any competition and we’re close to 50% invested,” she says. DPI held a final close on its $725m fund last year.

Deals are a lot more proprietary and are often not structured processes or auctions" – Doug Agble, 8 Miles

Despite DPI’s aversion to processes, partner and co-founder of Africa-dedicated GP 8 Miles, Doug Agble, believes the deal clog is at the large-cap end of the market: “The large-cap funds are looking to deploy equity tickets of $75m or more, so competition increases because there are fewer deals. That $75m-plus ticket space is limited.” He uses the 2013 acquisition of west-Africa-based Fan Milk as an example, which was bought by Abraaj at a reported 12x EBITDA.

Agble asserts the mid-market offers far more dealflow at better prices thanks to lower levels of intermediation: “We look to deploy $15-45m per deal and there’s a lot more dealflow in this space. Deals are a lot more proprietary and are often not structured processes or auctions.” Indeed, 8 Miles has so far done six deals, five of which were done off-market and average entry multiples come in at around 6x EBITDA.

For Pnmile Osibo, research analyst at the African Private Equity and Venture Capital Association (AVCA), there is no mismatch between amounts raised and amounts deployed: “I know of fund managers who have raised funds recently and have fully deployed the fund within two years. These managers are seeing many strong opportunities at attractive valuations that have compelled them to invest.”

Risky business
Given African private equity’s increasing maturity, why is it the continent is so under-served by the asset class? The obvious answer is risk, or rather, perceived risk. As previously mentioned, the hit on the oil & gas and commodities markets caused major depreciation of several African currencies.

“Currency risk is very real,” says Agble, who points to the Nigerian naira’s slide of around 40%. But it is crucial to note that for those economies dependent on oil exports, such as Nigeria, Angola and Mozambique, currency risk is understandably more pronounced.

Osibo agrees that currency risk is a concern, but says GPs that have operated in Africa for the past decade or so have found ways to mitigate this. And he also points out that currency risk is not an issue solely reserved for Africa.

Investors understand the difference between Germany and the Ukraine, but there’s a tendency to bucket Africa into one country. There is a huge perception issue" – Doug Agble, 8 Miles

Beyond currency concerns, Africa also carries political risk, but for Agble, this is more about perception than reality: “A lot of people see Africa as one country rather than 54. Political risk varies massively between countries.” He notes how private equity in Africa tends to concentrate on 12 to 15 countries, meaning around 30 or 40 countries are not considered suitable, such as Sudan, Equatorial New Guinea, Mali, the Central African Republic, Malia and Somalia. “If you compare Ghana to Somalia – it’s chalk and cheese. It’s like comparing Germany to Ukraine – yes they are both in Europe, but they have very different political risk profiles. Investors understand the difference between Germany and the Ukraine, but there’s a tendency to bucket Africa into one country. There is a huge perception issue,” Agble says.

The other key challenge for African private equity is sourcing necessary talent – both within private equity houses and for portfolio companies. Agble acknowledges it can take longer to find the right people: “We had one company where it took 15 months to find the right CFO. But in that time the company’s revenues grew by 53% – so it doesn’t mean everything goes on hold while you’re finding people.”

The bigger picture
An important step for the African private equity industry will be when the blue-chip private equity firms operating on the continent generate strong and consistent returns. Says Agble: “We want all of private equity to do well, but especially the bigger, household names, as they affect LP opinion in the west. For example, KKR, TPG and Carlyle now have African platforms; we all need them to do well, otherwise the perception of African private equity could be tarnished. These firms carry disproportionate influence on LP views.”

For Alam, now is the time to invest in African private equity: “The downturn was actually just a slowdown; growth is now 3.3% on average. And if you take out the resource-intensive and Arab Spring countries, the rest of Africa has increased its growth from 4.1% to 4.4%, according to IMF figures.”

Arguably the most compelling feature of African private equity is the import substitution opportunity. Take, for example, agri-business and agri-processing: in west Africa, food staples such as tomato pastes and purees are a basic ingredient for most dishes, but around $1bn of these products are imported each year. Private equity has an obvious role here. While there are risks linked to agriculture and agri-processing, if these can be mitigated, the opportunity is there for the taking. As Agble says: “You’re not creating a new market by changing people’s behaviour, the demand is already there; it’s about creating the local industry with import substitution.”

As we move into the second half of an incredibly tumultuous year in terms of global events, Africa is perhaps the region offering the greatest opportunity for private equity – not only to produce outsized returns, but to support the construction of a healthy economy; one which can self-perpetuate to continue creating industries and jobs, which will, in turn, create more wealth to be reinvested locally.

Further reading

• GPs

The call of Africa: Stability returns amid strong macro

• 25 Jul 2016

• UK / Ireland

South Africa: Down, but not out

• 10 Feb 2011

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