Unquote

The call of Africa: Exit focus

Exit options are strong in Africa
Exit market in Africa has strong momentum
  • LinkedIn  
  • Google plus  

African private equity divestments have seen strong growth and, despite longer holding periods than in Europe, signs point to a maturing exit market. In the last instalment of our series, Mikkel Stern-Peltz finds the region favours SBOs and trade sales

Read the first instalments of our Africa series here

Research from EY and the African Private Equity and Venture Capital Association (AVCA) registered 44 exits on the African continent in 2015, marking a nine-year high for private equity in the region. The two preceding years had 39 exits.

“The increased exit activity we’ve seen recently is driven typically by funds coming to the end of their lives, or because GPs are looking to raise new funds – rather than a statement of the African macro environment which is very tough at the moment,” says Marlon Chigwende, managing director and co-head of Carlyle’s sub-Saharan Africa buyout advisory team.

While the African private equity industry so far in 2016 has seen a slowdown due to macroeconomic factors, GPs have nonetheless continued to exit. This year has seen Actis sell payments group Emerging Markets Payments to Network International and telecoms infrastructure group IHS Holding buy Helios Towers Nigeria from Helios Investments in a trade sale.

On the trail
“There’s no shortage of interest,” Weyinmi Popo, partner at law firm Orrick, says of private equity assets in the African markets. “It’s a frontier market compared to Europe or any other mature market, but it’s exciting and the returns can be spectacular if you get it right.”

Interestingly, the frontier market nature of private equity on the African continent is not necessarily reflected in the region’s exit market, where the average hold period is on par with Europe. Following a drop in 2015 to 5.3 years on average for a European buyout, holding periods in the first half of 2016 show an increase to 6.1 years on average, according to proprietary unquote” data.

EY and AVCA’s research shows ownership periods of private equity assets have also been lengthening, from an average of five years in 2014 to 6.1 years in 2015.

The financial crisis hit Africa a little later than the west, around 2009-2010. Those who invested around that time have tended to hold their assets longer and what we’re seeing now is those assets being exited" – Marlon Chigwende, Carlyle

Popo says that, in general, African deals may require a longer hold to reach full potential: “There is some truth that for African transactions, the gestation period in terms of holds is probably a bit longer depending on the type of asset.”

Meanwhile, Chigwende sees the increased holds as the aftermath of the 2008 financial crisis. “The surge in hold periods is a result of the time period we are in,” he says. “The financial crisis hit Africa a little later than the west, around 2009-2010. Those who invested around that time have tended to hold their assets longer and what we’re seeing now is those assets being exited.”

He adds that generally exits have been taking longer recently because of a significant difference between sellers’ expectations and what the market is willing to pay. “As a result, processes have taken longer and exits have happened, though probably at a lower price than the original asking,” he says.

Pass the parcel
Acquirers are, in the main, trade buyers and other private equity firms. Apart from South Africa, public markets rarely represent a viable option for GPs, partly because of volatility risks, but also because of a lack of liquidity and developed stock markets. Currently, IPOs are also less in vogue because of adverse macroeconomic factors.

Trade sales and secondary buyouts remain the most popular exit routes for private equity on the African continent. The proportion of SBOs increased to 18% of all exits in 2014-2015 from an average of 13% between 2007-2013, according to AVCA and EY’s research.

Some see the increasing number of SBOs as a trend of more competition for African assets and suggest a substantial increase compared to a decade ago. For Doug Agble, partner and co-founder of 8 Miles, as private equity continues to embed itself in Africa, the market is naturally becoming more efficient. Says Agble: “When we launched the fund, our view on exits was around 60% to trade buyers and, say, 30% IPO. Now we think it will be more like 50% to financial sponsors because the growth in the number of large-cap funds is creating an exit route for us. Funds like us in the mid-cap space are soon becoming ‘feeder funds’ for them from a deal-sourcing perspective.”

Indeed, if competition for larger assets is growing, then the ability to buy well-managed companies that are au fait with private equity will certainly be welcome. “If large-cap funds are able to source deals from mid-market houses, then they might deploy more quickly and that could reduce the cycle,” says Agble.

Further reading

  • LinkedIn  
  • Google plus  

More on Investments

Latest News