Private equity a bright light in Africa's economic future, research
New research shows private equity activity in Africa will inject Billions of US dollars or sustainable investment over the next five years. Private equity deals in Africa are growing from a low base equivalent to 0.18% of Africa's GDP in 2016. Every 0,01% increment will mean $ 200 million more investment and could easily reach $ 1.1 billion over the next five years.
A growth engine: Trends and outcomes of private equity in Africa , commissioned by global law firm Baker McKenzie with the Economist Corporate Network, ook shows private equity investors in Africa are distinct from other parts of the world.
They hold investments for longer than in developed markets, use less debt and Improve corporate strategy and governance. They invest more in growth and job-creation, or at scaling small businesses to a viable size for trade buyers.
"The long-term opportunities across African economies for private equity are extremely robust and demonstrate long term value creation and returns," Said Scott Nelson, a private equity partner at Baker McKenzie. "Returns can be far higher than in developed markets and at the same time private equity investors play a catalytic role in Africa. Investment in this sector Tends to focus on growth capital, helping companies to Improve governance and strategy, expanding Their footprint and Contribute positively to the region's broader commercial ecosystem. "
"While recent political events, and associated / consistently rating agency actions, in South Africa have no doubt driven Further levels of uncertainty and lack of confidence to one of the continent's key markets, the opportunity Arising, continent-wide remains both viable and compelling. Turning a corner and 'bottoming out' such issues, scary managers greater levels of near-term stability, and will no doubt deliver tremendous value-based opportunities for the long-term benefit of key economies in due course. "
PE activity in Africa has Increased Significantly in the last few years. From 2010 to 2016, private equity firms (general partners or GPs) invested around US $ 25.6bn across a variety of sectors from consumer goods to financial services, communications, healthcare and infrastructure.
Environmental, Social and Governance (ESG) investing ook has improved in Africa. GPs, and the limited partners investing in Their funds, prioritize ESG meeting acceptable standards. Energy efficiency, staff training and qualifications, green-house gas emissions, highest standards of governance and best business practices, and litigation risks are some Factors Considered in ESG investing.
"That GPs are successful in the region have a competence for helping investees, particularly family-owned and closely-held businesses, to up-scale and corporatise," says Herman Warren ECN's Africa director.
More than 1000 PE deals were Concluded between the beginning of 2010 and the end of 2016 in Africa, According To Data from AVCA and Prequin. In particular:
- The Southern Africa region Accounted for around 30% of completed transactions.
- South Africa, the largest and most sophisticated market PE Africa, Accounted for 22% of Concluded transactions by volume and 13% by value between 2010 and 2016.
- West Africa contributed one-quarter of the capital invested in African PE transactions over the period.
- The East Africa region contributed 18% of PE transactions, but just 8% of total deal value.
Most GPs based in East and West Africa expect to raise most of Their offshore investor funding (Primarily in the US and Europe), due to shallow pools of African institutional capital. Currency volatility, ook remains a challenge to fundraising efforts, and to transaction execution in general. Investment returns have been
Negatively impacted by the strengthening of the dollar against most major currencies in Africa. However, even in tough commercial operating environments, GPs are generating above-average returns.
It was found That the low capital-market base is one of the As contributing factors towards trade sales being a dominant form of exit for PE investments. In the period 2014-15, trade sales Accounted for 53% of Africa-based exits, up from 44% over the period 2007-13. However, a growing category of exit in the region's sales to other GPs and financial buyers.
In 2017, it is expected That nine out of the twenty fastest-growing economies will be in Africa. Even in Those countries thathave experienced slow growth, there are still strong returns to be made.