African Private Equity – Riding out the Economic Storm
African private equity continues to weather the difficult economic environment in Africa. There was a steady flow of deals by African focused private equity houses in 2015, against the backdrop of the collapse in the oil prices, China’s slowdown, the resulting drop in commodity prices from copper to platinum and the ongoing weakening of African currencies to the US Dollar.
Importantly for the private equity industry in Africa, Ethos, ECP, Abraaj, Vantage Capital, Helios and Actis all secured exits of Sub-Saharan African businesses in 2015, with exits in South Africa leading the way. South Africa, has the most established private equity market in Africa, with a substantial amount of those funds raised by African private equity funds focusing on investments outside of South Africa still to reach full maturity. More importantly, there are South African private equity funds which are not dependent on making US Dollar returns, making them better placed to deal with the current currency volatility.
Exits to trade buyers remain the preferred exit route, with ECPs sale of Continental Re-insurance to Saham Finances and Africinvest’s sale of Brookhouse Schools to Educas being two recent examples, and IPOs continued to be considered, especially on the Johannesburg Stock Exchange.
2015 saw the continued rise of the secondary buyout in Africa, with Carlyle, Brait, Old Mutual and Abraaj all buying companies from other private equity funds. Whilst some may cite the lack of African businesses ripe for private equity investment as a reason, African Private Equity differs from more mature financial markets as investment in Africa is primarily made by way of growth capital. This contrasts to the common placed leveraged buyout in more mature markets, where financial engineering can be used by private equity houses to generate a return. As a rule of thumb African deals on average use only half the levels of leveraging as seen on the global environment and a third of that found in a US deal.
Private equity investment into Africa increased in 2015 with African focused private equity funds raising approximately $4 billion, a rise of 51% percent from 2014’s $2.6 billion. This largely due to:
Increased political and regional stability, as evidenced in particular by the elections in Nigeria;
Increased demand for telecoms, infrastructure, financial goods and services as well as a growing middle class of consumers;
Changes of legislation and regulation by a number of countries to allow pension funds to invest a greater portion of their funds into private equity;
Introduction of legislation and regulation better facilitating and addressing private equity investments.
There was a particular increase in private equity activity in respect of industrials, health care and technology businesses. This is to be expected when it is estimated that within 15 years, over 50% of Africans will live in urban areas. This data, along with estimated GDP growth rates of approximately 4% for Africa (varying country by country), all support forecasts of growth in the consumer goods and services sectors, which will open up additional scalable investment opportunities throughout the continent.
At the start of 2016 we have already seen Mediterrania Capital Partners announce a full exit of Cepro (diaper manufacture). We have also seen the successful closing of 4 funds, including Investec’s Africa Private Equity Fund 2 (IAPEF 2) at US$295 million. IAPEF2 has broad focus on the growing African consumer market and has already made three investments – into wiGroup (mobile transacting technology provider), IDM (South Africa largest debt management company) and a further investment into HIS (mobile towers company).
Looking forward, African private equity remains quietly confident about the year ahead. African private equity investors have tended to take a longer view of their investments than is the norm in more mature markets, holding investments for five to seven years (as opposed to three to five as would be the norm in Europe and the US). With very few African private equity funds nearing the end of the life of the fund and no, or low levels, debt to service by the portfolio companies, African Private Equity houses will continue to manage and work their existing investments and be very strategic around exits.
On the investment side, a difficult market always presents opportunities. The depressed commodity prices throughout Africa may well result in assets being relatively “cheap”. With amount of capital that have been raised by African focused private equity funds, and the continued interest in them from international investors, it is likely that African focused private equity funds will continue to be very active deploying their capital especially once current owners adjust their price expectations.
Keith Woodhouse, Partner, London
John Nielsen, Associate, London
Jeff Buckland, Partner, Johannesburg