Snapshot into Private Equity investments in Africa

June 11, 2015Africaby Jeremy Riro

African private equity deals are on the upswing.

Going by the growing investment opportunities in emerging markets, their popularity with investors from the developed economies is not dying down any time soon. Most of the investors are looking for high returns that their mature markets cannot offer, and hence finding prime investments in the emerging markets.

Private equity investors lead the pack in the hunt for quality investments with clear exit strategies across Africa and other emerging economies. Africa presents a strong case that is luring many private equity funds to re-focus their lenses to the continent. Advancement in technology, political stability and the aggressive infrastructure development across the continent are a few of the many pros that are being highlighted in Africa-focused pitch books.

In 2013 alone US$3.2 billion of private equity investments were made in Africa; a 136% increase from the 2012 figure of US$1.4 billion; according to a report by EY titled “Private Equity Round Up Africa”. The same report shows a growing interest in other parts of Africa away from South Africa the former darling for PE funds targeting Africa. Between 2008 - 2010, South Africa received 57% of all the PE total deal value in Sub Saharan Africa. However, the trend is changing with the same economy receiving 20% of the PE investments in Sub Saharan Africa in the period between 2011 - 2013.

As much as there is an increase in funds being directed to Africa, the proportion of the global PE funds directed to Africa remains very insignificant. For the period 2007 – 2014 PE funds raised globally amounted to US$ 3.7 trillion; according to a June 2015 survey report by KPMG & East Africa Private Equity and Venture Capital Association. Of the total amount, funds earmarked for Africa were a mere 0.6% (US$ 22 billion); with East Africa taking a meagre 0.04 % (US$ 1.6 billion).

In terms of deal sizes, Africa still lags behind the developed economies by far. In 2013 the average PE backed deal size was US$30 million. In the US in Q1 2015 more than 50% of the deals were valued at more than US$25 million, with a significant number of deals falling in the US$100million – US$ 500 million bracket; according to a Q2 2015 report by Merrill Datasite - That notwithstanding, Africa has experienced a doubling in the number of PE deals from 49 in 2011 to 98 in 2013.

Priority sectors for most PE funds have been banking and financial services with media & telecommunication infrastructure also gaining traction. Beside the service sector which takes up a bulk of the PE funds, the commodities also are getting a good share of the cake. Energy and natural resources also rank high for foreign PE funds focused on Africa.

Narrowing down to East Africa, the KPMG report on East Africa PE survey puts the number of deals between the years 2007 - 2014 at 79. Total deals value within the same period stood at approximately US$822 million bringing the average deal size to about US$10 million for the region.

Most of the PE funds were invested in the financial services and the FMCG sectors; supported by the bulging middle class in the region; which assures investors of scalability of their targets. Agriculture being the major economic activity in the region attracted 27% of the PE funds; though they were more focused on agri-processing as compared to the primary agriculture sector. Financial services attracted 14%, FMCG 11%, ICT 10% and healthcare closes the top five target sectors at 9%.

Going forward, Africa will leverage on its peace dividend and its faster growth rate compared to other economies globally to attract more foreign direct investments. As more local companies grow and become more stable, PE funds are likely to move in and find quality investments to deploy their dry powder in. The PE market in Africa is still nascent, but we can only look forward to brighter days ahead buoyed by the positive African economic growth narrative.