This article was written by Cindy Valentine (Partner, King & Wood Mallesons) and Barri Mendelsohn (Managing Associate, King & Wood Mallesons).
For years the BRICs were the talk of the town in investment circles, when it came to emerging markets. Brazil was the golden child, and then non-BRIC emerging markets such as Turkey had their time in the spotlight.
In EMPEA's Annual Global LP Survey last year, sub-Saharan Africa emerged as the leading jurisdiction for investment. Not one BRIC country made the top three. Africa is regarded by many as the last frontier for private equity – the last sizeable geographical area of untapped growth in the global economy.
And a report by Riscura, AVCA and SAVCA, said more than two thirds of the surveyed LPs believe that Africa is more attractive than other emerging markets. Some 85% plan to increase their exposure to private equity in the continent over the next two years.
With a population of just over 1 billion, Africa is the second most populous continent after Asia. According to the UN Population Fund, in 2009 its’ population doubled in the preceding 27 years. Half the population are under 25 in most countries. Predictions are that the continent may quadruple in just 90 years. It is therefore not hard to see Africa’s potential for growth and the potential unprecedented impact it could have on the global economy.
Its’ growing middle class of consumers, a young and growing, increasingly better educated workforce, scalable companies, improved infrastructure and connectivity which are easing the challenges and limitations of doing business, along with increasingly stable and transparent political and regulatory environments are key attributes, which make Africa a tantalising investment destination.
Private equity has a history of symbiosis and success on the continent and in fact has been achieving better returns in Africa than listed equity with the Riscura-SAVCA South African Private Equity Performance Report showing that private equity returns (at 21.2% to March 2014) have exceeded the JSE All share index over the same period (20.5%).
For years Africa has been the Next Big Thing, but it is only in the last few years that we have seen this translate into a successful fundraising market with substantial momentum. First time and established fund managers have enthusiastically been raising funds for investment in Africa since the market crisis. For many it has been a real struggle. Fundraising figures have fluctuated dramatically since 2008. But 2014 is likely to prove a record breaker.
Larger funds like Helios have successfully raised impressive amounts of capital in the last few years, but other well-known fund managers, and first time fund managers, have struggled and either not managed to reach a close, or closed at well below anticipated targets. Whereas prior to and including 2008, funds were exceeding or meeting their targets, in the last three years the average proportion of target size raised at final close has ranged between 75% and 85% according to Preqin's Private Equity April 2014 Spotlight.
In 2013 the Preqin statistics showed that $2.6 billion was raised, up on the $2 billion raised in 2012, with largest final closers being Ethos ($800million) and Vital Capital ($350 million). This does not account for first and interim closings of managers such as DPI, Carlyle and Amethis who completed substantial first and interim closes.
Last year was exciting for the African fundraising market. Carlyle reached its final close in April of $698m, $200m above its initial target. Amethis Finance raised $150m from OPIC on top of its’ $380m target. Abraaj is currently in the market raising $800m for Abraaj Africa III as well as an additional $200m for their North African fund. Investor confidence in fund managers with deeper track records is translating into commitments.
According to the African Development Bank, investment in Africa was expected to reach around $80bn in 2014 and it remains to be seen whether this positive trend of increasing investment was realised. For private equity investors, the agriculture, logistics and business services, technology, telecoms, financial services and FMCG sectors have been leading the way. The investment thesis centres on African consumers demanding more goods and services, more akin to their developed world counterparts.
There have been some significant new entrants to the African private equity landscape. US-based global giants Blackstone and Carlyle entered into separate strategic partnerships with Dangote Industries, the African industrial conglomerate, to invest in sub-Saharan Africa. Blackstone and Dangote Industries will jointly invest up to $5bn in energy infrastructure projects. Dangote’s joint investment with Carlyle will focus on the oil and gas sector, as well as the consumer, financial services and agribusiness sectors - Carlyle will use its $698m sub-Saharan Africa fund, which closed in last year. And last year KKR took a reportedly $200m stake in Afriflora, the Ethiopia and Netherlands-based rose farming company.
Notwithstanding these larger investments being announced, there remains a lack of genuine mid-market and larger ($50m+) deals. Most activity is in the $10m-30m range, which is still a large ticket size for Africa. The situation brings to the fore the need to source and structure creatively.
Geographically, South Africa has traditionally received the greatest amount of private equity investment; but there has been a shift towards east and west African countries in recent years. Improved inter-connectivity and infrastructure in East Africa will likely encourage further investment in this region, and growing middle-class consumerism in West Africa will continue to draw private equity investment into financial and consumer-driven sectors.
North Africa has also seen a resurgence in private equity investment since the “Arab Spring”. Last May, UK-based private equity firm Development Partners International paid $20m for a 42.1% stake in Universite Privee de Marrakech.
There are a variety of exit opportunities available to private equity in Africa, including trade sales, secondary buyouts, IPOs and management buybacks. In August The Abraaj Group sold its’ investment in Fibrex, one of Angola’s leading manufacturers of plastic pipe products used in the construction industry. Also last year LeapFrog Investments exited a Kenyan insurance firm it invested in in 2011, by selling its minority stake to Swiss Re.
Trade sales to strategic buyers remain the predominant exit route for private equity investors in Africa. Secondary buyouts are the second most common exit route, indicative of a maturing market. In July 2014, South Africa-based Ethos Private Equity, acquired Actis’s 80% stake in RTT Group, a South African logistics and distribution company.
There were further exits announced by the leading dealmakers towards the end of 2014. Examples include the sale by Ethos of the Tiger Automotive Group to a Carlyle-Old Mutual consortium, originally acquired by Ethos in 2008, now with 86 stores in South Africa. Abraaj fully exited from Moulin d’Or, a leading producer of baked goods in Tunisia now with over 8,000 points of sale, in which it invested in 2012.
IPOs have been rare, primarily as a result of the small size and comparative illiquidity of regional capital markets, with perhaps the exception of the Johannesburg Stock Exchange. But given the size of some portfolio companies, industry experts predict increased private equity-related activity in the continent’s stock markets. In May 2014, Actis exited its minority investment in Commercial International Bank (Egypt) SAE through the sale of its shares to Fairfax Financial Holdings (a listed Canadian entity) under the newly applied block trading mechanism on the Egyptian Exchange.
There are undoubtedly challenges to exits – relatively weak financial markets and complex legal and regulatory frameworks – the overall outlook remains positive. A strong pipeline means that this will be an interesting playing field in the next couple of years and beyond.
This article was first published in the Corporate Financier, edition 169, February 2015