11 December 2015

Deal or no deal

This article is written by Cindy Valentine (partner), Barri Mendelsohn (managing associate) and Ofei Kwafo-Akoto (associate).

There has been much commentary about the amount of private equity capital being raised for investment in Africa and whether in fact there are sufficient investment targets available to deploy this flow of capital.  Some industry participants believe that given the amount of capital being raised, particularly by the large cap funds, there is simply not the deal flow to sustain the deployment of capital  in these funds,  and this will lead to increased competition and valuations, which will make investor returns less attractive.

The concern stems from the fact that funds raised in Africa has risen exponentially in recent years.   The 2007 fundraising high of US$4.7 billion has not yet been reached but the amount of capital raised in Africa has been growing steadily and all indications are that this will continue uninterrupted.  Strong growth on the continent, which has arisen as a result of a young, emerging middle class and increased urbanisation, has fuelled consumer demand for fast moving consumer goods, financials and industrials and it is these sectors that are attracting private equity.

Capital raising began increasing steadily in 2013, with US$3.3 billion  of capital being raised, followed by a bumper year in 2014 of US$4.1 billion  (more than double the average for the preceding five years, according to data from EMPEA).   This included fundraises by Carlyle (US$700m), Amethis (US$530 million) and Helios with its record breaking US$1.1 billion  raising. 

Fundraising in 2015 has been strong, with Abraaj closing their Sub – Saharan Africa and North Africa funds at US$990m and US$340million respectively.  DPI also closed its second pan-African fund at US$725 million and most recently, the debut Indian private equity firm Ascent Capital raised US$80 million for its Ascent Rift Valley Fund (exceeding an initial target of US$60m). 

Francois van der Spuy, Head of Private Markets at Investec Asset Management (IAM) believes that the concerns about the inability of private equity funds in Africa to deploy capital is founded on a slightly simplistic outlook.  He explains that this view does not take into account the long term dynamic view to investing.  There is an active mid-market in Africa where he believes there are substantial investment opportunities, and not necessarily a high level of competition.  It is the mid- market funds which acquire and build mid-market companies into quality companies that will provide depth and breadth for the large cap market.

As van der Spuy explains, “Many large-cap deals do not start out with an investor putting in USD50-100 million of capital up front.  Often a smaller amount is deployed up front and then supported with growth equity.” 

A case in point is IAM's investment in the mobile tower company IHS in 2011.  Investec's Africa fund invested US$79 million in IHS along with two co-investors.  In the 4 years since, the company has grown exponentially and raised another US$3 billion  of additional capital.  Looking at these figures emphasises the point van der Spuy makes about mid-market funds creating opportunities for larger funds.  “Just a couple of these types of deals will swallow up substantial amounts of capital earmarked for Africa” remarks van der Spuy.

When considering whether there are enough deals to enable deployment of all the capital that has been raised, it is also important to consider that often investments are made on the basis that they will provide a key for platform level investment.  "A smaller mid-market deal may form the basis for additional acquisitions to create a country specific or industry specific platform across several countries" counters van der Spuy. 

Other outlets for large amounts of capital up-front include financial services and oil and gas, whether in country or across other Africa countries, dependant on the investment policy.  The financial services industry in particular counts for a large proportion of PE investments in Africa as this is often where diversified, pan-African companies with skilled management is found which makes for suitable investment.

We have seen a number of larger deals in 2015. To start the year off Abraaj was active with an investment in Mouka, the Nigerian mattress manufacturer, as well as in a US$200 million consortium investment in a North African healthcare platform among others. In October, Abraaj closed the c. US$100 million acquisition of the Egyptian school operator, Tiba Group and recently closed a US$60 million investment into Careem, the regional car app service, and also an investment into a private oncology clinic. These deals show the ability for rapid strategic deployment of significant capital into the region.In the first half of the year Helios invested US$100 million into Africa Oil (the oil exploration partner of Tullow in Kenya) in return for a 12.4% stake as well as US$276 million in Oando plc, showing its continued focus on the oil & gas sector.  Helios also sold out its stake in the successful Equity Bank of Kenya investment.

In May a Standard Chartered Private Equity-led consortium invested US$175 million into Fine, a major tissue manufacturer in North Africa showing the major houses investing in North Africa post the political upheavals.

Continuing with the trend of investments in the consumer sector, in September, Actis bought the South African furniture retailer Coricraft as part of a strategy to tap into Africa's fast-growing consumer sector.  Sun European, an arm of the US-based Sun Capital, acquired Finlays Horticulture, a flowers and vegetables business with operations in Kenya and South Africa, in a deal reported to be worth approximately US$154 million. .

This healthy mid to large-cap deal activity augurs well for 2015 and supports the view that there are in fact plenty of investment opportunities for PE funds to deploy capital in 2016 and beyond, in both the mid-cap and large-cap targets and platform investments.  There has also been a number of exits fuelling the virtuous circle of private equity investment and fundraising.

As those in the industry in Africa know, deals just take time to find, diligence, negotiate and conclude but for the right private equity team they are out there.

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