Private equity in Africa on the rise

Private equity in Africa on the rise

Private equity seems to hold the African growth promise.

Amid the sluggish economy and the lengthy deleveraging process that the developed countries have been going through, Africa is rising as a fertile, promising, and untapped playground for foreign investments.

Investors are shifting gears towards the black continent, not only to diversify away from a slowing economy, but also to grasp the unrivalled opportunity that Africa has to offer.

Africa’s real GDP has been growing at an average compound rate of 5% in the last 5 years, a pace that is faster than that of developed nations. Other economically viable reasons to set foot on the continent, to name a few, are: a booming consumer market that is expected to reach US$1 trillion by 2020, an advancing and more efficient financial sector, and more importantly new governmental measures that aim at bolstering new opportunities through reforms and diversification from oil industries.  

All these are factors making the African soil more inviting to foreign investors. However, the best route to access the African growth seems to be different from the conventional equity market exposure that is popularly adopted in developed countries.

At the exception of Johannesburg, stock exchanges in the rest of Africa are young and have few listings that are relatively illiquid. The value of shares changing hands in the Casablanca and Nigeria stock exchanges, two of the busiest financial hubs in the region, are very low by international standards; only US$7.1 billion In Casablanca Stock Exchange with a total market capitalization of US$52.6 billion, and US$ 3.5 billion in Nigeria Stock Exchange with a market cap of US$ 56.3 billion in 2012.

Furthermore, there is an imbalance between the sectorial break down of GDP and that of the stock markets. According to the Financial Times, in Nigeria, the energy sector contributes 41% to GDP while it is almost absent from the stock market. The same is noticed in the consumer goods sector that accounts for 20% of the economy while it only represents 1% of the stock capitalization. This imbalance seems to get accentuated as the stock market gets smaller.

It is, then, no doubt that the stock market is not the best way to live the African adventure.

Africa seems to have its own investment rules. It requires investors to embrace the African soil and consider the private equity market. According to RisCura Fundamentals, an African provider of independent valuation services, a large portion of the 158 African private equity deals studied involve companies in the consumer sector, mining, and energy, all of which are high potential sectors in the region.

Another reason why investments in private equity are an attractive opportunity in Africa is the low valuations at which the deals are conducted. According to Bright Africa, a report providing insights on the transaction multiples across the continent, private equity deals in Southern, West and North Africa are concluded at EBITDA multiples of x6 and x7, lower than listed equity multiples in the region and 12% lower than global averages.

All these reasons seem to drive Private Equity activity. Sub-Saharan Africa, according to the Emerging Markets Private Equity Association (EMPEA), has the largest increase in investment activity in the first 6 months of 2013 with 36 concluded deals amounting to US$ 850 million, an increase of capital of 45% compared to the same period of 2012. The same source also announced that the 2nd largest deal in emerging markets took place in Kenya in the energy sector with an investment of US$600 million.

Looking at the stock exchange activity in Africa seems to be the wrong way to go about assessing the African potential. African stock exchanges are surely getting better. They have come a long way since a decade ago and they still have a long way to go.  Meanwhile, private equity activity is thriving.

Naziha BAGUI, Manager, Infomineo.

Sources:

– African Review: African private equity finds ‘silver lining’

– Financial Times: Follow the private equity road for profit in Africa

– Emerging Markets Private Equity Association (EMPEA): Press release

– RisCura: Bright Africa

– Emerging Capital Partners

– African Development Bank

– Pesa Times: Delonex to invest US600m in African energy

– Casablanca stock Exchange

– Wold Bank Data – Market capitalization of listed companies

– World Bank Data – Stocks traded, total value