Africa P.E. Insider: A Closer Look At Africa’s Private Equity Market

By Anna B. Wroblewska AFKI Original Published: January 28, 2015, 11:17 pm
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In this weekly column, we share some of the activities, trends, and inner-workings of the African private equity industry.

African private equity is unique, particularly when compared to the complex leveraged buyouts popularized by such movies as Barbarians at the Gate.

Nonnie Wanjihia, executive director of the East Africa Venture Capital Association, described it to AFKInsider in this way: “Private equity in Africa is focused on growth and expansion, rather than financial engineering, in order to unlock and realize value.”

In other words, the key to private equity in Africa is its focus on building businesses. That the industry is growing rapidly is perhaps not surprising, then, considering the dynamic economic and business growth across the continent.

And of course, growing businesses need capital.

The appetite for financing is strong. A McKinsey estimate projects that the region’s demand for capital will grow by 8 percent annually through 2018; the number reaches a breathtaking 20 percent in ten countries.

Private equity firms are an obvious source of funds, considering their willingness to get their hands dirty in management of investment assets and in the longer-term, higher-risk nature of their mandates.

And private equity is flocking to the region: according to Ernst & Young, 2013 saw a 43 percent rise in capital raised by Africa-focused funds to $3.3 billion.

It might not, as a recent Investec report notes, be an enormous number, but it is growing rapidly. According to the bank, about $4.5 billion is currently being raised by Africa-focused funds.

Most of these funds are generalists, meaning that they cover a number of sectors and deal sizes.

On the other hand, the report notes that specialization and regionally-focused funds are also on the rise. These include anything from infrastructure investors focused on issues like power and transport, to “impact” investors focused on areas like affordable housing.

However, in big picture terms, “The main space still is generalist,” Nick Tims, managing director at Investec Asset Management and author of the report, told AFKInsider.

“You look at the big funds raising out there… these are generalist vehicles, and I think the opportunity as we see it, and as most of our major competitors would see it, is still the ability to go multi-country, multi-sector,”  Tims said.

Making deals

These big funds tend to pool on the larger size of the deal spectrum. “The interesting thing is if you go above $100 million deals, there’s a real scarcity. In 2014, there were only 7 deals done above $100 million.” With few opportunities, competition has stiffened, according to Tims.

On the other hand, Investec reports that the so-called “middle market,” which Tims defines roughly as deals in the $15 million to $50 million range, faces chronic capital shortages.

Speaking to AFKInsider, Graham Stokoe, Africa private equity leader at Ernst & Young, notes that, while the opportunities are there, the “large [private equity firms] are having to work harder to get the large deals done,” primarily owing to the number of interested investors. These include not only other private equity shops, but also trade buyers like large corporations.

While pointing out the obvious difficulties in generalizing for a continent as large as Africa, Stokoe says, “There is however probably more demand for capital from the small and medium sized African businesses than there is capital supply, where for larger businesses the balance between supply and demand for capital is more balanced.”

Erica van der Merwe, chief executive officer of the Southern African Venture Capital and Private Equity Association, has seen similar trends. In an interview with AFKInsider, she said, “Anecdotally, there appears to be many deal-making opportunities for private equity firms doing transactions in the mid-size to small spectrum.”

According to van der Merwe, fund managers find these deals through their networks and proprietary relationships.

It’s a comment that underscores the importance of the question: can you invest in Africa if you aren’t in Africa?

Van der Merwe emphasizes the importance of a local presence. She says, “Each jurisdiction differs in terms of the functioning of its markets and institutions, its regulation and its people; attempting to manage a business by remote would be a daunting and potentially dangerous task.”

On the other hand, “It is challenging to find local talent and set up local offices, particularly if you’re not a fairly large private equity fund,” says Stokoe.

Of course, “Firms do it in very different ways,” says Tims. “We do it with hubs in London and Cape Town, so we roughly split our private equity team.” It helps to have the resources to hire enough people: “In the case of Investec we’ve got roughly 65 people crawling all over Africa.”

Smaller funds, or those unable to expand, can manage in other ways. Wanjihia mentions funds which don’t have a local office but “understand the importance of wide networks and spend[ing] time on the ground building these.”

That being said, though, she notes that “talent remains one of the sector’s challenges.”

Exiting deals 

So once a private equity fund has come into the market and identified great businesses to finance, how does it make money?

This part of the deal process is referred to as the “exit,” and there are a variety of options. In Africa, however, the classic “IPO,” or Initial Public Offering of company stock on public markets, is not a common route.


“We expect the number of IPOs to increase, but it’s not going to be a main exit route. Exits to trade buyers [like corporations] and other private equity/financial investors will continue to be the more common exit route,” says Stokoe.

The reason is that the 22 African stock exchanges are not always attractive for companies. Investec cautions that most of the exchanges have very low liquidity, meaning in this case low trading volume. Less trading means it’s more difficult and costly to buy and sell shares.

The major exception is South Africa’s Johannesburg Stock Exchange, which has a daily volume of $1.3 billion. By comparison, Africa’s largest economy, Nigeria, has a daily volume of $24 million. The listed companies are also rather small; Nigeria’s listed market capitalization (the total value of all listed companies) is 21 percent. In India the number is over 80 percent.

However, Wanjihia believes that the number of IPOs is likely to grow. “As markets deepen we can certainly expect to see more exits via IPO.” 

This would be great for private equity firms.

“Generally, an IPO exit has an attractive valuation compared to many other exits, so it’s a route that we’d like to see… This is something which is clearly developing in Africa though still nascent in many countries.”

Tims says that Investec might exit two investments in the next 18 months via public listings. These will most likely be on international exchanges, though with the possibility of parallel local listings.  

All in, private equity in Africa is in an exciting place, with plentiful opportunity and the growing scope to capitalize on investment efforts. Expect to see more — much more — in the coming years.

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