What are set to be the most influential moments and movements for African private equity in 2018?
KKR’s exit cannot be a defining moment.
This subject needs to be digested before progressing through any other subject on African private equity in 2018. The exit of private equity firm Kohlberg Kravis Roberts (KKR), one of the largest assets managers in the world, from the African continent is not a surprise in many corners, especially if you get many fellow African investors behind closed doors.
That said, African investors do not believe this should be the preamble to the decline of African private equity.
The pessimists already have some selected chapter titles: (a) Atlas Mara Recapitalization (after struggles with initial investments), (b) Carlyle Group and Diamond Bank (focus on 75 percent-plus drop in share value since Carlyle’s share purchase), (c) Bain Capital in South Africa (on losing control of retailer Edcon Holdings to creditors in debt-for-equity swap).
The optimists will argue their case this year. Deal flow is likely be up this year, as a result of that argument, with some hungry and creative investors leading the way.
Small and mid-cap private equity will drive the African investment rebound…
The aforementioned struggles are largely concentrated with large cap investors. Data, according to the Africa Private Equity & Venture Capital Association (AVCA), shows that small and mid-cap private equity firms account for a greater percent of the firms that outperformed the reported 4.4 percent annual internal rates of return (IRR) net of management fees for limited partners over a five-year period ending Dec. 31, 2016.
These same firms will continue to lead the way in 2018. African small and medium-sized enterprises (SMEs) are the greatest opportunity for growth in both challenging and boom times.
The Africa investment environment is a mix of both challenge and boom right now, thus SMEs may be the ‘bread and butter’ focus for investors. SMEs are also the pathway to tapping into the significant growth at the bottom and middle of the African pyramid.
This is where the greatest percentage in income and job growth is happening. Investments in this space will also help employment growth.
Oil will help global liquidity…
Higher oil production and oil prices are helping oil giants and subsequently the balance sheets of some big players on the African continent.
Some analysts are increasingly bullish on Brent oil prices averaging north of $70 in 2018, particularly backed by ongoing drawdowns of oil inventories according to the U.S. Energy Information Administration (EIA).
That price, combined with higher production, will strengthen forex in many African countries, including regional giants Angola and Nigeria. As bigger giants return to the scene with larger government coffers, the entire continent could benefit.
Borrowing rates and inflation remained constant in 2017, with many countries implementing spending and related fiscal restraints to buoy this stability.
A bump in oil prices—hopefully with continued fiscal restraints—should be a boon for private equity investment in Africa, with theoretically lower returns on fixed income assets and cash compared to private equity assets.
Chinese (and Middle East?) investors may be bigger buyers in 2018…
Chinese investors have generally been described as large Chinese government-backed companies providing cheap loans in Africa…there is some truth to this storyline.
But the caricature as hyper debt peddlers to Africa misconstrues the growing role that Chinese debt and equity investors currently (and will continue to) play in the African growth story.
Although considered part of the competition to many western investors, Chinese investors are actively engaging western investment banks and private equity firms to place more capital in Africa.
If the West and the East become joint as well as complimentary investors in Africa, this will be a major boon for the African continent and open the doors to greater partnerships between private equity and government investors.
Middle East investors may join the party on the back of growing oil prices and consequently increased liquidity, as they seek to aggressively grow funds necessary to support projects at home over the long term.
The East and West will be in friendly competition…
The aforementioned growth in oil prices will help West Africa. Nigeria as a more active player in Africa cannot be understated, especially when combined with the already strong growth in French West Africa (i.e., Senegal, Cote d’Ivoire, etc.).
High projected growth in Ghana, north of eight percent according to the World Bank, will also be a boon to the sub-region.
The pitching by governments to attract more private equity investment in the western region has been conspicuous despite efforts to wrap it in high level policy speeches. The East is making efforts to keep a foothold on its place as the top investment destination in Africa, led by Kenya (looking to rebound post-election) and Ethiopia (maintaining its quick economic pace of recent years).
Tanzania and Uganda will also make a play for a piece of the capital pie. The great thing for both regions is the competition will jointly grow the capital pie, not cause one region to lose out to the other region.
Increasingly attractive investment environments across the entire African region—underlined by strengthened financial markets and laws, as well as reduced red tape—is (and will continue) benefiting private equity investment in the space and subsequently boost growth and opportunity for all Africans.
Kurt Davis Jr. is an investment banker, with private equity experience, focusing on Africa and the Middle East. He earned a M.B.A. in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at email@example.com.
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