Nigeria skyline image

25 Oct 2019

Private equity in Africa: why you need a long-term view

Despite the hurdles, opportunities abound in Africa for private equity – but innovation and a long-term approach are needed.

In this article, we examine the investment case in Africa, and how the private equity segment can help unlock opportunities for growing businesses and investors alike.


Out of Africa, something new


The African continent has opened up significantly in recent years as a destination for investors. After decades of turmoil and economic mismanagement, many African governments have worked hard at reforming their economies and financial systems, reforms that have led to a general rise in incomes and more attractive markets for foreign investors.


The growth of economies like China and India has also contributed to a rise in demand for commodities, providing an impetus to growth on the continent. There is potential for the continent to grow further, both as consumer demand grows and as investment in infrastructure rises.


While Chinese investment has grabbed the headlines throughout much of Sub-Saharan Africa, many other countries, such as Turkey and India, have also increased their diplomatic and business presence. This could result in foreign direct investment continuing to rise, with capex channelled into public sector infrastructure and private sector developments. This may create a virtuous cycle of improved incomes and living standards, which should fuel opportunities in the domestic economies and export sectors alike.


Liquidity problems


The opening up of capital markets in Africa has created new opportunities for foreign investors. From an almost total absence of capital markets in much of Africa just three decades ago, a number of countries in Africa now have established stock exchanges, as well as bond and money markets.


However liquidity remains a challenge for many foreign investors. Apart from the Johannesburg Stock Exchange (JSE), most of the exchanges suffer from low turnover, making this a hurdle for global investors to take up stakes in locally listed companies.


To demonstrate the effect, in July (the latest figures available from the World Federation of Exchanges) the JSE had a monthly turnover of US$370bn, compared with US$44bn (8.4 times) for the Nigerian Stock Exchange, the next largest exchange on the continent, and US$14bn (26.4 times) for the Egyptian Stock Exchange, the third largest.


Furthermore, many locally focused businesses prefer to remain private, so many sectors in the economy remain underrepresented on their countries’ exchanges.


Foreign direct investment has grown over the last 20 years, though much of this has been by large multinationals or development finance institutions, either into infrastructure projects or in mining, energy and telecoms. Few locally listed companies have benefited directly from this.


Recent trends in private equity in Africa


Does private equity have a role in mobilising capital in Sub-Saharan Africa? Private equity can be a channel for investors to tap into the opportunities in Sub-Saharan Africa. While the numbers can sometimes be volatile, there is a clear rise in interest in the sector on the continent.


According to data from the African Private Equity and Venture Capital Association (AVCA), there were 186 private equity deals in 2018. Compared with 158 deals in 2014 and 2015, this represents a steady increase over the last few years, though still below the 196 deals done in 2013.


Despite the increase in the number of deals in recent years, the total deal values have been on a downward trend in recent years. The total value of private equity deals across Africa last year was US$3.5bn, from US$3.9bn in 2017 and US$4bn in 2016 – and well down from US$7.8bn in 2014. The median size of deals is between US$6m and US$8m, which are small amounts by global standards.


Similarly the amounts raised to invest in Africa, by limited partners such as pension funds, are also volatile. US$2.7bn was raised in 2018, from US$2.4bn in 2017 – though both are below the amount raised in 2015 (US$4.5bn), according to AVCA.


Can private equity gain traction in the region and contribute to the continent’s growth?


According to Grant Crosby, Investec’s head of fund finance for emerging markets, the fund raising environment in Sub-Saharan Africa has slowed as investors continue to commit to developed market funds, a function of their relative outperformance of late. In addition, the high profile failure of the US$14bn Dubai-based Abraaj private equity fund last year on allegations of fraudulent misuse of funds, has also affected sentiment. Abraaj was a major investor in Sub-Saharan Africa and counted among its investors the Bill and Melinda Gates Foundation and the International Finance Corporation.


However there is clear potential in Africa for those prepared to take a longer-term view, says Crosby. The deepening of capital markets in the region, increases in infrastructure investment, growing consumer markets and recent higher commodity prices, all present opportunities for investors to generate returns.


Crosby argues that the historical underuse of fund leverage in the region is also an opportunity for funds, particularly if they are prepared to use innovative structures to mitigate currency risk.


“The sector has a long way to go, but a combination of improving macro and structural issues and innovations should lead to an invigoration of the sector,” says Crosby.


Chetan Jeeva, Investec’s head of specialised finance (Africa), comments that a portfolio approach is required, that takes into account the different legal, business and cultural dynamics in different countries in Sub-Saharan Africa.


“There are idiosyncrasies in each economy, from the way business is done, to the way one funds,” he points out.


Jeeva says it’s often a case of finding lending opportunities that can grow into private equity funding further down the line. Notwithstanding the differences between countries, Jeeva says one often finds that industries like FMCG or technology are dominated by family-owned businesses, with their own, often opaque, ways of doing business. An equity partnership with outside shareholders may not always be attractive for these businesses, he points out.

“However they may well be willing to fund their expansion plans by using debt. By providing innovative lending solutions, one can hopefully plant the seed for private equity down the line,” he says.


Again, this requires a patient, long-term take on doing business in the region. Jeeva and Crosby both agree that the key is usually strong partnerships with local businesses and financial institutions. And there’s no doubting the rewards for patience in a region that is likely to grow in the coming years.



About the author

Patrick Lawlor

Patrick Lawlor


Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View, and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek, and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.

Receive Focus insights straight to your inbox


Please complete all required fields before sending.

Thank you

We look forward to sharing out of the ordinary insights with you

Sorry there seems to be a technical issue

  • Disclaimer

    The information furnished in this document, material or communication has been prepared by Investec Bank Limited. The information referred herein has been obtained from various sources believed to be reliable, and may include opinions, estimates and facts relating to the related products as well as current events or prevailing market conditions as at the date/time of the information going to print, which conditions or facts may change without prior notification to the recipients. Investec or its affiliates and/or any of its subsidiaries do not warrant the completeness or accuracy of the information. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. Investec and/or its employees may hold a position in any securities or financial instruments mentioned herein. The information contained in this document does not constitute an offer or solicitation of investment, financial or banking services by Investec. Investec accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or special indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the or reliance on the information contained in this document, whether authorised or not. Investec does not make representation that the information provided is appropriate for use in all jurisdictions or by all investors or other potential clients who are therefore responsible for compliance with their applicable local laws and regulations. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of Investec. 

    Investec Corporate and Institutional Banking, a division of Investec Bank Limited. Reg. No. 1969/004763/06. An Authorised Financial Services Provider and registered Credit Provider. A member of the Investec Group.