African prospects appealing
The continent’s attraction as an investment destination continues to grow
AFRICA continues to receive more and more interest as an investment destination from investors looking to emerging markets to access their growth potential or from investors looking to secure the natural resources that the continent offers.
These are some of the highlights from PwC’s sixth edition of its biennial valuation methodology survey.
An African Perspective: Valuation Methodology Survey 2012 reflects the views of 49 financial analysts and corporate financiers. This year the study broadens the reach of the previous South African surveys by including perspectives from analysts in East and West Africa.
A significant number of executives have declared their company’s intentions of growing their presence in Africa, and the number of global companies looking to establish a foothold on the continent has increased.
A key characteristic of the post2008 recession period has been the increase in prominence of Africa as an investment destination. With an already higher than average growth rate, Africa is fast becoming an attractive place to do business especially as corporates in developed markets seek to augment slowing growth rates in their home markets. Price and value how- ever remains the key challenge for companies doing deals in Africa as the gap between sellers and buyers seem larger on the continent than in other jurisdictions.
This year’s survey looks at companies’ perceptions of investment around Africa as an investment destination. Specific questions addressed in this edition of the report relate to the reasons for the increased investor interest in Africa; the industries that are attracting the most interest in Africa from potential investors; the level of cross-border and intra-African interest in the continent; deal activity in African markets; companies’ perceptions of African markets; and the challenges faced by companies in performing valuations in African markets.
Economic growth in Africa has recently been significantly higher than that in many developed regions, which is often cited as the main reason for investment in Africa. On average, developing economies have an expected five year compound annual growth rate (CAGR) that is more than twice that of developed economies, according to the International Monetary Fund (2012). Africa has a lot to offer, particularly in terms of scarce resources. Currently the level of demand in Africa is also improving, making the continent a more attractive place to do business. Growth in demand can be partly attributed to the maturing banking sectors in Africa. However, there are also a host of factors hindering the continent’s success, such as a lack of infrastructure, various barriers to trade, low productivity and skills shortages. Infrastructure and technology are also improving on the continent.
There is a strong perception in the market that African companies have greater growth expectations than those in other markets. No less than 92% of respondents see this as either “very relevant” or “extremely relevant” in
There is a strong perception in the market that African companies have greater growth expectations than those in other markets
explaining the increased interest in African companies.
In addition, there is a strong drive to diversify away from low-return markets, with 92% of analysts and corporate financiers also seeing this as either “very relevant” or “extremely relevant”. This demonstrates investors in developed markets’ desire to augment slowing growth in home markets. On a secondary level, improved political stability and risk-return tradeoffs have contributed to a more positive perception of African markets.
The results of the study also indicate that the majority of valuations are still performed for investors in home markets. However, a significant number of valuations are also being performed for investors from Europe and the US, which underscores the heightened level of interest from developed market investors seeking exposure to higher anticipated growth in Africa.
The level of activity by industry tends to differ between regions. The study shows that the most predominant target industry in West Africa appears to be the retail, consumer goods and industrial products industry, whereas mining continues to be a key industry within the southern African market.
Analysts and financiers cited the lack of data, both about comparable companies that could provide valuation benchmarks in a valuation analysis, as well as industry data (eg, around market demand, the competitive environment and growth expectations) that could support cash flow forecasts as challenges to performing valuations.
The results of the study indicate that there is a lack of consistency in accounting standards in East and West Africa, which also makes it difficult to carry out valuations.
The outlook for deal activity in the emerging markets is clearly improving. However, there are also challenges to performing valuations in emerging markets, such as accounting for country risk, lack of data and inconsistent accounting standards. Companies entering new emerging markets need to spend time researching the prospective markets thoroughly, even more than they would a potential new investment in a new developed market.