Africa a rewarding prospect for patient investors
• Opportunities for private-equity firms in the continent’s consumer, IT and healthcare sectors
From humble beginnings, private-equity investing in Africa has become a popular theme among global investors. The challenges of committing capital to the continent were highlighted by the fall in commodity prices from 2014 to 2016 — which caused currency devaluation and an economic slowdown in many African states — and the difficulties foreign investors had in repatriating hard currency from countries such as Nigeria and Zimbabwe.
But while caution is healthy, there are many exciting and fruitful opportunities in this space, particularly for those prepared to entertain a broad opportunity set and take the time and effort required to make investing in Africa a successful venture. One such opportunity set is in small and mid-sized companies (SMEs) in Africa, particularly family ones.
African SMEs stand to benefit greatly from the more professional approach to managing their businesses as well as the opening up of untapped markets that private equity firms can engender. Private-equity managers can help generate expansion and development in such companies. This stands in stark contrast to the situation in developed markets, where financial engineering and driving bottom-line efficiencies are the main methods private equity managers use to extract returns.
To be sure, private-equity investing in Africa is not without challenges. Private-equity firms need to have a strong and sustained on-the-ground presence to develop the networks necessary to originate deals, the ability to understand the markets in which target companies are operating and to perform the thorough due-diligence tests required. Local knowledge and an appreciation of the technical aspects of the target companies and their industries is crucial, as is a thorough grasp of the relevant legal and regulatory environment. Smaller, more specialised private-equity funds with this kind of local expertise are able to make the most out of such opportunities.
In the past decade there has been a change in the types of industries and sectors in which private-equity firms invest. Initially, driven particularly by development-finance institutions, the energy, banking and commodities sectors were the greatest areas of focus.
However, according to the African Private Equity and Venture Capital Association, 25% of investments from 2012 to 2017 were in consumer-related companies in the consumer staples, consumer discretionary, industrials, information technology and healthcare sectors.
A further 22% of the investment was allocated to telecommunication services, while utilities attracted 21% and energy received 15% of the capital from private equity investments.
A great number of private equity firms see value in the theme of a growing and urbanising consumer class.
There have been shifts, too, in regional allocations. According to the association, SA’s share of African private-equity deals by value decreased to 15% on average over the period 2010 to 2015, while East, Central and West Africa were beneficiaries of 33% of total investment. West Africa, in particular, has gained attention in recent years.
While economic growth in African countries has generally slowed over the past decade, growth remains positive and demographic trends support this. The continent’s working age is set to keep on climbing for another five decades. Education is improving. The skilled labour force is expanding. Household expenditure has tripled across the continent from 2004 to 2013, and the number of middle class and affluent Africans (those with the equivalent of $1,600 or higher in annual income) is projected to double by 2024 to about 166-million people. Against this backdrop, there is still a tremendous need for development in physical infrastructure, energy, real estate, general industry and services.
There are challenges. The overall ecosystem and corporate and political governance of many African countries presents difficulties, although there is some improvement. In general, access to information is limited and technical expertise and managerial skills are scarce.
However, the difficulties SMEs experience in raising capital to grow is an opportunity for private-equity firms. Domestic equity and debt markets are generally insufficient to meet the needs of these companies.
As a result of the challenges, operating successfully in Africa is costly, and substantial investment is required to build local capabilities. African-focused private-equity funds employ more staff than similarly sized funds elsewhere. According to The Boston Consulting Group, the median employment level for international private equity funds is one staff member for each $112m in assets under management. For Africanfocused funds it is $45m.
Private-equity investing in Africa requires sustained hard work. Fostering relationships and networks is essential. There are great opportunities for driving value by improving and professionalising management of target companies, expanding their markets and providing capital for expansion, but this requires a hands-on, patient and flexible approach.
Nontraditional asset classes such as private equity play a vital part in the investment universe as they deliver diversification to investment portfolios, enhancing the probability of meeting client objectives. Alternative assets form an integral part of Alexander Forbes Investments’s Living*Investing framework, a risk-led, forward-thinking investment approach that aims to achieve client outcomes with greater certainty.
THE NUMBER OF MIDDLE-CLASS AND AFFLUENT AFRICANS IS PROJECTED TO DOUBLE BY 2024 TO 166-MILLION PEOPLE