What private equity investors will look for in Africa after Covid
• The pandemic will have left few sectors unscathed, and many will produce good opportunities
African private equity investment has always been riskier than investment in other regions, but for those willing to invest long term and sustainably, the region provides opportunities that will outlast current economic shocks.
With much dry powder around for private equity transactions (almost $2.5-trillion was waiting to be deployed globally, Preqin reported last year), private equity investors are now studying African markets carefully to find good value opportunities in the region.
Due diligence has always been a crucial aspect of the investment decision and is expected to be more in-depth and to last much longer after the pandemic. Private equity investors will, in addition to looking at a target country’s approach to governance and corruption, now also consider GDP as well as the ability to deal with social issues and how all of that is affecting the population, economic growth and the interplay between them.
They will study policy and regulation, location, infrastructure and pricing. They will look at the impact of Covid-19 and government responses. In the short term, country-specific restrictions such as those on movement and travel may affect transactions and the ability to conduct on-the-ground due diligence and site visits.
Private equity investments in Africa differ from those elsewhere in the world in that they tend to require holding investments for longer than in developed markets, use less debt and improve corporate strategy and governance, investing in the growth of their investments. Returns on private equity transactions can also be far higher than in developed markets, and investors are known to play a catalytic role for much-needed investment in Africa.
After Covid-19 (and in some cases under current circumstances), private equity investors with strong market positions will want to capitalise on the opportunities available in the most challenged sectors, such as retail, transport, energy, construction, hospitality and leisure.
The oil and gas industry and noncore infrastructure sectors are also facing stress, producing opportunities for buyers.
There are also opportunities in the sectors that have performed well during the pandemic, such as those in technology, health care and fintech.
ESG INVESTING
Environmental, social & governance (ESG) investing has become a focus for investors in Africa. General partners and limited partners prioritise ESG elements such as energy efficiency, sustainability, carbon footprint, community involvement, workplace health, education, skills development and governance.
Few sectors will not be affected by the pandemic, and many will produce good opportunities for fast-moving private investors who have done their homework and have the right approach to sustainability.
As corporate M&A in Africa has plunged in the first half of 2020 and corporate investors are standing back to assess their options, potential will be created for private equity investors to take a first look at investment opportunities on the continent. In Sub-Saharan Africa the total value of M&A deals fell 56% to $6.8bn in the first half of 2020, from $15.3bn in the first half of 2019, says Refinitiv.
Private equity investment in Africa faces many challenges. Post-pandemic investment has been affected by the sentiment that life will never be the same. Investors are thinking carefully about which businesses and sectors will be winners and which will be losers, and where the pandemic has created opportunity to acquire quality assets at a discount.
General partners have had to address new risks brought on by the pandemic and stabilise their investments, while sellers are holding on to their assets, waiting for an increase in value. Volatility has also hampered private equity deals across Africa in recent years.
General partners expect to raise most of their funding offshore, mainly in the US and Europe, due to a lack of African institutional capital. With the global decrease in bank lending in a post-pandemic environment, private debt funds may fill in the lending gaps and provide bridge financing for private equity investors.
African pension funds also have a key role to play as an additional pool of capital. New and better access to African savings pools have been identified for a while now as something that could act as a catalyst for further private equity investment in Africa. Pension reforms to encourage investment in specific asset classes have recently been mooted, or in some cases enacted, for example in SA, Nigeria, Kenya and Namibia.
Post-Covid-19 exit strategies will be important as many sellers will be waiting for conditions to improve before exiting the market. However, the rebound might be quicker than in a normal economic recession, resulting in a flurry of exits as conditions improve.
Due to inactivity in the African capital markets, made worse by Covid-19 uncertainty, asset sales have been the dominant form of exit for private equity investments. A growing category of exit in the region is sales to other general partners and financial buyers.
Even in tough operating environments, general partners are generating good returns in Africa because there are still good opportunities and assets are cheaper. Fund managers that are plugged into local networks are unearthing choice assets in Africa.
AFRICAN PENSION FUNDS ALSO HAVE A KEY ROLE TO PLAY AS AN ADDITIONAL POOL OF CAPITAL
GENERAL PARTNERS EXPECT TO RAISE MOST OF THEIR FUNDING OFFSHORE, MAINLY IN THE US AND EUROPE