From a dozen or so active general partners (GPs) in the region in 1990, there are currently at least 140 GPs active in Africa. Between 2010 and 2016, GPs invested around US$25.6bn across sectors that ranged from consumer goods to water and sanitation.
GPs’ approach to investment in Africa is, in several ways, distinct from how the asset class functions in other parts of the world. For instance, PE fund raising and deal execution have a longer lead time in Africa than PE funds focused on other regions; the deal sizes are usually smaller; the average holding periods sometimes extend over eight years; and the exit options are weighted towards trade sales. Trade sales are associated with corporate buyers purchasing assets in their core line of business. PE, therefore, plays an important role in facilitating the presence and strategic expansion of corporates in the region.
Moreover, PE investment in Africa tends to focus on growth capital, helping investees to improve governance, and strategy, expand their footprint and (at times) contribute positively to the region’s broader commercial ecosystem, for example by deepening capital markets and expanding supply chains. The focus on growth capital is the opposite of the financial engineering accusations often directed at GP activities in other regions. Rather than buying a business, significantly increasing its debt levels, aggressively reducing costs and exiting after a short holding period, the GP approach in Africa centres on holding and scaling businesses with limited, if any, debt capital included in deal structures.
GPs operating in Africa have surpassed benchmark levels of return: between 2007 and 2015, they generated an average return well over 150% the MSCI Emerging Market Index. This notwithstanding, PE has low penetration relative to performance in other regions. Reforms have been enacted in some countries in the region in order to encourage Africa-based institutional investors to allocate capital to the asset class.
However, more remains to be done to harness fully PE’s potential to contribute to Africa’s socioeconomic development. Each investment counts: every 0.01% in concluded PE transactions as a percentage of African GDP (US$2.1trn) translates to over US$200m of much needed incremental annual investment in the region.
The impact of private equity
Capital to grow: PE plays a catalytic role in Africa. The general shallowness of African capital markets and the high cost of debt finance mean that PE plays an important role in helping to unlock and grow the potential of individual companies and ecosystems. Unlike in other regions, where transactions may be driven by a financial engineering objective, the asset class is primarily applied to fund enterprise growth in Africa.
GPs generally approach transactions by assessing the potential to expand a targeted portfolio company’s market reach and/or combine it with a complementary business or service offering. “We play at the larger end of the PE spectrum. Investments start at US$50m and may go up to US$250m,” says David Cooke, partner at Actis, a GP that invests in emerging markets. “Baked” deals—those that are acquired at scale and run efficiently—are not as common in the region.
“We find very few baked transactions. We may take a successful national business and expand it regionally; everything we do is around growth,” adds Mr Cooke. Debt, when used in deal structures, is generally sparingly and judiciously applied. “We typically use a lot of equity, no more than one third debt,” says Nhlanganiso Mkwanazi, director at Medu Capital, a Johannesburg-based firm. “In the mid-market space, we want to generate investment returns by growing the businesses. The businesses need to have strong balance sheets, not onerous structuring, to enable them to grow effectively,” adds Mr Mkwanazi.
Geographic expansion and job creation
Various indicators point to the value of GPs’ involvement with their portfolio companies. For example, between 2009 and 2015, Africa-based PE investee companies grew their employment “Private equity in Africa is primarily used to support growth, whereas, in the developed world, it may have more of a financial numbers by over 15%, according to The African Private Equity and Venture Capital Association (AVCA). One of Actis’s South Africa-based investments, Food Lover’s Market, is adding an average of five new employees daily.
Fanisi Capital, a Kenya-based GP, has had success growing smaller enterprises into national and regional enterprises. “We do earlystage investments, sometimes with a single entrepreneur, and help to corporatise them,” says Ayisi Makatiani, managing partner at Fanisi Capital. He adds, “For example, we made an acquisition that had two pharmacies and helped to build it into a chain with 53 outlets.”
“While the typical size of our PE investments is between US$50m and US$100m, we will look at anything from US$30m to US$200m. In terms of size, we care less about where we start out, and more where we can end up. Our focus is on the capacity to grow and develop a company into a market-leading business of scale,” says Souleymane Ba, partner at Helios Investment Partners, a London-based GP that invests exclusively in Africa.
“We put investment and growth first, before anything else.” Bruce MacRobert, chairman, Consol Holdings Improving environmental social and governance (ESG) performance says ESG is a generic term used by investors to evaluate corporate behaviour. GPs, and the limited partners investing in their funds, prioritise investees meeting acceptable ESG standards. These standards include financial and non-financial indicators geared to measure how well a company is performing and give an indication of its long-term prospects. Energy efficiency, staff training and qualifications, green house gas emissions and litigation risks, as examples, form part of a host of ESG factors.
Often a GPs involvement in an investee results in a dramatic improvement in ESG performance. “All of our portfolio companies in some way are making life better for people and businesses in Africa,” says Dabney Tonelli, investor relations partner at Helios Investment Partners. “Through our investment activity we’re developing the next generation of business leadership potential, enhancing lives through access to information and technology, creating financial security, increasing financial inclusion, improving environmental care and quality and improving governance standards,” she adds.
Transactions: doing deals
The period 2010-16 for some GPs 2016 was their busiest year. “We do two to three deals a year, flowing from an annual pipeline of over 160 potential opportunities. In respect of transaction volumes, last year was our biggest year as a firm,” says Mr Ba. Out of 54 African countries, only five had a GDP that exceeded US$100bn in 2016, according to The Economist Intelligence Unit. Large PE transactions are, therefore, few and far between in the region.
Over the seven-year period, transactions greater than US$250m composed a little under half (US$12.5bn) of concluded deals. GPs biased towards larger deals generally do not conclude transactions that exceed US$250m. “The typical size of a deal is US$50m to US$100m,” says
Ngalaah Chuphi, executive director at Ethos, a In 2010-16, around US$25.6bn of PE transactions were concluded. The annual investment level averaged around US$3.7bn. However, this figure does not tell the entire story. For example, 2013 and 2014 stood out within the period: over US$12bn, or 48% of total value, was invested in those two years alone.
Three large telecommunications deals by IHS Towers, a company that builds and operates base stations, averaging around US$1.4bn each, and one US$630m deal by Helios Towers Africa, which also builds and operates base stations, accounted for around US$4.8bn of the total value of concluded deals.
Notwithstanding slower macroeconomic growth in the region, in 2016 the total amount invested by GPs was US$3.8bn or US$160m more than the average annual investment over the Larger deals dominate overall, but not in every year. Johannesburg-based GP. In fact, in the period 2011-16, only around 3% of PE-transaction volume involved deals valued at US$250m or more, according to Prequin, a firm that provides data on the PE industry. Deal mix: Regional focus
Over 1,000 PE deals were concluded between the beginning of 2010 and the end of 2016, according to data from AVCA and Prequin. Transactions that involved investees that operated across a single sub-region composed the largest share of deal value over the seven-year period. The Southern Africa region accounted for around 30% of completed transactions. South Africa is the largest and most sophisticated single PE market in Africa, accounting for around 22% of concluded transactions by volume and 13% of concluded transactions by value between 2010 and 2016.
West Africa contributed one-quarter of the capital invested in Africa PE transactions over the period, while accounting for around 25% of total transactions. The East Africa region contributed 18% of PE transactions, but just 8% of total deal value. Between 2011 and 2016, there may have been as few as seven concluded deals in East Africa valued at US$50m or more; other East Africa-based deals concluded over the same period averaged around US$8.5m per transaction, according to Prequin.
The smaller average size of East African deals suited Fanisi Capital, a Nairobi-based GP focusing on transactions in the range of US$3m to US$5m. “Africa is big, and it is complicated; that leaves opportunities for regionally based GPs like us,” said Mr Makatiani. He adds, “The challenge has been that East Africa has become very popular.