Nastassia Arendse

African Independent 9th September 2016

EVEN though Africa was once perceived to be a no-go area for global capital, private equity firms are actively looking for opportunities. The value of private equity as an asset class remains positive. Despite currency fluctuations and low gross domestic product rates, returns are still being generated.

Companies are taking advantage of networks and local market expertise to benefit from the specific opportunities. Those that are investing in Africa are outperforming public markets.

The most exciting development in private equity has been the rapid expansion across emerging markets. The growing middle class and rising consumer spending power are underpinning the modern Africa story, with private equity playing a key role.

Rapid urbanisation and more business-friendly policies continue to support these trends and provide specific investment opportunities.

“Our annual Africa Private Equity exit study shows that despite the changing macroeconomic dynamics, private equity firms still continue to outperform public markets,” said Dorothy Kelso, head of research at the African Venture Capital Association (Avca).

Over the past two years, African markets have seen a rapid rise in private equity exits, says Graham Stokoe, EY’s Africa private equity leader. A private equity fund’s basic goal is to sell or exit its investments in portfolio companies for a return which is in excess of the price paid.

“Private equities are focusing on increasing value by diversifying their portfolios. The environment under which they operate still poses challenges, but the firms are finding ways of creating value in the region and finding new opportunities for exits,” says Stokoe.

Private equity firms exited 44 companies in Africa last year compared to 39 in 2014. South Africa accounted for 39 percent of the exits, 11 percent came from Egypt, while Nigeria and Kenya accounted for 10 percent each. The most common sectors for exits over the past two years were financial services, consumer goods and services, industrials and health care. Those that retained their investments were waiting for the right opportunity to exit due to macroeconomic uncertainty.

“With exits reaching a nine-year high, the availability of efficient exit routes remains important for private equity in Africa,” says Avca research analyst Ponmile Osibo.

According to the latest Africa Attractiveness Survey, Africa’s perceived attractiveness has

risen dramatically. Regarding investment, the continent is ranked the fourth most attractive for private equity. Five years ago, Africa ranked number eight.

Investors are moving away from markets such as the US and Europe to focus on the African potential.

As other key markets begin to reach saturation, investors are increasing their investments beyond South Africa. Countries such as Kenya and Nigeria remain high on the radar screens of private equity firms. This has resulted in firms investing in an array of businesses outside infrastructure and commodities.

According to the private equity firms surveyed, the most attractive sectors for investors are in retail and consumer products, financial services, retail and consumer goods, education, health care and energy.

In a global survey of 100 private equity firms’ active in the oil and gas sector by advisory firm EY, such firms are set to increase investment in the global oil and gas industry; 25 percent of respondents are planning acquisitions before the end of the year and 43 percent by the first half of next year.

EY Africa energy lead Claire Lawrie says the biggest challenge facing oil and gas companies is access to funding. Amid the low oil price environment, oil and gas companies are exploring ways of raising capital. Companies backed by private equity firms are looking to joint ventures to help cut costs.

Lawrie sees possibilities for a return on investment in the midstream and upstream segments. The oil and gas industry involves the upstream operations, which deal with the identification of deposits, drill wells and the recovery of raw materials from underground.

The midstream links the upstream and downstream sectors, i.e. refineries and marketing.

Last year saw an increase in deals linked to the oil and gas and basic materials sectors.

“Investors remain keen to explore opportunities in Africa through private equity funds, providing further evidence of Africa’s untapped potential,” said AVCA chief executive Michelle Kathryn Essomé.

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