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Private equity in Africa set to move into ‘investment period’

Rory Ord, executive at RisCura.

Rory Ord, executive at RisCura.

Africa’s private equity industry has made headlines recently for achieving some milestones in 2015, even though the year was characterised by economic troubles. Low oil and commodity prices globally placed strain on African current accounts and saw local currencies weaken against the dollar. In general growth slumped across the region.

However, according to data from EY and the African Private Equity and Venture Capital Association (AVCA), private equity exits on the continent reached a nine-year high in 2015. This is in spite of firms holding onto their investments longer due to economic uncertainty – with the average hold period in 2015 increasing to 6.1 years, from five years in 2014.

Research from Africa investment specialist RisCura shows that there was an increase in fundraising activity in 2015 with the total value being US$4.3bn. On the other hand statistics also revealed that new investments took a dip to around 160 – a level last seen in 2010 and 2011.

So what does this tell us about the current private equity climate in Africa?

Cautious interest in African deals

Rory Ord, executive at RisCura, owes the increase in fundraising in 2015 to two factors. Firstly, much of the money was likely raised over 2014 and 2015, but was only recorded in 2015 when total fundraising was completed.

Secondly, three of Africa’s larger private equity funds reached close in 2015, such as Helios Investors Fund III (with $1.1bn raised), Abraaj Africa Fund III ($990m) and African Development Partners Fund II ($725m).

Nevertheless, he notes the increase in funds raised shows there is still an interest in investing in Africa, despite the economic slowdown.

“At the macro level there is a lot of growth happening in different parts of the continent, in different countries and sectors. But I think it has taken some time to see exactly how the downturn in resources would actually impact these sectors and companies. So the actual fund managers who have to pull the trigger on these deals are being quite cautious to make sure they understand the way these things are playing out before actually going ahead with deals.”

Despite the fall in private equity entry transactions, there has been a relative increase in competition for larger deals, notes Ord.

“While all this uncertainty was going on, there was also quite a lot of competition for the large deals because larger funds were raised in the years leading up to that time and now needed to be deployed… So large deals on offer have been fairly competitive in an African context. It is still not nearly as competitive as it would be in other parts of the world… but it has been more competitive than in the past, which places some upward pressure on pricing despite the fact that fewer deals have been done.”

He adds that while transactions have slumped, the increase in merger and acquisition activity reveals corporates are looking to expand their operations around the continent.

“And I think this is where it comes to the exit story we have seen [in 2015], because a lot of those buyers of the private equity exits would have been corporates.”

Looking ahead: Investment period

Ord says it is likely that headlines next year might highlight a dip in fundraising during 2016 and 2017, but this will mostly be due to the fact that a lot of the large funds have already raised their money – and might only start fundraising again in three years.

“We are now in more of an investment period so we are going to see that money, which was raised over the last couple of years, getting invested around the continent. There is going to be a lot of focus on those deals actually getting done.

“Fund managers have had time to see how the macroeconomic situation – the dip in currencies and commodity prices – has impacted the real economy. So I think they will get a little more comfortable around those things and find a way to deploy their money,” he continues.

“One question mark on that is still around the way Nigeria is dealing with its currency. It is still not devaluing it… and I think if it did devalue [the naira] it would stimulate a lot more activity. Nigeria is Africa’s largest economy and we are still seeing a lot of growth, despite the downturn in oil prices. But investors are understandably waiting to see what happens with the currency before actually investing there.”

He adds that the consumer sector will further attract private equity interest and deals.

“I think across the top ten economies in Africa they are expecting [growth] of about $120bn or so in the consumer sector in the next five years. So a lot of attention is going to that sector.”

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