Africa’s private equity opportunities and challenges

Accra, Ghana

Accra, Ghana

At the end of November 2016, a group of private equity professionals gathered in Cape Town for the SuperReturn Africa conference, which bills itself as the continent’s largest private equity and venture capital event. Jaco Maritz was there to learn about the opportunities and risks private equity investors see in Africa.

“The great explosion in private equity, if it is going to occur anywhere around the world in the next couple of years, is probably going to be in Africa, particularly sub-Saharan Africa, where the penetration rate is about one-twelfth or so of what it is in the United States.”

This is what David Rubenstein, co-founder of The Carlyle Group, had to say at the US-Africa Leaders Summit in Washington, back in August 2014. Carlyle is one of the world’s largest private equity firms.

Private equity fund managers typically try to improve the financial results and prospects of the companies in which they buy stakes, in the hope of reselling the business to another firm or cashing out via an initial public offering (IPO). The value created is then passed on to the fund’s investors.

While private equity is still a relatively small industry in Africa, the past few years have seen a reasonable amount of activity. According to the African Private Equity and Venture Capital Association (AVCA), 928 private equity deals, with a value of US$22.7bn, were completed in the period from 2010 until the end of the first half of 2016.

The economic backdrop against which Rubenstein delivered his comments looks very different today. Low oil and metals prices have put a strain on resource-rich African nations such as Nigeria, South Africa, Angola and Zambia. Nigeria’s economy, for example, grew by 6.3% in 2014, but has been in recession during 2016. Likewise, South Africa – a major metals and minerals exporter – saw growth fall from 1.6% in 2014 to a predicted 0.1% this year.

On the other hand, countries such as Kenya, Tanzania, Ethiopia, Côte d’Ivoire, and Senegal are still growing rapidly, with each expected to expand by more than 5.5% in 2016. These economies are typically not reliant on the export of crude and metals, and have benefited from the low oil price.

During a panel discussion at the SuperReturn Africa conference, Aubrey Hruby, an investment advisor and co-founder of the Africa Expert Network, called for a “normalisation” of the conversation around Africa, saying businesspeople need to look at the continent from a country perspective, rather than creating one narrative for the entire region. She said sub-Saharan Africa’s average 2016 GDP growth – estimated at 1.4% by the IMF – doesn’t paint an accurate picture, as Nigeria will contract by 1.7%, while Ethiopia will grow by 6.5%.

However, she accepts that the lack of growth in South Africa and Nigeria – sub-Saharan Africa’s two largest economies – does impact overall foreign investor sentiment. “If you look at the list of folks registered for SuperReturn last year, compared to this year, there is a significant change – and that is because some people are sitting on the margins and waiting.”

Currency woes

Foreign currency shortages and exchange rate fluctuations are some of the biggest challenges facing private equity investors in Africa. These issues featured prominently at the conference.

For example, the Nigerian naira has come under significant pressure due to a fall in the oil price. In March 2015, the Central Bank of Nigeria (CBN) pegged the local currency at just below ₦200 to the US dollar in an attempt to protect against inflation. This situation quickly led to a shortage of dollars in the country, and meant that many companies were unable to convert their naira earnings into dollars. To conserve foreign reserves and facilitate the resuscitation of domestic industries, the CBN last year also barred importers of 41 product categories from accessing foreign exchange. In June 2016, the CBN eventually devalued the naira, which has seen the currency weaken to about ₦315 to dollar, although black market rates can be over ₦400.

Foreign exchange is also in short supply in Ethiopia, where the government maintains an overvalued currency through strong capital controls.

Greg Metro, managing director of Schulze Global Investments, explains forex considerations now play an important role in the firm’s Ethiopian investment decisions. “We went through a process earlier this year where we mapped out which sectors we wanted to prioritise our time on. And one of the biggest factors in that – beside the overall growth in each sector – was: Does it need forex?

“So our solution is that we are going to focus a lot more on businesses that need less forex.”

According to Aubrey Hruby, private equity firms must account for currency volatility in their investment decisions. “You have to look for portfolio companies and opportunities that are going to deliver returns that are able to withstand some currency fluctuation. I think the currencies issues are the new normal.”

The drop in commodity prices and forex woes have also led to a greater appetite for local manufacturing in many African countries – as a way to overcome more expensive dollar-denominated imports and to source foreign currency.

“Everybody is looking for import substitution and to basically save foreign exchange in any way, shape or form they know,” notes Hruby. She stressed, however, that import substitution is less feasible if producers remain reliant on imported inputs. And often the local demand isn’t sufficient to warrant a full-scale manufacturing venture.

Similarly, companies are looking at export opportunities to get their hands on foreign currency. “I was just in Nigeria three weeks ago and I have never seen in all my trips to Lagos the kind of energy, intellectual capacity and fervent hustle that is being put… into exporting, and exporting to get dollars,” Hruby explains.

Africa’s frontier markets

In this complex economic environment, where are private equity investors placing their bets? A panel discussion titled, ‘A closer look at the most promising markets’, identified Ethiopia, Côte d’Ivoire, Tanzania, Kenya, Cameroon and Ghana as some of the countries that should be on investors’ radar.


In the period from 2000 to 2016, Ethiopia averaged annual GDP growth of 9.2%. The country has seen significant investment in infrastructure, with recent projects including the Addis Ababa-Djibouti standard gauge railway; a metro line in the capital; and the 6,000MW Grand Renaissance Dam hydropower facility, which is currently under construction. The government is also encouraging investment in the manufacturing sector through attractive incentives and the construction of industrial parks. H&M and Tesco are already sourcing garments from the country, while PVH Corp (which owns the Calvin Klein brand) recently established a factory there.

However, Ethiopia has recently been shaken by protests, fuelled by the largest ethnic groups, the Oromo and Amhara, who are calling for greater rights and political power in a country they say is dominated by the Tigray, who make up 6% of Ethiopia’s populati

on. The protests have been met by resistance from government, with Human Rights Watch saying 500 people have been killed in clashes between protesters and security forces.

In addition, Ethiopia this year faced one of its worst droughts in decades.

Ashenafi Alemu, co-founder of east Africa-focused private equity firm Zoscales Partners, says 2016 was a difficult period for the country. However, he views social instability as a side-effect of economic growth. “We’ve seen quite a bit of rioting and… land issues and other [things] that come as a result of economic growth. But we’ve seen that stabilise again. And our prediction is that things will go back to normal.”

One of Ethiopia’s most prominent private equity companies is Schulze Global, which has invested in a string of industries, including cement, food and education. While its managing director, Greg Metro, remains upbeat about the country’s prospects, he says the protests have negatively impacted investor interest, leading to a drop in competition for deals. “The Ethiopia story diminished over the last few months with the unrest that is happening… Almost all the deals that are in the pipeline now – we are the only fund that is looking at them. We haven’t seen any big increase in competition.”

According to Alemu, the most attractive opportunities for private equity firms in Ethiopia lie in investing in companies that cater to the local population, as opposed to those using Ethiopia as a manufacturing base for exports. He says Ethiopia’s export-focused apparel manufacturers are long-term plays that have to deal with challenging supply chains and logistics. These companies generally also have deep pockets and established markets, which limits the opportunities for private equity firms to add value.

On the other hand, he expects the government’s job creation initiatives to pull a substantial number of people out of poverty, which could create opportunities for companies targeting the emerging middle class.

Côte d’Ivoire

Schulze Global, whose African investments up to now included only Ethiopia, is expanding its footprint to Côte d’Ivoire. Greg Metro says the west African country has attractive economic fundamentals, supported by government policies that have made it easier for foreign investors. Matthew Adjei, chief executive officer of Ghana-based Oasis Capital, echoes these sentiments, highlighting the opportunities in the agri-processing and services sectors.

In 2010/2011, Côte d’Ivoire experienced significant unrest in post-election violence between supporters of current president Alassane Ouattara and those loyal to previous incumbent Laurent Gbagbo. This was preceded by almost a decade of instability and subdued economic growth. However, these days Côte d’Ivoire is one of the continent’s fastest-growing economies, with average annual growth of 7.7% expected from 2016 to 2020.


Since taking office in November 2015, Tanzania’s new president John Magufuli has implemented a range of anti-corruption measures and cut down on wasteful state spending. While many have welcomed his policies and can-do attitude, he has also been criticised for his unpredictability, heavy-handed tactics and the silencing of critics. GDP is expected to grow at an average rate of 6.9% from 2016 to 2020, driven partly by increased industrial activities and investment in infrastructure.

Kurt Davis, investment banker and analyst at Barclays Capital, is optimistic about Tanzania’s future, and believes Magufuli will have a positive impact. But, while Jonathan Berman, managing director at FieldStone Africa, is “watching Magufuli with interest”, he says the jury is still out on what the president’s impact will be.


With images of the 2007/2008 post-election violence still vivid in the minds of many, a degree of political risk has again crept into Kenya in the run-up to the country’s 2017 elections. However, Tony Couloubis, managing partner of SPE Capital Partners, doesn’t expect serious disruption, citing greater electoral maturity.

The IMF anticipates the Kenyan economy to grow by 6.3% every year up to 2020. For Couloubis, one of the challenges for private equity firms wanting to tap into this growth is the fact that many businesses, especially those in the manufacturing sector, are family run. These companies are often unwilling to bring in outside investors; the profitable ones also already have access to debt funding. Management typically gets passed from one generation to the next, and it is only when the children don’t want to continue running the business that buying opportunities for private equity firms open up.

“So you have to be there and wait for those opportunities, it is not in abundance at the moment,” says Couloubis.


With a GDP of US$30.8bn, Cameroon is by far the biggest and most developed economy in the Central African Economic and Monetary Community (CEMAC) region. But one of the tests to stability will be whether it can manage a peaceful transition once the three-decade rule of its 83-year-old president Paul Biya comes to an end. In addition, northern Cameroon has also been the target of attacks by Islamist militant group Boko Haram, although these have declined in frequency in recent months.

According to Davis, Cameroon offers potential in the areas of agri-processing for export to neighbouring countries; light manufacturing; and infrastructure development by the private sector. He also believes that Western powers will assist the country to contain the threat from Boko Haram.


Once one of Africa’s star performers, Ghana has recently fallen on tough times, due to a widening budget deficit, high inflation, and an energy crisis. Depressed oil prices are also not doing the country any favours. To help Ghana address its challenges, the International Monetary Fund in April 2015 approved a $918m three-year credit facility. The aim is to foster a return to high growth and job creation, while protecting social spending.

Adeji says positives for the country include political stability and the fact that it has put a number of reforms in place. He believes essential services and consumer-focused industries still present under-exploited potential.

Pan-African versus single country strategy

Participants debated whether private equity firms should have a pan-African strategy, or focus only on individual countries.

Greg Metro said Schulze Global’s approach is to pick specific African countries that it believes will outperform. Rather than mitigating risk by spreading across countries, the firm diversifies itself in terms of the sectors to which it has exposure. “So the key for us is diversifying across sectors, across different targeted consumers… and also import- versus export-driven investments.”

However, Dennis Matangira, senior managing partner at Databank Agrifund Manager, a Mauritian-registered private equity group focusing on agriculture and food production value chains, says his firm doesn’t target specific countries, but searches for opportunities across the continent. One of the companies in which it has invested is a Madagascar-based producer of fertiliser made from bat droppings. The company exports all over the world.

“This is a very unique asset that has nothing to do with oil or commodities. But it took us a long time and a lot of effort to identify… So we will continue with that strategy across Africa despite a slowdown of commodity-driven economies such as Nigeria and South Africa.”

According to Aubrey Hruby, funds that focus only on a specific country generally find it tougher to raise funding because of the heightened perceived risk of having all one’s eggs in one basket.


In a continent where stock exchanges remain under-developed, private equity offers investors access to high-potential companies. But deciding in which countries and industries to invest, is, however, becoming more complex as the blanket ‘Africa rising’ narrative ceases to be applicable. Economic prospects vary greatly from country to country. To achieve success, private equity managers need to be adequately diversified for their funds to withstand the unexpected local and global events that are becoming the norm rather than the exception.

This article was specifically written for the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.