Consumer demand will drive the next wave of African private equity investments

Meeting current needs of the one billion plus population and the future demands of the rapidly emerging middle class consumers will drive the next wave of private equity investment on the continent. However, investors are keener to do business in sectors that have little to no direct relationship with government, or through structures that limit government control and undue influence.

This is the view of Dapo Okubadejo, ‎partner and Africa head of deal advisory and private equity at KPMG. “Throughout our ongoing interactions with foreign investors, it is clear that concerns about ‘red tape’ and perceived corruption are still top of mind for investors who are looking to enter African markets.”

Numerous African investors – and those from across the world – are realising that the best way to exploit the significant growth potential in Africa would be to invest in sectors that talk to the fundamentals of Africa’s growth story. These include the geographical size and sheer diversity in the markets on the continent, the young population, and the very high rate of urbanisation in Africa that is also creating increased disposable or discretionary income among the emerging middle class.

“These socio-demographic factors are not only a positive show of sustainable growth in certain economies, but also demonstrate that there will be rapid growth in needs and demands for consumables, which bodes an immense opportunity for investors in consumer facing sectors – including for instance, fast moving consumer goods, healthcare and financial services,” says Okubadejo.

“Additionally, in most African countries these sectors have been reformed, where they are predominantly in private hands and there is a clamour for improved services and efficiencies, which will be best achieved through increasing competition and bringing new innovations, solutions and products to local markets.

“This is not to say that the old favourites such as mining activities and infrastructure development, including in transport, energy, utilities and households, for instance, won’t still see a share of private equity investment. There is still a huge need and growing demand for all of these sectors in Africa and as such these segments are still very popular for investment, depending on the investor’s risk appetite. Typically, however, as these sectors are largely government controlled and more often investments into these sectors are driven through government-to-government relations and deals, or public-private-partnerships with foreign investors,” continues Okubadejo.

Four key corridors of private equity investment

There are a number of concerns that the current economic slowdown experienced in China will negatively impact private equity investments into Africa, however, Okubadejo’s disagrees.

“Although growth in China’s economy has slowed, we must remember that it is still growing at around the 7% mark and although this is a lot lower than the country’s recent records – generally speaking – it’s still a solid figure, even for a high growth market. With this, the level of interest that we are seeing in Africa from companies and/or institutions in China is still very high and, as China looks to diversify its own economy – with Africa being a source of invaluable inputs of raw materials for China’s production, manufacturing or energy sectors – we don’t expect to see the rate of investment into Africa from China slow.”

Conversely, although the economic slowdown experienced in Europe – and to an extent some devolution of the Euro currency – is driving private equity houses to look for sources of diversification, often times they rather invest within the Euro Zone.

“Europe is a very wide zone that cuts across Western Europe, Eastern Europe and event parts of EuroAsia, and some of the economies of certain countries within this region can also be classified as emerging or frontier markets. So in a way European private equity houses are taking advantage of opportunities of emerging market returns or emerging market investments within the Euro Zone itself,” says Okubadejo.

“Based on that, and issues of complexity with investing in Africa, although European private equity houses continue to actively track developments within the continent, they haven’t yet developed a great appetite for having direct exposure in Africa. While we have recently seen deals by European private equity houses being closed in South Africa… the subdued appetite has led them to not be bullish – particularly compared to private equity houses from other markets such as the US.”

Most of the USbased interest and investment into Africa is by top global private equity houses and those who are bullish about Africa have even developed dedicated African teams and/or raised Africa focused funds.

“KKL and Carlyle are both great examples of this trend, where these private equity houses have closed deals in Africa, accredited to their dedicated team and focused funds, and both are still very actively seeking out other investment opportunities across the continent – and particularly in sectors such as consumer goods, agribusiness, infrastructure and financial services,” adds Okubadejo.

However, what is perhaps more exciting is the growing rate of intra-Africa private equity investments. Okubadejo highlights that South Africa will continue to be relevant from an investment standpoint into Africa for the following reasons.

“Firstly, South Africa still has the most developed economy on the continent, as well as the most sophisticated equity market – and the equity market is also ranked very high when compared to other emerging markets due to the very strict enforcement of governance principles, procedures and exit protection rules, etc. For this reason, a lot of investors outside of Africa still view South Africa as a springboard into the continent. And, even if they aren’t necessarily investing for growth in Africa they are investing in South African corporates, who are looking at Africa for expansion – and I believe we are going to see this trend continue.

“Secondly, South Africa’s private equity community being the most developed and largest on the continent, and having gone through different cycles in the last decade or two, we are seeing a number of South African private equity houses exempting or in the process of doing exists by the way of secondaries and this is a great source of degeneration in the South African market as well. So we are seeing a lot of secondary transactions, in which South African private equity houses are selling off or their existing their portfolio has reached the limit of the holding period, where other private equity houses may also use these as a launch pad into Africa.

“Other African private equity houses have their Limited Partners, or LPs, or their investors are largely outside of Africa and are domicile in parts of the continent, where players such as Development Partners International (DPI), Helios Investment Partners or Actis have been doing a lot of pan-African transactions – either as fund-of-funds or taking direct equity stakes – and we expect this trend to continue.

“Africa is certainly not without risks, however, it is also blessed with opportunity. Although still maturing, the private equity landscape in Africa has already experienced significant transformation over the last two decades, where today there are over 150 fund managers managing billions US dollars in funds targeted specifically at Africa. The reality is that every investment risk can be priced if investors have the right appetite and take a long-term, risk-adjusted approach to their investments. And with the right market entry or advisory partner there is unlimited potential major returns to be gained for investors who are seriously looking to expand their business and want to take advantage of the Africa rising opportunity,” concludes Okubadejo.