Five things you should know about private equity in Africa
During a recent forum experts discussed various issues concerning private equity investments in Africa.
During a recent forum in Cape Town experts discussed various issues concerning private equity investments and opportunities in Africa. Here are five points to consider. 1. Pension funds getting involved in private equity
According to Rory Ord, head of RisCura Fundamentals, changes in regulations and investment processes of pension funds are having a significant impact on private equity in Africa.
“What that has allowed is that for the first time pension funds are explicitly allowed to invest in private equity and that change in regulations has also opened the landscape for pension funds to invest more in the rest of Africa and to do that in a way that is sanctioned by local government,” said Ord.
“I am specifically talking here about the South African regulations but there are similar changes and regulations that are happening in other parts of the continent as well, and these are all in progress ... But I think the big shift we are going to see in the coming years is that large pension funds – particularly the Nigerian ones which are really going to come to the fore in the coming years – are going to be allowed to invest their money into unlisted investments which [will not only have] a strong impact on the development of the countries in which they invest in, but also on the development of financial markets as a whole.”
2. Rise of consumerism opens doors
Ord pointed out that in the past five years private equity has seen funds go towards various sectors in African economies, particularly in infrastructure. However, with the rise of the African middle class and consumerism, private equity fund managers are seeing additional opportunities develop.
“The exciting thing about Africa and private equity in Africa is the fact that so far private equity has basically been driven by commodities and by infrastructure,” explained Keet van Zyl, a venture capitalist and co-founder of Knife Capital and AngelHub. “So the rising age of consumerism has now created a whole lot of opportunities, specifically in the technology consumerism space and where certain things can leapfrog like mobile has leapfrogged ... and those things have opened up a whole lot of opportunities in Africa.”
3. Less competition for deals
With private equity only emerging on the continent, many firms are still uneasy about investing in Africa with its history of economic and political instability. However, according to Van Zyl, those who have already “put some chips on the table” are benefiting from the lack of competition.
“The other thing is also that in that space it’s not as crowded and while there is competition for deals and it’s increasing, it’s not quite Silicon Valley and [private equity investors] never want to be where there is an auction for pricing,” Van Zyl pointed out. “So when we look at a company to invest in, whether it is here or whether it is in Kenya, or Zambia, one can actually take their time and do it properly with due diligence and without too many other bidders driving the price up.”
4. Long lead times
Chris Derksen, head of Africa and global frontier markets strategies at Investec Asset Management, recently closed a deal in Angola, a country known for its difficult business environment, and gave an example of how long the initial deal process can take. “Sourcing the deal took us a year and a half. We had a guy living in Luanda, for over a year, to speak to the right people, get to know the right people and eventually we sourced exactly the right deal,” said Derksen.
Derksen added that private equity fund managers don’t have a defined universe of investment opportunities like investments made on stock exchanges.
“If you talk about private equity in Africa you start with a clean slate, you have to get to know good people in any one of 54 very different countries, and these good people have to run businesses which you believe in and which you think will create significant value over time,” said Derksen. “And in order to get there we are talking about a very long lead time, building very good relationships over a long time, and eventually I think you can make extremely good investments.”
5. A big opportunity
Derksen explained why he believes there is so much opportunity for private equity investments on the continent.
“I think the one thing to lift out when you think private equity is to benchmark our continent with the developed world,” said Derksen. “Look at the developed world and you look at market capitalisation to GDP ratio (it’s a bit like a PE to a country I guess) you will see that that ratio for Africa (the extent to which corporate value is capitalised on the domestic stock exchanges) is about one-fifth of what it is in the developed world – a lot more of that potential corporate value is in the private sphere as opposed to listed on public stock exchanges. So that’s one very good reason why I believe private equity has a big future on this continent.”