Paul Boynton: Private equity – a return of investor confidence and greater deal flow expected in 2018
With 2017 drawing to a close, it’s time to take stock and reflect on what kind of year it’s been for African private equity, and to look forward to what we can expect next year.
All things considered, 2017 was an improvement on 2016 in terms of money raised and the number and breadth of projects greenlit, and this was very welcome after some slower years for the private equity industry.
If we take just one part of the private equity market, and look at funding for large infrastructure projects like new power generation, roads and major housing schemes, in 2016 the private equity industry only raised US$250m for African infrastructure projects.
But in 2017 the figure was at least four-times higher, with well over $1bn of new investment secured. Next year, we are optimistic that the sums raised will continue to rise, as investor confidence returns to Africa, boosted in part by recovering commodity and natural resources prices.
There’s no doubting Africa’s potential. It is now the world’s fastest urbanising region. According to research cited by McKinsey, there will be an additional 187 million people living in African cities over the next decade, and by 2045, an average of 24 million additional people are projected to live in cities each year, which is higher than China or India’s urban population growth. Such enormous growth clearly requires considerable funding in terms of delivering new housing, transport and other services to these fast-expanding conurbations.
It’s estimated that $100bn a year is required for infrastructure projects alone. Without it, Africa simply can’t compete effectively in a global market. Currently, the cost of moving goods through African ports is three to four times more expensive than in Europe.
And if we look at road access, Africa is again well behind global norms. For example, three quarters of the roads in sub-Saharan Africa are currently unpaved, which means slower freight deliveries and more frequent vehicle breakdowns and delays. These high transportation costs can add up to 75% to the price of goods in parts of Africa.
One consequence of slower years is that the private equity industry has accumulated a mountain of cash while waiting for the right projects to back.
With the momentum generated this year, we believe next year will continue to produce stronger deal flow, and that it will be more widely allocated, not just to essential infrastructure projects throughout the continent, but also we are anticipating plenty of activity in agriculture, education, and in Africa’s more developed economies rising consumer spending will also drive retail, leisure and lifestyle businesses.
With so much cash in the system it’s inevitable that there will be stiff competition among general partners (GPs) chasing the best deals. And it’s just as inevitable that this will squeeze up project valuations.
But another legacy of the slower years is that GP fees and performance will continue to be under close scrutiny. Only the GPs with the strongest networks on the ground and solid project availability, as well as transparency on their fee structures and performances, will be able to win the best mandates.
Next year, we expect even stronger momentum among private equity investors for reliable comparison data on what were once the “softer” issues such as corporate social responsibility. Environmental concerns are also going to be foremost, particularly energy consumption. However, at this stage of their maturity all aspects of ESG are now fundamental to fund managers.
While we have a positive outlook for 2018, we must acknowledge a potential cloud on the horizon if the Chinese economy slows down. Its government has invested a total of $220bn into the African economy since 2000. It now contributes about one sixth of all lending to Africa, according to a study by the John L Thornton China Centre at the Brookings Institution.
In closing, for non-private equity investors this year has produced very strong performances in the global equity markets, with both the Dow Jones and the FTSE 100 indexes hitting record highs. At some point after a nine-year bull run, it’s likely there will be some loss of upward momentum in the next 18 months. If indices start to fall private equity could be a major beneficiary as financiers seek alternative investments. But even if quoted company share prices continue to rise, the conditions are still set fair for private equity and thus we move towards the close of 2017 more optimistic for the year ahead.
Paul Boynton is the CEO of Old Mutual Alternative Investments (OMAI).