According Rory Ord, private equity valuation specialist and head of South African-based RisCura Fundamentals, it wasn’t too long ago that private equity in Africa was dominated by development finance institutions – such as the International Finance Corporation, the African Development Bank and European institutions.
“But now we are seeing a lot more purely commercial money come into the market, with a lot more interest from pension funds and commercially minded institutions and investors from around the world,” Ord told How we made it in Africa. “So that is probably the biggest shift that I have seen.”
So what does 2014 hold for private equity in Africa?
More fundraising successes
It is “more of a definite” that Africa will see a lot more fundraising successes in private equity this year, according to Ord.
“I think we are going to see a lot more fundraising happening because there are a lot more fund managers out there at the moment,” he said, adding that there are almost 300 private equity fund managers in Africa. “So I think we will see some success there given the attention that Africa is receiving at the moment, compared to the past.”
While the rise in fund managers will make the African private equity market more competitive, Ord explained that the level of competition varies in sectors and regions. For example, West Africa – and Nigeria in particular – has been a point of interest for investors and Ord suspects private equity fundraising in this region specifically will continue to become more competitive.
In terms of sectors, the valuations of a number of consumer facing companies in West and East Africa are high and Ord said this is also reflected in the private equity and listed markets.
“So I think we will see competition there. There is a lot of belief around the growth of the African consumer and a lot of investors are positioning themselves to take advantage of that. So that kind of explains those high valuations.”
In North Africa Ord suspects that private equity transactions will continue among a group of investors who understand the markets well.
“Even though there are certainly risks across the North African Arab states, there are definitely parties who see opportunity through those difficult times in those countries. So I think we will see some strategic acquisitions happening in those markets.”
More competition over larger deals
In the rest of Africa, Ord believes there will be more competition for larger deals in private equity. “Just because of the increased amount of capital looking at those larger deals,” he added.
“But I think there is probably not significantly more competition at the lower level – the more startup companies and growth companies that are earlier on in their growth lifecycle. They are probably in a better position now because they have better access to finance… but I don’t think at that end of the market different investors are up against each other too much competing for the same deals.”
He added that the continent could also be seeing some more sales of assets from one private equity fund to another, particularly with large African companies.
“At the large end of the market outside of South Africa there aren’t that many large companies so I wouldn’t be surprised at all to see sales from a fund that is nearing the end of its life to another one at the beginning of its life.”
Rise of African pension funds
Regulatory changes in South Africa have allowed the country’s pension funds to invest in private equity in African countries and Ord said there are similar regulatory changes in the works in Nigeria, Kenya and Ghana.
“I don’t know if they will come through in the next year but there is certainly a period of evaluation at the moment around what pension funds should be allowed to invest in,” he continued. “We may see some relaxing of the rules around what pension funds in other African countries can actually invest in, as well as investment outside of their own countries which is a big restriction that is in place at the moment.”
While these regulation changes are somewhat political, as it means institutions are investing in the development of companies in other countries as opposed to their own, Ord said they are generally a good idea.
“Institutions like to diversify their portfolios and one of the ways to diversify is to invest outside of their own country and get access to other currencies first of all. So a lot of large South African pension funds have used right up to their 30% limit in going outside of South Africa to get exposure to non-Rand based investments which has been very good for them… given the state of the Rand,” he concluded.