Who are the drivers of private equity in Africa?

During a recent forum in Cape Town, South Africa, experts discussed private equity activity in Africa, including where they are seeing these investments coming from.

Chris Derksen, head of Africa and global frontier markets strategies at South African-based Investec Asset Management

Development finance institutions: Rory Ord, head of South African-based RisCura Fundamentals, said he still sees most money coming into private equity funds from the development finance institutions (DFIs), mainly from Europe with some investment coming from the US. “But what we are seeing is that mix changing a little bit to shift into some investment coming from the East for the first time. Over the last couple of years we’ve seen some investment coming out of Singapore, Hong Kong … and some investment again coming from the endowments in the US, although Africa really still has to tap into that market in a big way. But the trickle has definitely started from those sources.”

African diaspora: According to Brett Commaille, a venture capitalist and CEO of South African-based Angelhub, the African diaspora is playing a role in investment on the continent. “Africa has quite a big phenomenon of individuals who were educated in the US or [UK] at Cambridge and Oxford. So many of those businessmen are coming back and are starting to connect the African opportunities or are running venture capital funds or are running late stage private equity funds and they are coming back and leading a lot of the charge because they are the evidence that the opportunity is there. I don’t think it is wide spread yet, but I think that is certainly one of the hotspots of development at the moment.”

Chris Derksen, head of Africa and global frontier markets strategies at Investec Asset Management, said that investment from the African diaspora was not because they knew the continent better than foreign investors, but because they have a passion for the continent. “Its 54 different countries; knowing Ghana doesn’t necessarily mean you understand how Uganda works, or Zimbabwe. These are totally different places. What is very important is that you have an absolute passion for the continent and you have an absolute passion for investing on the continent. And I think generally that sort of diaspora you described has that passion and obviously ability to do so.”

African pension funds: According to Ord, changes in regulations and investment processes of both government and corporate pension funds are broadening the investment landscape, a movement that only began about two or three years ago.

“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. 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,” said Ord. “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.”

Derksen pointed out that because of new legislation concerning investments made by pension funds; Africa has become a rising investor on the continent. “We’re seeing some marginally increased investment from non-state funded institutions the world over but I think the significant marginal investment on the continent is actually Africa itself. Whether you are talking about African government pension funds, whether you are talking about our own South African government pension funds… So that I think is going to be quite big on the margin.”

Other than African countries, there has also been a significant wave of investment coming in from the developing world. When asked about investment from the BRICs, Derksen said, “I don’t know about all of them but what I do know is China is a significant investor on the continent. It’s not a rumour, it’s true.”