03 Jan

Top five trends that will drive Africa’s private equity market in 2018

While the rest of the world battles a series of economic and political difficulties, Africa is looking forward to a year of growth and increased private equity investment.

For a general view on the likely global trends in the private equity market in 2018, we need look no further than the developments of the past few years. As growth rates around the world declined, Africa and other emerging markets took on ever-greater significance, and are now pivotal in global private equity activity.

According to Quantum Global’s Africa Investment Index, in 2015, the top five African investment destinations – including Botswana, Morocco, South Africa and Zambia – collectively attracted foreign direct investment of $13.6bn. This was a testament to international players’ growing interest in the continent.

It is true that some of the world’s developed markets will return to growth in 2018, and private equity investors will turn their attention towards them once more. However, Africa’s long-term growth and increasingly transparent and stable geopolitical and economic landscape will continue to support the expansion of private equity across the region.

Private equity has also taken on a greater share of public sector financing in developing markets. Some of Africa’s largest economies have ventured into their first ever public-private partnerships (PPPs), and interest from limited partners and general partners has grown significantly over recent years.

However, the importance of private equity in Africa’s economic development is underpinned by an annual funding gap of around $100bn in the region, along with a soaring youth population. Private equity has also helped to drive much-needed development of the region’s capital markets, which are slowly maturing.

1 – Increased deal flow

Despite political uncertainty in countries such as Zimbabwe and South Africa, there is significant deal appetite and interest in quality assets in Africa. Further north and west, democratic elections have passed in multiple countries, including Angola, which saw its first transfer of power to the opposition party since peacetime in 2002. This should provide investors in those countries with much greater confidence than in previous years.

Deal flow remains high and, given the region’s economic growth, is likely to remain so in 2018. The challenge is one of quality and bankability: management in Africa remains complex for financial, structural and political reasons. These complexities are inherent in all developing markets and will continue in 2018 and beyond. Growth trends in 2018 will demand that general partners deploy highly specialised teams with expertise in specific sectors, in addition to a deep understanding of African markets.

2 – Economic recovery in West Africa

Improvements in commodity prices combined with the region’s expected economic recovery will drive further investment in West Africa. Nigeria and Angola will benefit from analysts’ forecasts that oil prices will rise to around $58 per barrel in 2018, easing public expenditure pressures. Private equity investors and other state players, such as China, will also benefit from a potential uptick in public sector spending on important infrastructure works, and we may see greater appetite for PPPs and general private capital in government-led projects.

GDP figures also recovered across most of West Africa in 2017, and in some cases are forecast to surge in 2018. The IMF’s most recent World Economic Outlook (released in Q3 2017) has projected growth of almost 9% for Ghana in 2018, with an overall rise of around 3.4% for sub-Saharan Africa.

3 – Improved global liquidity conditions

With projected higher oil production and oil prices predicted to rise throughout 2018, foreign exchange liquidity rates are also expected to grow globally. Private equity in Africa will therefore offer a much higher rate of return compared with cash and fixed income assets.

Around the world, borrowing rates and inflation remained stable throughout 2017. This was also the case in many parts of Africa – even in countries that struggled with low forex reserves and the slump in oil prices. Some of the region’s biggest economies, such as Angola and Nigeria, have reined in spending and demonstrated fiscal restraint, including introducing currency controls. These measures have contributed to greater liquidity.

4 – Nigeria attracting more investments

With the value of Nigeria’s economy projected to grow to $650bn by 2022,medium to long-term prospects look optimistic, with solid fundamentals underpinning growth expectations, particularly in the non-oil sectors of the economy. However, the country also faces an $878bn infrastructure investment gap between now and 2040. This figure (which pertains only to infrastructure) is based on forecasts of an annual GDP rise of 4.1% and a population that is rising by 2.4% per year at current trends.

5 – Chinese asset diversification

The slowdown in China’s economy is likely to lead to Chinese investors further exploring opportunities in emerging markets like Africa. Such investors are also likely to pursue increased collaboration with credible private companies and institutions. China has a track record of investing across diverse asset classes in Africa, particularly in infrastructure: as far back as the 1970s, China helped to build one of Africa’s longest railways, the 1,860km TAZARA Railway from Tanzania to Zambia. China is already investing heavily in diverse asset classes across the continent, including Angola’s first ever PPP. The inherent Chinese appetite for diverse assets in Africa spells good news for African governments, many of which have redoubled their efforts towards major infrastructure works over recent years.

As we look ahead to 2018, there is clear evidence that the global economy is improving, even though there are new geopolitical issues on the horizon: namely Brexit, the Chinese slowdown and Middle Eastern security concerns. Despite these issues, Africa faces a year of growth, and will continue to act as a promising destination for private equity investors.

Source: How We Made It in Africa

31 Oct

Private equity: Consumer staples a prominent theme for investors

Africa’s consumer-driven sectors, which includes agribusiness and food production, attracted strong interest from private equity investors in the first half of 2017, according to recent data by the African Private Equity and Venture Capital Association (AVCA).

Private equity firms typically try to improve the financial results and prospects of the companies in which they buy a stake, in the hope of reselling the business to another firm or cashing out via an initial public offering (IPO). The value created is then passed on to the investors in the fund.

“Consumer staples (including investments in the African packaged food industry) saw a rise relative to 2016. Telecoms and materials also showed an increase in terms of deal values as a result of a handful of large transactions in the first half of 2017,” says AVCA in its latest African Private Equity Data Tracker report.

The total value of disclosed private equity investments over the period was $1bn, with the median deal size about $15m. Some 68% of the total deal value was from private equity transactions between $100m and $250m in size.

Tapping into Africa’s agribusiness and food opportunity

One prominent agribusiness transaction during the period was an investment by Sahel Capital, managers of the Fund for Agricultural Finance in Nigeria (FAFIN) and CardinalStone Capital Advisers (CCA), in Crest Agro Products, an integrated cassava processor based in Nigeria’s Kogi State.

Cassava is a woody shrub with an edible root resembling a large sweet potato. It is widely grown in many parts of Africa, predominantly by small-scale farmers. Although cassava roots can be processed into a variety of products – including cassava flour, starch, ethanol and glucose syrup – the crop has not been a great commercial success in the continent.

Crest Agro’s aim is to become a major producer of food-grade cassava starch for industrial users in Nigeria and the broader West Africa sub-region. There is a strong demand for starch in the fast-moving consumer goods, brewing and pharmaceutical sectors. It is expected that as the Nigerian middle class grows and more companies look to enhance their ability to source raw materials locally, this demand-supply gap will widen substantially.

A major food-industry deal during the first half of 2017 was the tie up between Africa-focused private equity firm Helios and Barcelona-based multinational GBfoods, to create GBfoods Africa. The new entity has acquired assets from different African companies, including brands such as Jumbo (bouillon), Gino and Pomo (tomato paste), and Jago (milk powder and mayonnaise), as well as Bama (mayonnaise) distribution rights for Africa.

Read more: How We Made It in Africa

27 Jun

Private equity looks to East Africa for investment opportunities

Buyout groups investing in Africa are turning east and shunning the oil-rich western part of the continent as they grapple with the effect of low commodity prices on private equity’s final frontier.

In the decade before oil prices plummeted, west Africa — particularly Nigeria — was the most attractive region on the continent for global private equity groups from Carlyle to Actis looking to tap the potential of the “emerging African consumer”.

But with Nigeria in economic recession for the first time since 1991, investors say they are looking elsewhere on the continent for deals in sectors from consumer goods to healthcare.

Read more: Private equity looks to east Africa for investment opportunities

19 May

Private equity set to boom in Africa, says Baker McKenzie & the Economist Corporate Network

Africa looks set for a bright future on the private equity front with activity on the rise, according to a new report which predicts that around a billion dollars could be invested in the next five years.

Private equity activity in Africa will inject billions of US dollars of sustainable investment over the next five years with deals growing from a low base equivalent to 0.18 per cent of Africa’s GDP in 2016, the report says. According to the research – ‘A growth engine: Trends and outcomes of private equity in Africa’ – every 0.01 per cent increase will mean $200 million more investment and could easily reach $1.1 billion over the next five years. The report reveals a number of interesting trends about investment in Africa. Private equity investors in Africa tend to be distinct from other parts of the world, holding investments for longer than in developed markets and using less debt and improve corporate strategy and governance. Furthermore, they invest more in growth and job-creation, often scaling small businesses to a size viable for trade buyers.

Read more: Private equity set to boom in Africa – The Global Legal Post