African PE exits hit nine-year high

Hold periods top six years as PE firms seek to ride out macroeconomic uncertainties, a study by industry body AVCA and EY reveals.

Private equity firms exited 44 portfolio companies across Africa in 2015, a nine-year high, according to data from the African Private Equity and Venture Capital Association and EY.

The number of exits was up from 39 in both 2014 and 2013, with 28 firms offloading businesses. In 2014 and 2015, four countries – South Africa, Egypt, Nigeria and Kenya – accounted for more than two-thirds of PE exits.

The 2016 How private equity investors create value study, the fourth annual analysis of the way private equity investors create value in portfolio companies in Africa, examined exits between 2007 and 2015.

The study found that private equity firms are holding on to their investments longer, waiting for the right time to exit amid macroeconomic uncertainty. The average hold period in 2015 was 6.1 years, up from 5 years in 2014 and a low of 3.9 years in 2008 and 2009.

The data also revealed that currency declines against the US dollar have had a significant effect on returns on investments not denominated in the local currency: from 2007 to 2013 this resulted in a loss of 3.5 percent, and in 2014 to 2015 it resulted in a loss of 22.6 percent.

Exits across all regions outperformed the public markets, but there were variations in returns from region to region. Exits in East Africa posted the strongest returns from 2007 to 2015, returning 2.0x on an equivalent hypothetical investment in the MSCI Emerging Markets Index, assuming the same period as the private equity firms’ investments occurred. Southern Africa excluding South Africa returned 1.9x, North Africa 1.6x, and both West Africa and South Africa returned 1.5x.

The study found that, compared with exits between 2007 and 2013, 2014 to 2015 exits demonstrated private equity firms’ move to diversify their value creation toolkits.

Geographic expansion became more important – considered a key driver in 75 percent of deals compared to 31 percent – while private equity firms brought in new management in 42 percent of deals, up from 20 percent. Cost reduction, M&A and disposals also played increasingly prominent roles.

“PE firms clearly are focused on adding value to their portfolio companies and are diversifying their approaches to help achieve this, including helping their portfolio companies expand geographically and bringing in new management,” Graham Stokoe, EY’s Africa private equity leader, said. “While the economic environment still poses challenges, PE firms continue to find ways to create value in their portfolios in the region and find new opportunities for exits.”

Trade sales remained the most prevalent exit route, accounting for 53 percent of sales in 2014 to 2015, compared with 44 percent from 2007 to 2013.

Financial services topped the list of industries for divestment both in 2007 to 2013 and 2014 to 2015, and remains a top sector for investment going forward. Firms surveyed also singled out education, consumer products and retail, healthcare, and energy as some of the most interesting sectors.