African promise

Private equity firms such as KKR and Abraaj Capital have made their first forays into Africa through food and agri companies. Here Matthew Goodburn, editor of Private Equity International, considers the continent's private equity potential.

African private equity has been picking up pace in recent months and firms such as KKR and Abraaj Capital have made their first forays onto the continent through food and agriculture companies: Ethiopian rose farm Afriflora and South African food manufacturer Liberty Star Consumer Holdings respectively. Recent statistics from the African Private Equity and Venture Capital Association (AVCA) show that $22 billion in dedicated PE capital was raised for Africa between 2007 and 2014. Here Matthew Goodburn, editor of Private Equity International, considers the market’s potential.
Carlyle Group co-founder David Rubenstein made headlines last year for suggesting Africa was poised to become the next private equity hotspot.

“The great explosion in private equity, if it is going to occur anywhere around the world in the next couple of years, is probably going to be in Africa, particularly sub-Saharan Africa, where the penetration rate is about one-twelfth or so of what it is in the United States,” he was quoted saying at a summit of US and African leaders.
Among the global alternatives firms, Carlyle was certainly among the first to plant its flag in Africa, launching a Sub-Saharan Africa fund in 2011 that closed on $698 million. Some of its rivals, meanwhile, have also set up deal teams in the continent and have been making opportunistic investments, such as KKR’s $200 million deal last year for Ethiopian rose grower Afriflora.

Clearly, the appetite for investing in African private equity continues to grow. Which is why a recent report from the African Private Equity and Venture Capital Association (AVCA) made for interesting reading.

Its statistics show that $22 billion in dedicated PE capital was raised for Africa between 2007 and 2014.

Between 2007 and 2014, there were 983 private equity deals worth a cumulative $34.5 billion. Eye catching developments included West Africa finally usurping South Africa as the region seeing the most PE transactions (24 percent in 2014), while East African activity rose steadily from 13 percent to 18 percent of total transaction activity. Given the onset of the Arab Spring and ensuing MENA unrest, it is perhaps less surprising to see North Africa’s share of total transactions fall from 17 percent to 13 percent over the same period.

But it’s also hard to say those shifts are meaningful; with the African market still relatively nascent, big deals have the ability to skew the numbers significantly in one direction or another. A single Nigerian or South African transaction, for example, could make a huge material difference.

Pan-African firm ECP’s investment in African telecoms giant IHS was the largest private equity transaction in 2014, with the deal – an amalgamation of two separate transactions – worth $3.15 billion. That was almost four times the size of the next biggest deal last year. But if the IHS deal is stripped out, the overall numbers would look very different. The same could be said for the aforementioned KKR deal in Ethiopia. Aside from those transactions, and possibly a brewery said to be in play, one specialist GP told PEI there was precious little else of scale in the country to invest in, for either private or public capital.

Not all share that opinion, of course. Many Africa-focused fund managers are convinced the continent continues to offer some attractively priced opportunities, especially in the FMCG space – often viewed as the Holy Grail for tapping the rise of the African middle classes.

Nick Tims, head of the African PE team at Investec, told PEI that deals in the $100 million-plus bracket tended to have high valuations, but that there were a number of compelling opportunities lower down the value chain with the potential to tap Africa’s growing consumer base.

“Africa is largely expensive at the top end, but that is for those constituencies that need to invest at the $100 million plus level, thus pushing up the price. Below that you can find consumer facing companies in both the larger and smaller markets on four to six times EBITDA. This is not an overcrowded space and there is value to be had.”

Many of those opportunities might presently be found in Nigeria. The dramatic fall in oil prices and the currency’s slide to an all-time low in February has made the fast growing nation arguably the most interesting value play currently on the continent, Tims believes.

Whether or not GPs will find the third-party capital they need to chase those deals is another matter. Outside of DFIs and fund of funds, with the former still making up anything between 25 and 50 percent of African PE investments according to one GP, Nordic institutions still lead the way.

According to Tims, UK and European pension appetite for African PE remains limited at best, with the exception of Scandinavia and the Netherlands, broadly mirroring appetite in public institutional markets.

While perhaps not the most scientific indicator, he and his team noted just two UK institutions at AVCA’s Lagos conference earlier this year, in contrast to a significant number of US pension plans. While the vast majority of them are yet to deploy, Tims thinks it is just a matter of time.

“They have largely not deployed yet, but many of them are on their fourth or fifth visit to the African conferences, and making specific trips to countries like Ghana, Nigeria, Kenya and South Africa.”

If he is right, and the big US institutions – already big exponents of the asset class overall – begin to boost allocations to African PE, the next round of AVCA statistics could make for even more interesting reading. And Rubenstein’s prediction could indeed come true.