Private equity in Africa: a lot of money chasing scarce opportunities

Africa was once seen as terra incognita when it came to private equity. If Brett Mallen, chief operating officer of Sanlam Africa Investments, is correct, that view is wildly outdated.

 “Given the wall of private equity money coming in, I don’t think I will see in my working career all that money placed,” Mr Mallen said at a recent conference. Given that he is only 38, this may be problem.

Mr Mallen says his comment was a little tongue in cheek, but the data back up his central concern.

 Private equity firms raised $4.2bn to invest in Africa last year, more than double the average for the preceding five years, according to data from the Emerging Markets Private Equity Association (EMPEA).

 The pace hotted up still further in the first quarter of this year, when a further $2.2bn was raised, led by Helios Investment Partners, which closed the first-ever $1bn-plus Africa-focused fund, and the Abraaj Group, which was a fraction behind at $990m.

 Yet just $2.4bn was actually invested last year, and only $500m in the first quarter of this year. A time lag between raising capital and putting it to work is perhaps inevitable, but given that the larger funds will increasingly be looking to target larger investments, of $100m-plus, some doubt whether a suitable flow of opportunities will materialise.

 “Because they all raised such large funds they are going to have to participate in writing large cheques, but there aren’t many large companies in that space,” says Mr Mallen, who says that in Africa private equity funds have little choice but to focus on smaller, family-run companies.

Sanjeev Dhuna, a partner in the banking practice of law firm Allen & Overy, shares this concern, saying private equity groups are hunting for diversified, pan-African companies with high quality, “enlightened” management, but these are thin on the ground, outside of the financial services industry.

 “There is a lot of liquidity in the market at the moment. A lot of people are chasing deals and there is a lot of capital swilling around. But it’s a developing story for private equity because the type of companies they want to invest in don’t really exist [in Africa] as they do in the US or Europe. They are looking for the needle in the haystack,” he says.

Given the relative paucity of suitable ready-made companies to buy, Mr Dhuna says the private equity industry instead needs to work with and “nurture” family-run businesses.

 Perhaps unsurprisingly, Jacob Kohli, a partner at Abraaj, does not believe the volume of fundraising is a problem.

 “It’s true a lot of money is being raised, but a lot is being deployed as well. I see a good number of opportunities for the amount being raised, and probably even more. The whole asset class is very young,” says Mr Kohli, whose house this week bought a majority stake in Mouka, a Nigerian mattress manufacturer.

 Mr Kohli says the younger members of many business families have been educated in the US and Europe and are more open than previous generations to accepting outside capital in order to modernise their operations or expand beyond their home market.

 Nevertheless, a report co-authored by Allen & Overy and Global Counsel, a strategic advisory firm, in April found that more than half of all African private equity investment since 2007 had been in the telecoms, consumer and financial services sectors as the industry targeted the rising disposable incomes of Africa’s growing middle class.

 But “given the scarcity of these opportunities on the continent, entry values for attractive assets have been pushed up”, the report noted.

The report said this scarcity was increasingly pushing private equity houses to move beyond their South African and Nigerian beachheads and hunt for deals in east Africa and further afield in the west of the continent.

 It also speculated that they might start to look beyond the staples of the financial, consumer and telecoms sectors, which last year accounted for about 60 per cent of deals, according to the EMPEA.

 Last year saw a pick-up in deals in the oil and gas and basic materials sectors, although that has fizzled out this year. Mr Kohli sees opportunities in sectors such as healthcare, education, energy and logistics.

 The other big question mark is over how private equity groups, which typically hold on to companies for five to seven years, withdraw from their positions, given the relatively undeveloped nature of African stock markets.

IPOs accounted for just 4 per cent of exits in 2013, according to Allen &

Overy and Global Counsel, well below the comparable figure in most other parts of the world, with private and trade sales each accounting for 30 per cent.

 Mr Kohli accepts that IPOs are rare beasts, and he expects progress to be slow. Instead, he senses a growing appetite among multinationals from countries such as South Africa to snap up businesses from elsewhere in the continent to aid their expansion.

 Mr Dhuna does see scope for an improvement in the IPO market, with east Africa in particular starting to edge towards more unified and developed capital markets.

 He believes we will see other companies copy the lead of Seplat, the Nigerian oil and gas group, which last year floated in both London and Lagos in order to improve liquidity and demand for its stock.

 However, Mr Dhuna is perhaps more optimistic about the emergence of a so-called “secondaries” market, where private equity groups simply sell their holdings to each other, potentially solving the capacity and exit problems in one swoop.

Original Post FT