Carlyle leads the case for African private equity

By:
Kanika Saigal
Published on:

The shine of the Bric nations has dulled, so investors such as The Carlyle Group are setting their sights towards burgeoning African countries for better returns on their investments through private equity.

The Carlyle Group raised $698 million on April 16 for the company’s Sub-Saharan Africa Fund – nearly $200 million more than the initial target of $500 million when the fund launched in 2012 – highlighting the continent’s growing allure to prospective investors.

While other, smaller funds have launched over the years, Carlyle’s fund represents the largest first-time private equity (PE) fund in sub-Saharan Africa (SSA).

Carlyle’s strategy represents for many a shift in investment strategy away from the Bric nations, which have suffered slowing growth due to global economic pressures.

According to research by the Emerging Markets Private Equity Association (EMPEA), money invested in non-Bric emerging markets (EMs) increased 18% in 2013, to reach a five-year high of $11 billion and represented 44% of total capital invested in EMs. Meanwhile, the total amount of capital invested in the Bric nations dropped by 20% between 2012 and 2013.

The fund has already made two investments in the region. The first, a joint investment with Investec, is in Export Trading Group, a vertically integrated agriculture supply-chain company which works across Africa and is headquartered in Dar es Salaam; and J&J Africa, a pan-African logistics company headquartered in Mozambique that specializes in the road transportation of general cargo along the Beira corridor, one of southern Africa’s key trade routes.

The Washington-based alternative asset manager has $189 billion in assets under management spread across 118 funds and 106 fund-of-funds vehicles. The company has 34 offices around the world.

PE in Africa is still a relatively small endeavour. Between 2005 and 2011, PE funds that focused on Africa raised a modest $11 billion and invested $12 billion in the market. Within the same time, funds focused on Asia raised $160 billion and invested $140 billion.

However, the sector is growing. PE flows to Africa have been growing at 20% for the past three years. According to data compiled by the AVCA, the aggregate deal value of African deals done in 2013 was $3.2 billion, up from $1.6 billion recorded in 2012.

In the 2013 Global Limited Partners Survey held by the EMPEA, SSA was ranked the most attractive EM for general partner investment for the first time in the survey’s history. The survey also found that the region is expected to see the largest amount of limited partner interest during the next two years, accounting for a fifth of all global interest.

Other asset managers that have traditionally stayed away from Africa-focused funds are also changing tack: beside The Carlyle Group, KKR, another global PE heavyweight, recently employed Kayode Akinola, a former partner of Helios Investment Partners, to develop the company’s growing Africa efforts.

Africa-watchers agree that PE is a unique and powerful way to invest in the African consumer story.

“Private equity is a way of accessing countries that public funds can’t,” says Cavan Osborne, portfolio manager for Old Mutual African Equities. “If you want to be part of the consumer story in Angola, Mozambique or Ethiopia, for example, often this is one of the best ways to do so.”

Doug Agble, partner at 8 Miles, a PE firm exclusively focused on PE investments in Africa, adds: “If you are going to invest in Africa, it is essential to have country diversity and sector diversity.

“Several stock exchanges in Africa have bias towards specific sectors, such as financial services or mining, so investing in a stock exchange might not achieve sector diversity for an investor. For investors trying to get exposure to different sectors in Africa PE is probably the best asset class to achieve this.”

PE in Africa is an appealing investment window in the African growth story, because access to more public opportunities remains limited: There are 54 countries in Africa, but only 17 stock exchanges. In SSA, the largest and most liquid of them are limited to South Africa, Nigeria and Kenya.

“While investors should be very wary of lumping African countries into one generic group, generally speaking, financials account for nearly 50% of public equity investments in frontier markets,” says Kemal Ahmed, portfolio manager for Investec’s Horizon Markets Fund.

“The consumer sector accounts for very little. If you are looking to build an Africa portfolio in public equities, one reaches the inevitable conclusion that there will be a reasonable weighting towards financials across the continent – primarily in banks – and those will be limited to financials in certain countries.”

Kato Mukuru, senior financials analyst and head of equity research at Exotix, adds: “In fact, there is so much money chasing the same assets, I don’t think the system is stable.”

It’s a similar story on the debt side.