Sub-Saharan Africa 2015: Feeding a hungry market

Elliot Wilson
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With capital markets still in their infancy, private equity is the route taken by many investors lured by African opportunities.

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PRIVATE EQUITY IS booming in Sub-Saharan Africa. Buyout funds once gave the region a wide berth, fearing low levels of corporate governance, scarce management skills and complications involved in making a clean exit, through an asset sale or initial public offering. 

All that has changed. An industry once long on hope and short on deals now abounds in activity. Over the past year, US-based KKR has invested $200 million in Afriflora, the largest player in Ethiopia’s booming floriculture sector. This April, Aliko Dangote, Africa’s richest man, announced plans to build a $2.5 billion gas pipeline from the Niger River delta region to Nigeria’s commercial hub of Lagos, with a portion of the capital to be provided by Carlyle Group and Blackstone, the world’s largest buyout groups. 

Funds have been opened and quickly closed after easily hitting capital-raising targets. Already this year, London-based, Africa-focused Development Partners has announced the final close of a buyout fund capped at $725 million. In April, The Abraaj Group closed its third dedicated Sub-Saharan Africa private equity fund at $990 million. Leading asset manager STANLIB Africa launched a $105 million fund focusing on regional infrastructure projects.

  In April, Aliko Dangote, Africa’s richest man, announced plans to build a $2.5 billion gas pipeline from the Niger River delta to Lagos

In the seven years to end-2014, 983 buyout deals were closed in the region totalling $34.5 billion, according to data from African Private Equity and Venture Capital Association. More than $8.1 billion was invested in regional corporates and assets in 2014, the second-highest total on record after the pre-financial crisis year of 2007. Just as notable is the diverse range of the funding. Two-thirds of the capital comprising Abraaj’s new fund was sourced from European and North American institutional investors. Notable deals over the past year include London-based Permira’s deal in December 2014 to buy a 100% stake in data centre services provider Teraco Data Environments.

Attractive strategy

What has turned Sub-Saharan Africa into a financial mother lode for so many canny buyout groups? One answer lies in something the region still lacks: deep capital markets. Other than South Africa and Nigeria, and to a lesser extent Kenya and Mauritius, there are very few genuinely liquid stock exchanges. "The lack of efficient stock exchanges across the region increases the attractiveness of private equity as an investment strategy," says Irmgard Erasmus, an economist at independent South Africa-based consultancy NKC. 

For investors who want to hold portfolios that reflect the sectoral composition of African economies, tracking all-share indices or indices of the most liquid listed equities can be an unsatisfactory option. Some sectors are over-represented (finance, energy, telecoms and mining), while others such as agribusiness and retail are barely represented at all. This discrepancy will surely be rectified over the decades to come. But for now, notes Erasmus, it merely "increases the relative attractiveness of private equity deals across the region. In turn, private equity investments to access the fast-growing consumer retail sector continue to underpin a number of African deals."

Tipping point

To others, the region’s sudden allure is in large part due to rising education levels and managerial skills, stronger economic and political systems, and the desire of foreign-educated Africans to return home. Vladimir Sklyar, head of Russian research at Renaissance Capital, a Moscow-based investment bank with assets across the region, says Sub-Saharan Africa has reached a tipping point. "A few years ago, the IMF kept trying to drive through reforms but they wouldn’t work, as the region lacked the right skills base. All of that has changed. I’m amazed by how many truly skilled white-collar professionals I now see on the ground. People see presidents and prime ministers, ruling predominantly democratic countries and regions, and that gives them hope. They see how they can benefit: that they can get their share of economic growth, and that wealth will trickle into their pockets."

Vladimir-Sklyar 200x234
 People see presidents and prime ministers, ruling predominantly democratic countries and regions, and that gives them hope

Vladimir Sklyar, Renaissance Capital

The same is true for industry heavyweights. Jacob Kholi, partner and chief investment officer, Sub-Saharan Africa, at Abraaj, has more than 10 years’ experience in the industry. When he began, private equity was still in its infancy. Now, he says, it offers phenomenal potential. Abraaj has opted for a loose hub-and-spoke model, focusing on core markets including Nigeria, Ghana and South Africa, while delving further into rising emerging markets and frontier states, from Cote d’Ivoire to Rwanda, and Ethiopia to the Democratic Republic of the Congo. All are markets where Abraaj, notes Kholi, boasts a "strong and growing network of relationships" across the region. "The key to success is to know your markets and your people." In the words of former US secretary of state Dean Acheson, you need to be 'present at the creation’ of key corporates and industries.