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Sub-Saharan Africa 2015: Feeding a hungry market

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. 

“It makes a big difference to be on the ground in key markets,” Kholi adds. “You can only pick up intelligence by being ‘there’, being local, while being able to offer companies the breadth and depth of your experience.” Here, Abraaj’s long history in the region surely helps. “The beauty of our platform is that we have local presence and global standards. Our partners can call on us any time of day or night – our doors are always open. Being physically present drives our philosophy. You wouldn’t get this with a partner who flies in for a week or so every other month.” Abraaj investments around the region range from Kenyan steel (Athi River Steel) and Nigerian oil services (AOS Orwell) to Ghanaian ground handling (Aviance) and Senegalese business services (Matforce).

Prices on the rise

As the industry grows and matures, both buyout groups and the companies they seek to target are growing more demanding and selective. Auction prices are on the rise, a reflection both of the region’s long-term potential, and the increasing likelihood of being able to exit an investment over the long term. And as economies mature, regulators are becoming increasingly active, a boon for investors keen to know they have sovereign support when entering, holding, and exiting assets. 

It can still be a tough place to do business. Sub-Saharan Africa is not, say, Australia or Canada, developed markets offering high levels of corporate support. Many markets remain underdeveloped, even wild, offering high levels of both risk and reward. 

To Jacques Nel, an economist at NKC, investors should remain both cautious and judicious when spotting a juicy target. Some sectors remain out of bounds to foreign investors, or restricted in terms of the stake a non-domestic investor or group of investors can hold. He advises investors to look to collaborate with reliable domestic investors, “particularly in countries with less developed private sectors”, while noting that many regional governments “have shown an increased willingness to collaborate in public-private partnerships, particularly in sectors such as infrastructure”.

Golden opportunities

Even the recent slowdown in energy and commodity prices offer opportunities to the eagle-eyed. Global and regional borrowing costs remain low, and the winding down of a long commodity supercycle will open up the prospect of distressed investments and leverage buy-outs of commodity producers. “The energy price slump provides opportunity for the deployment of capital and acquisition at attractive valuations - a golden opportunity for private equity-led deals in the energy and mining sectors,” notes NKC’s Erasmus. On the flip side, buyout firms are also targeting retail- and export-focused assets in eastern Africa, notably energy-scarce economies such as Kenya, Uganda and Tanzania. 

This should be the beginning of a golden era for private equity in Sub-Saharan Africa. And that should be good for everyone. The continent, notes Robert Hersov, founder and chairman of investment and advisory outfit Invest Africa, still has a “serious shortfall in capital. It needs investment. Thousands of pioneers and entrepreneurs are on the cusp of success, if only they can find a backer. The market is hungry. Moderate investment can be hugely rewarding.” Private equity groups, he adds, “are waking up to the prospects of Africa”.  

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