Will 2020 be the year that private equity takes off in Africa?
In 2016, $3.5B was raised for private equity in Africa, the 2nd highest total in 5 years, followed by a 3-year slump.
At the mid-way point in 2019, the total value of fund raising closed by African focused private equity firms reached $1.7B.
This has caused many experts to believe that African private equity is finally ready to take off.
The argument that many have regarding Africa, stems from the deals or lack of deals.
It’s great raising billions to back African businesses but more deals need to be made.
Unsurprisingly South Africa are leading the march;
South Africa brought in the largest share of private equity deals by volume in the first half of 2019. South Africa is also considered by the majority of investors as the most developed country in Africa which speaks volumes to potential investors who would prefer to make money not lose it due to unnecessary risks.
With so many macro opportunities within Africa including desperate need of healthcare, an abundance of natural resources, the rise in renewable energy and 80% of adults not having access to simple banking, many are looking at investment in Africa as a quick easy win, which isn’t ideal for the companies involved.
This is why private equity is the great hope - experts are saying; “a long-term view is needed”. Private equity wants to help companies grow, give them time and patience to do so, this format fits Africa perfectly.
However, there are three main hurdles that are currently preventing private equity in Africa from exploding.
Political stability, lack of large companies and improper corporate structure.
Private equity firms have admitted to avoiding investments during election years due to the history of unrest that can be caused. There is also a long history of government corruption that may get in the way.
There are few African companies large enough to purchase a typical minority stake in. Therefore, everyone is fighting for the same deals. Private equity firms may need to purchase majority stakes in smaller companies if they hope to succeed in Africa.
Private equity firms are familiar with the luxury of New York or London based companies with department upon department, ESG teams, etc taking care of every aspect making the process seamless. With a lack of reliable data, improper corporate structure and other hurdles, many firms will choose to avoid deals at the slightest hint of difficulty.
20 years ago, almost no private capital existed on the continent. Regardless of the potential stumbling blocks, it’s an inevitability that Africa and private equity will enjoy gigantic growth, but it may take time.
With $1.2B people off grid without energy and with statistics suggesting that Africa has a larger middle class earning $20.000 per year than India, the potential for growth is encouraging.
Furthermore; Kenya, Nigeria, Namibia and South Africa have changed the asset allocation rules of their state pension funds. The changes mean a certain percentage of pension assets (some companies 15%) may be invested in private companies.
It’s a common misconception that Africa is a single uniform market, but with 54 countries all offering unique opportunities, a private equity boom in Africa is an inevitability. 2020 is anyone’s guess, but the breakout year we’ll all remember is likely to fall within the next decade.
AlternativeSoft is an award-winning quantitative analytics software specialising in asset selection, portfolio construction and customised reporting. To find out more or register for a free demo, get in touch with our team.
81 Farringdon Street, London,
+44 20 7510 2003+1 917 791 2237