AFRICA_ PRIVATE EQUITY IN AFRICA

Private-equity (PE) activity in Africa has increased significantly in the last 30 years.

From a dozen or so active general partners (GPs) in the region in 1990, there are currently at least

140 GPs active in Africa. Between 2010 and 2016, GPs invested around US$25.6bn across sectors

that ranged from consumer goods to water and sanitation.

GPs’ approach to investment in Africa is, in several ways, distinct from how the asset

class functions in other parts of the world. For instance, PE fund raising and deal execution have

a longer lead time in Africa than PE funds focused on other regions; the deal sizes are usually

smaller; the average holding periods sometimes extend over eight years; and the exit options are weighted towards trade sales. Trade sales are associated with corporate buyers purchasing

assets in their core line of business. PE, therefore, plays an important role in facilitating the

presence and strategic expansion of corporates in the region.

Moreover, PE investment in Africa tends to focus on growth capital, helping investees to

improve governance, and strategy, expand their footprint and (at times) contribute positively

to the region’s broader commercial ecosystem, for example by deepening capital markets

and expanding supply chains. The focus on growth capital is the opposite of the financial engineering accusations often directed at GP activities in other regions. Rather than buying a

business, significantly increasing its debt levels, aggressively reducing costs and exiting after a

short holding period, the GP approach in Africa centres on holding and scaling businesses with

limited, if any, debt capital included in deal structures.

GPs operating in Africa have surpassed benchmark levels of return: between 2007 and 2015, they generated an average return well  over 150% the MSCI Emerging Market Index. This notwithstanding, PE has low penetration relative to performance in other regions. Reforms have been enacted in some countries in the region in order to encourage Africa-based institutional investors to allocate capital to the asset class. However, more remains to be done to harness fully PE’s potential to contribute to Africa’s socioeconomic development.

Each investment counts: every 0.01% in concluded PE transactions as a percentage of African GDP (US$2.1trn) translates to over US$200m of much needed incremental annual investment in the region