Growing Entrepreneurship in Africa

Africa boasts alpha returns for private equity investments

Africa’s private equity (PE) landscape is uncharted and at an early stage of development, however, it is growing steadily and giving good returns. In fact, according to a KPMG survey, a record amount of 25.7 billion rand ($3.03 billion) in PE money from Africa was returned to investors in 2011, up from R18.1 billion in 2010.

According to Dapo Okubadejo, the partner in charge of Corporate Finance & Financial Advisory Services at KPMG Nigeria:

Africa is now viewed by PE houses and fund managers as a priority investment destination. As growth in other economies have slowed in recent years due to the 2008/9 recession and current crisis in the Eurozone, investors have been looking to emerging markets and economies that will provide higher return rates and Africa is continuously proving its business case for investment.”

Home to 7 of the top 10 fastest growing economies by 2015

Africa is currently one of the fastest growing regions in the world – where according to the International Monetary Fund by 2015, seven of the world’s top 10 fastest growing economies are expected to be in Africa and gross domestic product (GDP) for the continent is expected to grow to $2.6 trillion by the year 2020.

We are seeing growing interest and activity from both international and African-based PE investors, in raising funds and targeting a range of markets and investments opportunities – including energy & natural resources, infrastructure, consumer goods, financial services and the entire agriculture value chain for instance – that capitalise on Africa’s growth opportunity,” adds Okubadejo.

According to the Emerging Markets Private Equity Association (EMPEA), about $1.1billion of new investments were made in sub-Saharan Africa (SSA), in 2012, and about $1.4billion was achieved in fund raising.

This could increase further, with growing confidence in the market as more companies look to Africa for alpha returns.”

Risk versus reward approach

Investment in new and emerging markets is never without its challenges. While some investors have made direct investments into new and uncharted regions or countries, more cautious PE houses and fund managers have used their existing investments and portfolio companies in South Africa – where about 40-50% of all African PE funds are currently invested – to springboard their investments into the rest of the continent.

Whenever we speak with investors or potential investors about Africa, we always advise that Africa is about having the right risk-versus-reward approach. It is true that Africa faces many risks and challenges ranging from weak infrastructure, government bureaucracy and weak legal and regulatory framework especially the judicial system but with a long term investment horizon, the risks can be broadly evaluated against significant growth potentials and investment incentives available to investors in many African countries.”

The Private Equity landscape

As many PE firms jostle for deals, coupled with strong interests from strategic investors and DFIs, the PE landscape in Africa is changing fast. Successful PE firms now have an uphill task of demonstrating their true value proposition.

It’s not just about providing capital but forming the right partnerships with portfolio companies and providing adequate operational support that will yield significant value uplift through strong earnings growth. In addition, having a robust value-chain approach and adopting a roll-up strategy as well as deep local knowledge and experience to navigate through each market’s unique complexities is pinnacle to achieving desired investment returns.

Dapo Okubadejo will be speaking at the 10th Annual Africa Venture Capital Association Conference taking place in Cape Town from 8th to 10th April 2013. The 2013 AVCA conference will go beyond the usual dialogue of the African growth story and discuss in-depth how private equity is having a catalytic effect on the growth of Africa. AVCA will launch the first Africa-focussed private equity performance benchmarks, release key data on the African private equity landscape and highlight how fund managers are driving value creation via private equity exits.

David Okwara

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