Venture Capital and Private Equity Industry Performance Survey of South Africa covering the 2014 calendar year

Africa leads the way in private equity investment


Private equity offers investors the chance to get a firm foothold in Africa’s economy. This is especially true for the fast-growing consumer market which is expanding in line with a number of sectors, including fast-moving consumer goods, agriculture, mobile communications, and financial services.

Private equity involves ownership of a company that’s not traded on the stock exchange but held by private individuals. Private equity investment involves putting capital into a new or growing business in return for part ownership of the business and a share of its profits.

The nature of private equity differs from normal investors as they don’t typically want to be involved in a business for a long period of time. Typically, Private Equity players will step into a business for a few years and then exit by selling back their shares to the business, along with an expected return investment.

Private equity in Africa

Driven by institutional investors, private equity firms, or venture capitalists, private equity is usually attracted by businesses demonstrating the prospect of rapid growth, often through some kind of product or service innovation. For most small to medium-sized businesses, such funding goes hand-in-hand with fundamental business changes, such as the business becoming a limited company in its own right, beyond its owners.

Private equity in Africa is gaining ground as a way to drive the continent’s economic growth. With the developed world experiencing an economic downturn, Africa is looking set to be the focus of increased investment in the future.

Africa as an investment destination

When it comes to private equity investment, it can be considered a priority investment destination. Africa is about having the right risk-versus-reward approach. Having a robust value-chain approach and adopting a roll-up strategy, as well as having deep local knowledge and experience to navigate through each market’s unique complexities is pinnacle to achieving desired investment returns.

Analysis by Cape-Town based consultancy RisCura reveals that investors aiming to play a role in Africa’s increasing domestic growth (standing at around 5% a year for the past 3 years) would be wise to consider private equity investment.

Rory Ord, Head of Fundamentals at RisCura, argues that those looking for access to Africa’s growing consumer market should consider private equity instead of listed African equities if they are looking to invest in growth:

If you compare the sector breakdown of GDP versus that of the stock markets, they look like two different countries.

Africa’s growing consumer market

For example, in Nigeria, Africa’s most populous country of 170 million, the consumer discretionary sector accounts for 20% of GDP while being less than 1% of stock market capitalisation.

Despite numbers like these, the discretionary consumer sector is typically underweighted across equity markets on the continent, with the exception of South Africa. This is possibly due to the past successes of foreign retail companies that have dominated local markets through ventures such as retail chain stores like Game and Makro.

Equity markets in Africa

As a result, the banking sector often offers the only route for investors in public markets to work with the recent empowerment of the consumer. In addition, public markets outside South Africa also suffer from limited liquidity and, in many cases, a narrow range of stocks.

For Ord, “liquidity is improving but it’s going to take some time to get it right. They don’t have an established pensions culture, so you don’t have pools of capital.” With the public structure still in the developmental stage and facing a number of challenges, Ord points to private investment as a better way of profiting from the African consumer market.

RisCura’s database of 158 African private equity deals since 2006 suggests the largest slice (28%) involved companies in the consumer discretionary sector, followed by industrials, materials, and energy. These deals are usually concluded at relatively low valuations, largely cheaper than listed equity markets, due to the relatively modest levels of debt or leverage used in African deals.

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David Okwara

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