South Africa, Morocco & Mauritius top PE countries in Africa
South Africa was the most active market for PE investment on the continent in H1 2012, according to Bureau Van Dijk’s Zephyr database, with South African targets attracting $547m over the period. In second place on the continent was Morocco with deals to the tune of $243m, followed by Mauritius with $106m, Ethiopia with $90m, and Kenya with $57m. Nigeria, which was a very active PE market in 2010, was considerably less animated in H1 2012, attracting one deal with a value of $5m.
This geographical spread of PE activity affects sector distribution, too: as the more sophisticated markets attracted the most investment, sectors that are important in those markets, especially services, are heavily represented in overall transactions. We consider that many of these investments in South and North Africa or Mauritius do not constitute typically African deals, and think that the most exciting opportunities are in the primary sectors and in consumer goods.
Agriculture and infrastructure the sectors to watch
African agriculture attracted $102m worth of private equity investment in the first six months of 2012, compared with $54m in the whole of 2011. Almost all of these flows were investments by Standard Chartered Bank, which spent $74m on a minority stake in grain and fertiliser trader Export Trading Group in Tanzania and another $20m for an indirect stake in Zimbabwe’s horticultural firm Ariston. Ethiopia’s attractiveness to PE investors has much to do with its strategy of welcoming foreign investors to develop its agricultural sector. While a 2011 Prequin survey found that only 23% of Africa specialist PE fund managers preferred the food and agricultural sector, we think that the long-term trends will make this sector stand out in future.
Some big and interesting infrastructure deals from 2011 include the $110m investment in Rift Valley Railways by Citadel and the IFC, and the $48m Capital International/Standard Chartered investment in Seven Energy Nigeria. PROPARCO, the AfDB and the IMF have collaborated on the Lomé Container Terminal in Togo, a transhipment terminal to encourage the development of smaller harbours in the sub-region, at a cost of €30m.
Consumer demand increases popularity of cyclical sectors
More cyclical plays have become profitable thanks to the growth in consumer demand in Africa, a trend that is set to continue over the next few decades. So there is substantial interest in fast-moving consumer goods (especially breweries), formal retail and mobile telephony. While most investment in these sectors is by multinational corporations, PE managers have sometimes been first to sign, or have entered companies in these sectors as minority partners.
Investors and managers in consumer spending companies in Africa say that they find they consistently underestimate the size of the market, and that they find themselves surprised by levels of demand when they begin operations. Some of the explanation lies in the underutilisation of formal banking networks, so any analysis that uses deposit and loan book figures to estimate demand will end up being too pessimistic.
The sectors benefitting from demographic and macroeconomic trends
The demographic and macroeconomic trend fuelling the consumption boom is also driving the attractiveness of real estate plays (although property investments are often considered separately from PE). Shopping malls are currently fashionable investments, although more classic residential or commercial plays remain popular. Property plays provide many of the opportunities for smaller PE funds to start investing.
Healthcare benefits from the same economic dynamic. Companies in this sector have proven massively profitable in South Africa over the past decade especially, and other African countries will see similar returns on investment in the sector as the demographic dividend pays off. Aureos already figures prominently in this sector thanks to its $105m Africa Health Fund, a semi-philanthropic vehicle funded by the IFC, AfDB and the Bill & Melinda Gates Foundation.
Africa’s financial services sector is benefitting from broadly the same macroeconomic drivers as the consumer goods sectors. PE investments in financial services have historically tended to focus on sophisticated financial companies in more developed markets like South Africa or North Africa, with investment in the sector on the rest of the continent usually driven by acquisition activity as European or South African banks expand their businesses.