The promise and obstacles facing private equity investment in Africa

Private equity investment might provide some exciting opportunities for your business, but it also comes with a number of challenges. Private equity is capital that is put into a new or growing business in return for part ownership of the business and a share of its profits.

Private equity investors don’t typically want to be permanently involved in a business – they will step in for a few years and then exit by selling back their shares to the business, along with a return investment. Private equity partners are rewarded by the company’s success, generally realising a capital gain through an exit which may include selling their shares back to the business, selling the shares to another investor (such as another private equity firm), a trade sale (the sale of company shares to another strategic partner), or the business achieving a stock market listing.

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, that can be invested in by others and be responsible to others.

Private equity investment in Africa

In Africa, private equity investors are mainly banks or entrepreneurs that have made it big. And in South Africa in particular, private equity fund managers tend to be quite conservative.

Concerns over the economic future in Africa means that only about R2 billion of the available R8 billion for private equity investment is actually in use. Small business is particularly hard hit in this regard.

Other challenges for private equity investment in Africa include negative perceptions about investing in Africa, an information gap about the opportunities available on the continent, regulatory constraints, and a shortage of talent in this field.

However, research shows that, in South Africa in recent years, private equity is increasingly being used to fund larger-scale BEE deals (especially those where white owners are looking for black partners). This will ideally drive long-term development and job growth.

Advantages and disadvantages of private equity investment

As a business owner, if you have a great idea or a business that is sure to experience enormous growth, you might consider the advantages of private equity investment, with the proper financial guidance. The journey can be a challenging but rewarding one.

Some of the advantages of having private equity investment as opposed to traditional debt financing include:

  • Private equity backed businesses have been shown to grow faster than other types of companies due to the input of capital and personal experience by private equity partners.
  • A medium to long-term investment horizon that will give the business a chance to grow and succeed along with an established development plan.
  • Equity partners are committed until their contracted ‘exit’ from the business. This means a solid, flexible base to meet future growth.
  • Capital repayment, and dividend and interest costs (if relevant), are tailored to the company’s needs and to what it can afford, making for good cash flow.
  • Commitment from equity investors to make things work as the greater the business’ growth and success, the better the returns will be. Also, as private equity investors rank alongside other shareholders (after banks and other lenders), they stand to lose their investment if the business fails therefore they are likely to work hard to ensure that the business overcomes its difficulties.

On the other hand, some of the disadvantages of private equity investment, from the business owner’s perspective include:

  • Securing this kind of funding is a lengthy and sometimes difficult process as private equity investors require detailed market, financial, legal, environmental, and management due diligence. The required information could take several months to collect before a final investment decision is made.
  • Entrepreneurs have to give up some of their business’ shares to the investor. This in turn means changes to the business’ structures and operations, including reporting and responsibility roles.
  • Private equity managers have control over the timing of a sale of a part of the business when they make their exit.
David Okwara

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