African markets are ripe to absorb more private equity investment

19 October 2016 6 min. read

Private equity investments across Africa may soon rise as firms are set to expand their activity on what remains one of the fastest growing regions in the world. While concerns remain around the viability of the continent, particularly in light of commodity price decreases, a new report suggests that conditions remain ripe.

In a new report from The Boston Consulting Group, the management consultants explore the state of the private equity (PE) landscape within Africa. The report, titled ‘Why Africa Remains Ripe for Private Equity’, looks into changing demographic and economic fundamentals across the vast African continent and the impact of those on the PE market.

Africa private equity market has grown

PE growth opportunities

The consultancy firm highlights that PE activity across Africa has come in waves. In the early 90s the focus was on South Africa – the continent’s second largest economy after Nigeria – and Northern African countries, with financial activity stemming primarily from development finance institutions. By the early 2000s, larger scale international investors entered the scene as well as private equity funds focused specifically on the African region. By last year the landscape had more than 200 funds with more than $30 billion under management, primarily from international investment firms. 

The funds active in Africa have also begun to diversify their portfolios, both in terms of asset type and geographical location. Prior to 2007, targets tended to be well positioned utilities or energy assets. Between 2007 and 2014, according to analysis by the African Privet Equity and Venture Capital Association (AVCA), around 57% of investments geared at companies selling goods and services, on the back of the expanding African middle class. 

Investment are more geographically dispersed

The diversity of the continent, mixed with changing PE player appetites, has seen PE activity spread across the continent. Investment activity has fallen slightly in South Africa, from 28% of the total investment to 24%, while East Africa and West Africa have seen increases of 5% and 3% respectively.

BCG’s report also suggests that the private equity sector in the country is maturing, following an uptick in the number of exits. The continent averaged 40 exits in 2013, 2014 and 2015, relative to an average of 29 across the previous five years.

Number of factors suggest bullish outloo

Stronger fundamentals

The fall in commodity prices, as well as the relatively low number of good quality targets, has however raised the possibility of a bubble in Africa’s PE market. Despite the risk at hand, the consulting firm notes, that, even with the risk profile, the market appears to have a number of relatively positive fundamentals.

The African continent remains a place of diversity, from climates to cultures and economies. Until mid-way through 2014 many of the countries on the continent were benefitting from high commodity prices, particularly oil, which saw average growth rates of 5% between 2007 and 2014 – which, following a recent dip, is projected to again reach significant levels of activity. The population too continues to see demographic changes, with working age population projected to increase for the coming five decades. The share of tertiary education is also forecasted to grow, spurring a rise in the number of middle-class Africans, from 166 million in 2024 to 270 million in 2034. 

The continent also today has relatively low PE firm activity, 1% of the global total, meaning that considerable potential exists for PE firms to enter into markets with relatively low competition where, by identifying strong ‘hidden’ targets, they are able to generate lucrative returns as the regional markets develop. The firm highlights that many companies are currently not on the radar of PE firms, which tend to focus on large targets ($100+ million in revenues). Smaller $10 million -$100 million are in abundance and may provide growth avenues.

Winning in Africa’s private equity market

BCG, which itself opened its fourth office on the continent (Lagos, Nigeria) in April this year, further concludes that that the investment climate in many African countries is improving, supporting easier access to acquisitions and investment. A recent study conducted by FTI Consulting, delivered ahead of the World Economic Forum’s 2016 African summit, painted a similar picture – across the board executives globally are generally confident about the African economy. 

Tawfik Hammoud, a BCG Senior Partner and lead of the firm’s Principal Investors & Private Equity practice, says, “These trends are likely to expand Africa’s capacity to absorb private equity investment in the decades ahead. In fact, they suggest that most African markets are still underserved by private equity. Africa’s underdeveloped investment environment means that private equity firms need to build significant on-the-ground capabilities that they normally do not require in more developed markets.”

A report released earlier this year, by Bain & Company, found that the global private equity market is at a high since the financial crisis.