African markets are ripe to absorb more private equity investment

19 October 2016 Consultancy.uk

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.

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Consumer goods start-ups grow interest from venture capital

23 April 2019 Consultancy.uk

Funding the latest consumer goods start-up has been a real money-spinner for venture capitalist firms, with a number of $1 billion companies – or unicorns – having emerged in the space in recent years. New analysis has explored the resulting corporate consumer products activity in the acquisitions space.

Consumer products have enjoyed years of strong growth as new markets opened in developing Asia. China in particular has enjoyed strong growth across a range of consumer good types as the country’s middle class expanded. Private equity firms have been keen to pick up targets in the space as they expand their portfolios to include additional local capacity as well as customers in new markets.

As a result, a study from Bain & Company has found that interest from PE firms in the consumer product space grew sharply in 2018, hitting 6.1% of all invested capital for the year, and making it the third most sought-after category. It is now only behind financial services (23.9%) and advanced manufacturing and services (13.9%).

Corporate venture capital investment

The ‘M&A in Disruption: 2018 in Review’ research found that growth in the segment reflects key changes in the segment as a whole. This is particularly true of insurgent brands, which often leverage local expertise in order to take on international giants in domestic markets.

Short change

The market changes have led to shifts in motivations for consumer goods company investments from PE firms. The number of strategic investments stood at 50% in 2015 compared to deals that increased scope. This has shifted significantly, with 34% of deals focused on strategic outcomes in 2018 compared to 66% for scope. The move towards scope reflects companies seeking out fast-growing products that enable stronger revenue growth streams.

Acceleration in scope-oriented M&A in consumer products

However, there were other motivations for deal activity in the space. Activist investors have put pressure on companies to expand their portfolios in recent years, with the trend expanding from just US targets to Europe.

Further trends

The other key shift in the space regards outbound deal activity. The study found that outbound deal activity has increased significantly in the Americas (up 363%) with total deal volume up only slightly (15%). Key deals included Coca-Cola and Costa, Procter & Gamble and Merck’s consumer health unit, and PepsiCo and SodaStream. In the Asia-Pacific region, outbound deal activity rose 195% while total deal activity fell sharply, by -36%. The EMEA region saw both a sharp decline in outbound deal activity, at -68%, as well as lower overall deal activity, which fell by 32%.

Cross-regional deal making

Deal-making in the current environment is increasingly fraught with uncertainties, as business models change on the back of new technologies, new consumer sentiments and wider market changes from new entrants. As such, acquisitions are increasingly useful as possible hedges on changes in market direction. As such, companies are increasingly pressed to take a future-back position, making sure to incorporate a vision of how the company needs to look in five years into acquisition strategy.

The firm notes that certain acquisitions which enhance a remembrance of a nobler mission, revive a sense of entrepreneurialism and engage directly with consumers may be necessary qualities in acquisitions that transform a company to fit market expectations in the coming decade. While going forward, focus on innovation, partnering with retail winners, reducing cost base and constantly reallocating scare resources will be necessary to protect market share in areas where insurgent local and strategic competitors are active.

Related: Private equity asset growth top priority for 2018.