About $698 million worth of deals were done in sub-Saharan Africa (SSA), as of August 2012, and up to $3.1 billion achieved in fund raising, compared with $49 billion and $102 billion in the USA, respectively, according to the Emerging Markets Private Equity Association (EMPEA).
However, this could increase following growing confidence in the market, as more companies look to Africa for alpha returns. Exit volumes in the African PE industry hit a record high in 2012,
bolstered by sales to trade buyers. 14 exits were made in 2012 valued at $1.65 billion, a 13 percent rise over $1.43 billion in 2011.
The growing youthful population, expanding middle class, and having some of the fastest growing economies, have attracted some of the world’s largest PE firms (Carlyle Group and Emerging Capital Partners, among others) to the continent.
Currently, there are 158 PE funds (115 fund managers) in Africa with a total of $32.9 billion in capital closed since 2002, or currently being raised (average fund size is $216.5m).
PE refers to the purchase by a private investor of a share of a company that is not listed on a stock market. The company invested in, can then take the money from the sale and use it for expansion or other investments. In exchange, the owner gives up some control, as the new partner gets a seat on the board or, in smaller companies, plays an advisory role. Eventually, investors make money by selling their shares or receiving dividends.
According to Avanz Capita, an investment firm that specialises in private equity across the emerging and frontier markets l, the underpenetrated private equity industry in Africa offers substantial growth potential, given that SSA PE represents only 0.09 percent of total gross domestic product (GDP) for the region.
Further, the potential of the private equity market in Africa is substantial, given the estimated 400,000 private companies in South Africa compared with 388 publicly listed companies.
Public (stock) markets are often concentrated on larger companies and they lack representation of many companies and industries that will benefit from future growth of the continent.
The African continent comprises 44 countries in SSA and eight in North Africa and can be divided into five sub-regions East, West, Southern, Middle and North. Of these five sub-regions, West Africa is divided into Anglophone and Francophone West Africa.
Each of the sub-regions is typically dominated by one country that provides a larger market hub for many increasingly regional companies – Kenya in the East, Nigeria in the West, South Africa in the South, and Egypt in the North, offer the most developed country-specific markets.
The macro-economic backdrop for Africa, also serves as a boost for PE activity on the continent.
The International Monetary Fund (IMF) estimates that GDP growth in Africa will be 6.6 percent in 2012, compared with 3.7 percent for Organisation for Economic Co-operation and Development (OECD) countries.
The economies of Africa are resilient, as demonstrated by the economic growth maintained through the heart of the financial crisis.
According to IMF data, SSA’s GDP grew at a high of 7.1 percent in 2007, slowing to 2.9 percent in 2009, compared with advanced economies’ real GDP growth, which averaged 2.8 percent in 2007 and 3.6 percent in 2009.
Moving forward, there are high growth expectations for Africa. More specifically, growth is forecast to average 5.5 percent in 2017, compared with advanced economies’ expected average of 2.7 percent.
The continent holds 16 of the top 30 economies that are expected to have the fastest growth rates over the next five years (2012 - 2017).
The landscape of PE funds in Africa is small compared with emerging Asia (excluding the developed countries), where there are 427 funds (286 fund managers) with a total of $184.3 billion in capital closed since 2002 or currently being raised.
Latin America has a similar number of funds to Africa, 165 and number of fund managers at 110, but the total capital closed since 2002 or being raised currently at $54 billion and the average fund size of $330 million have nearly doubled that of Africa.
The large and growing size of domestic institutional capital is a significant opportunity for private equity on the continent.
For instance, in Nigeria, the Contributory Pension Scheme (CPS) has grown to $13 billion assets under management (AUM) by the end of 2011.
Of Africa-based fund managers, 53 percent operate out of South Africa, while Egypt, Mauritius and
Morocco are home to 8 percent each, and Nigeria and Kenya hold 5 percent and 4 percent, respectively, according to September 2011 data from Preqin.
Some Nigerian success stories in the PE space include the sale of Aureos Capital’s stake in Nigerian Biscuit - manufacturer of Deli Foods - to South Africa’s Tiger Brands after three years, reaping what Aureos called “solid” returns, and Helios Towers Nigeria Limited.
Avanz Capital concludes that Africa’s PE industry is at an early stage of development, but is growing steadily, providing a solid case for investment.
The ratio of PE investments to GDP in SSA stood at 0.09 percent compared with 0.98 percent in the US and 0.14 percent in China in 2011.