African market attracts small percentage of $300bn raised globally for private equity

Africa may be flavour of the month but in relative terms still attracts a small percentage of Private Equity (PE) and international investment capital.

“The biggest challenge global institutional investors see when they approach Africa is the lack of established fund managers,” according to Mike Casey, founding director, EMPEA Consulting.

He said in a plenary at the Africa Development Forum in Marrakech, which focused on Private Equity, that last year, about $300 billion was raised globally for private equity. Out of that huge amount, 12 percent was reserved for emerging markets, and of those 12 percent ($38bn), 3 percent ($1.2bn) was for Africa-focused funds.

He however believes that Africa is, without a doubt, one of the most exciting opportunities for investors on the planet. “However, one of the major questions institutional investors have is: Are there enough companies for all this capital that is being raised for the continent?” he said.

Though PE in Africa is a relatively recent phenomenon that started in the early 2000s, the opportunities it offers are great, Ijeoma Agboti, director at Abraaj Group, said. The biggest challenge when Abraaj started was to overcome the scepticism of investors who did not know them. Highlighting the risks and challenges specific to the continent, she said: “Most businesses in Africa are family businesses and investors need to be very sensitive about that. An important development that we have witnessed and contributed to is the regionalisation of private equity in Africa. Businesses need to transcend borders, and it is very important to build conglomerates.”

Meanwhile, Nathan De Assis, executive director of Equity Capital Resources, discussed the PE model that had worked in Zambia, saying “we took the standard private equity model and shaped it within the Zambian context. We tried to use the capital in such a way that it allows SMEs to grow, create jobs and at the same time, contribute to the economic growth of the country.

“At the heart of the model is the idea that SMEs are the key engine of African growth. Investors need to provide resources to SMEs so that they grow. Once SMEs grow, the larger players within the market can pick them up and bring them to the next level. It was not easy to attract money because, given the state of our economies, pension funds are quite reluctant to give capital. What we have been doing is to try and convince policy makers and governments to encourage some of the pension funds to provide capital for SMEs.”

In a side panel, David Ashiagbor from the AfDB highlighted the rapid growth of the pension fund industry and how it could provide a great source of capital for the PE industry. Since 2008, for example, in Nigeria, pension funds under management has risen from $6 billion to $25 billion. Namibia has pension fund assets of 80 percent of GDP, while Botswana’s is 40 percent, extremely healthy numbers.

However, regulatory reform is needed to ensure that this capital base can be accessed and is invested in the African growth story. Right now, 70 percent of these assets are sitting in riskless treasury bonds yielding returns upwards of 10 percent, which makes other asset classes risky in comparison.