South Africa losing PE advantage to fast-growing rivals

South Africa is no longer the destination of choice for private equity (PE) investors seeking to tap returns on the continent.

Buyout firms are increasingly targeting markets such as Kenya and Nigeria, Africa’s largest economy, where expansion this year is forecast by the International Monetary Fund to be more than double that of South Africa.

“Almost all the growth is outside South Africa’s borders,” Andrew Dewar, managing partner of Johannesburg-based Rockwood Private Equity (Pty) Limited, which was spun out of Barclays Africa Group Limited in 2013, said in an interview on February 13. “The shift from South Africa to the rest of Africa also means the way exits happen will change. You could use listings in London if you get to scale in Africa.”

South Africa’s economy is being hobbled by power shortages, with the state-run utility rationing electricity for 11 days so far this month, helping to push the rand to a 13-year low. Returns for buyout firms in the country have been shrinking for a decade and lag behind the benchmark stock index.

Read also: Sterling Bank moves to bridge $1bn education funding gap

“We used to get a net IRR of 30 percent; now it’s about 18 to 20 percent,” Andre Roux, who founded Ethos Private Equity Ltd. in Johannesburg, said at a conference on February 13. He was referring to the annual net internal rate of return, buyout firms’ benchmark for measuring the success of deals.

Southern Africa is now the third-most attractive region for buyout firms after West Africa and sub-Saharan Africa, according to an African Private Equity and Venture Capital Association report released last year.

Nigeria has attracted US private equity firm Carlyle Group LP, the world’s second-largest manager of investment alternatives to stocks and bonds, which invested $147 million for an 18 percent stake in Diamond Bank plc and said it would spend as much as $200 million in a second Nigerian company this year.

Other targets for the firm include Ghana and Ivory Coast in West Africa, Carlyle said in November.

Nigeria, Kenya, Ghana, Zambia, Mozambique and Angola are the countries Ethos is looking to for expansion opportunities for its investments, Ethos CEO Stuart MacKenzie said in an interview on February 13 at the conference in Stellenbosch, near Cape Town.

“South African corporates are going north in search of growth and part of our strategy is to take our investments there,” MacKenzie said. Ethos is targeting logistics, consumer, business and industrial services companies, he said.

AutoZone, an automotive-parts retailer sold by RMB Corvest and Zico

The FTSE/JSE Africa All Share Index advanced 18.8 percent a year on average in the decade ended September 2014 compared with private equity’s annualised rate of return of 18.5 percent, net of fees, according to the most recent research from the private equity association.

As South African companies expand in Africa and gain from more rapidly expanding markets, it becomes more attractive to consider alternatives to Johannesburg’s stock market for initial public offerings, according to some executives.