EY, AVCA link growth of PE in Nigeria to financial services

Financial services was the major driver of the growth of private equity (PE) in Africa between 2007 and 2013, a new study by Ernst & Young (EY) and the African Private Equity and Venture Capital Association (AVCA) has revealed, adding that PE in Africa is becoming a more established asset class in the continent’s investment landscape.

The study entitled ‘Broadening horizons’, which examined the results and methods of PE exits during the six-year period, recorded a total of 207 realisations by PE fund managers in Africa, for transactions with an entry enterprise value of at least $1m and where PE firms had fully exited their investments.

According to the study, exits are being achieved across the African continent and increasingly outside of the most developed market of South Africa. As expected, South Africa accounted for just under half of the realisations by number and value (41 percent and 47 percent respectively), but West Africa saw more than one-quarter by both number of exits (28 percent) and value (26 percent).

Financial services accounted for the highest proportion of exits at 19 percent between 2007 and 2013.

Industrial goods accounted for 12 percent of exits, followed by agriculture/forestry and telecommunications, both at 9 percent.

Meanwhile, construction and technology both accounted for 8 percent of PE exits by number, and food and beverage for 7 percent.

Sandile Hlophe, transaction advisory services leader for Africa, EY, at the presentation of the study in Lagos last week, said: “Typically, what is driving growth in private equity primarily in emerging markets, more so in Africa are sectors that are exposed to what we call the growing middle class.

“Nigeria’s PE market is very big,” he said, adding that the number of domestic or resident PE companies in the country has more than doubled in the last three to five years. “There are probably more than 10 resident PE firms and the number keep growing as many are looking to set up shop in the Nigerian market.”

Michelle Kathryn Essomé, AVCA chief executive said, “The study finds that PE in Africa continues to outperform comparable listed equities indexes, confirming it is a key asset class to access the astounding growth fundamentals of Africa.”

Private equity firms are able to achieve a return on investment which is far higher than that obtained on the capital market, and private companies operating across Africa have achieved higher return on investment than private equity in North America, Europe and Australia, according to Bisi Sanda, partner, transaction and advisory services, EY.

According to the study, the stage is set for the continued growth and development of the PE industry in Africa, as PE firms uncover opportunities in the rapid economic growth across the region, and complement this with increasing sophistication in value creation techniques.

Paul Kokoricha, partner, African Capital Alliance, said: “The private equity market in Nigeria is an interesting market. The Nigerian potential is huge. Every sector requires capital. The FMCG sector requires capital; oil and gas, particularly creating domestic capacity to take advantage of the abundant oil resources that we have requires capital. One of the challenges we have in the power sector is that gas has not been properly developed to be able to power the plants. So there is no sector that does not actually require capital.”

FEMI ASU