The world’s leading advisor on business strategy, the Boston Consulting Group (BCG) says Africa remains one of the world’s growth opportunities for private equity investors, despite a crash in global commodity prices that has swept African economies off their feet.
In its latest report titled “Why Africa Remains Ripe for Private Equity,” the management consulting firm observed that funds which consider more flexible investment strategies and set new types of corporate targets would generate high returns for investors.
“To fully capture the opportunities in Africa and earn high returns, private equity funds must adapt to the rapidly evolving market and consider more flexible investment strategies,” said Marc Becker, a BCG associate director and a co-author of the report.
The report recommends that private equity investors consider other investment approaches, such as majority stakes, strategic partnerships, and evergreen funds, rather than only funds with timing constraints for divestiture.
It also suggests that funds look at a wider range of targets, such as Africa’s growing pool of dynamic smaller companies with significant growth potential.
“Too many private equity investors are pursuing the same kind of target with the same kind of deal structure,” said Patrick Dupoux, a BCG senior partner and a co-author of the report who leads the firm’s activities in North Africa. “But look beyond the narrow cohort of Africa’s corporate elite and you’ll see that the continent offers real opportunities. Some of the most promising targets in Africa are companies that are still off the radar of most funds.”
The value of private equity deals in Africa fell by 69 per cent to $2.5bn last year, from a total of $8.1bn in 2014, the lowest since 2012, according to data compiled by the African Private Equity and Venture Capital Association (AVCA).
West Africa accounted for the most deals, a quarter of deals by value, ahead of South Africa on 15 per cent.
In Nigeria, the private equity industry has grown from about three players with approximately $75 million under management to ten indigenous players with about $2 billion, in the last decade.
“There is always a huge demand for capital in Nigeria,” says Mustapha Suberu of research and strategy department at Eczellon Capital, “But only the large companies stand better chances of securing finance,” Suberu said by phone.
Only last month, a consortium led by sub-Saharan Africa-focused 8 Miles, bought a minority stake in Nigerian biscuit maker Beloxxi for $80 million in a deal described as a bet on the company’s ability to meet the rising demand of a growing consumer class.
However, the amount of private equity and principal investment capital under management in sub-Saharan Africa remains very low, relative to world standards—a mere 0.1 percent of GDP, compared with approximately 1 percent of GDP in western countries.
BCG cites low penetration, rising pool of investment and waning alternative options for raising funds as major drivers of the positive outlook for private equity in Africa.
“The pool of investment targets is growing. Nearly 11,000 African companies have revenue of $10 million to $100 million and assets of $20 million to $200 million—and their ranks are growing fast,” the report noted.
“Alternative options for raising capital are scarce,” BCG said, drawing inference from the small scale of African equity markets with only four countries having stock exchanges with a market capitalisation of more than $50 billion, making it difficult for companies to raise capital or for founders to exit their businesses through initial public offerings.
“These trends are likely to expand Africa’s capacity to absorb private equity investment in the decades ahead,” says Tawfik Hammoud, a BCG senior partner and a co-author of the report who leads the firm’s Principal Investors & Private Equity practice. “In fact, they suggest that most African markets are still underserved by private equity.”
BCG further observed that “the investment environment is improving. As more private equity funds, investment banks, and institutional investors establish a local presence, they are bringing greater investment expertise.”
Africa’s financial markets are still underdeveloped; and the report suggests that PE Firms will need to invest in a strong local presence, given the fact that access to information is limited.
“Many private equity firms also need experienced people who can help create value in their holdings by providing management expertise and strategic guidance,” the report stated.
“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,” said Seddik El Fihri, a BCG expert principal.
Pursuing new investment strategies in Africa will be challenging, and building local capabilities will add to costs. But funds that do so can develop powerful competitive advantages, according to report’s authors.
“Organisations that can navigate Africa’s complex investment environment and add value to companies are likely to gain an inside track on the best deals in what promises to be, over the long term, a significant growth market for private equity,” Dupoux said.
Analysts say PE as a financing tool is desirable for Nigeria with its large informal sector, particularly as the traditional means of financing is often not available to companies in the early growth phase.
LOLADE AKINMURELE
