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Private equity giants are pulling out from African investment

--Nigeria tops preferred destination for investment in Africa

Private equity
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Global giants in the private equity space are divesting their investments from the African market no thanks to interest rates hike in advanced countries and the harsh operating environment that has dealt a steeper blow on emerging market stocks.

Just recently, the Blackstone Group L.P, an American multinational private equity, announced plans of selling its African focused subsidiary, Black Rhino Group, back to management due to the little growth recorded by the firm so far since the 2014- 2015 fundraising boom that brought many firms into the market.

In 2014, the New York-based PE firm acquired control of Black Rhino to invest billions into energy and infrastructure projects in Nigeria and Ethiopia but failed to seal the deal due to an undisclosed reason.

The aftermath of the acquisition of Black Rhino was a deal it sealed in 2018 when it led a consortium of investors to acquire a 55 per cent stake risk and financial businesses Thomson Reuters Corporation, a world-leading data and financial technology platform.

The mismatch between the size of available deals in African markets and the target investment size of global asset managers of Blackstone continues to be an issue.

Blackstone’s later resorted in departing from the African market joining other top American PE players like the KKR in leaving the market.

In late 2017, KKR disbanded its Africa team after making only one investment on the continent, in 2014, of $200 million in the world’s largest rose farm, Afriflora that it has since sold.

Carlyle Group an American multinational private equity, was another firm that got the sour taste of investing in the continent after it invested in one of Nigeria’s tier 2 lender, Diamond bank.
At that time, the US-based PE firm said it was well-positioned to benefit from Nigeria’s status as one of the fastest-growing economies on the continent and enthused how it could become one of the largest financial institutions in West Africa.

While Carlyle closed a $698 million fund dedicated to Africa in 2014, its flagship investment in Nigeria’s Diamond Bank failed to perform, with its shares fall over 90 per cent since Carlyle invested $147 million.

The trigger for the collapse was as a result of the 2014 oil-price crash, and restiveness in the Niger Delta region that crippled growth in the economy since Nigeria built its economy around oil. This moribund state started just as Carlyle made its investment.

The recession hammered Nigeria’s economy and caused non-performing loans to soar which affected the quality of most banking assets with Diamond bank inclusive. Growth at that period was 0.8 per cent, having averaged more than 6 per cent in the first half of the decade.

The diamond bank finally went under the carpet in a merger with a tier 1 lender, Access bank.
A lot of blockbusters happened in Nigeria’s business landscape in 2018, from a backlash between its apex financial regulator and it’s largest non-oil direct investor that controls about 39.7 per cent market share and service about 66 million subscribers in Nigeria’s telecommunication sector, to the closure of local offices of two global lenders.

The CBN in August fined four banks a total of ₦5.86 billion for breaching Nigeria’s extant laws and forex rules when they facilitated illegal repatriation of funds to South Africa on behalf of MTN.

The CBN then asked MTN Nigeria to immediately repatriate a total of $8.134 billion, being part of funds that were illegally taken out of Nigeria by the telecom company between 2007 and 2015. The telecom firm was also slammed US$2bn in tax arrears on imported equipment and payments to suppliers from the office of the Attorney General of the Federation.

This CCI fiasco sent a negative signal to investors who raised eyebrows on the way and manner the apex bank handled the situation, pushing FDI to N379.84 billion($1.2 billion) in the first half of the year from 532.63 billion nairas ($1.7 billion) a year earlier, according to CBN half-year data.

Global lender UBS closed its Nigerian office after it expressed dissatisfaction over the way and manner the apex bank brought its hammer on the telecom giant.

In the same manner, HSBC shut down its operations in Nigeria over several backlashes from the government after it predicted that Nigeria’s president Buhari’s victory in the 2019 elections would stall the economy.

Foreign Direct Investment into the country declined 36 percent from $3.5 billion to $2.2 billion in 2018, according to a report from United Nations Conference on Trade and Development (UNCTAD), making it the lowest foreign inflows that Africa’s largest economy has recorded in the last 13 years when the Geneva-based permanent intergovernmental body started tracking FDI data across the globe.

However, despite all the hurdles, Nigeria has remained an investment decision for investors in the continent due to its large and diverse population.

“A country like Nigeria, with a population of 198million, has a number no investor will ever want to ignore”, Jimoh said at the sideline, when the bank partnered the Chattered financial Analysts (CFA) society in attracting investment in Nigeria.

A higher proportion of Private Equity (PE) investors see Nigeria as the most viable destination for investment over the next three years, according to a survey by African Private Equity and Venture Capital Association (AVCA).

The survey showed that 58 per cent of the Limited Partners (LP) surveyed said they see Nigeria as an attractive country for PE investment in Africa, followed by Kenya’s 40 per cent and Egypt’s 31 per cent.

Rafiq Raji, the chief economist at Macroafricaintel, while responding to the survey said Nigeria is an ideal destination for PE investors, due to its vast amount of untapped resources.

“Demographic is one of the reasons why Nigeria is viable for PE, alongside aspirational culture as there are untapped sectors like tourism and outsourcing/back-office services which is virtually a potentially lucrative opportunity,” Raji told BusinessDay.

South Africa came to the fourth most popular option amongst LPs; an improvement from 2017, when the country was the 8th most popular option amongst LPs.

“If you want to be a relevant player in the African market, you need to have a presence in Nigeria”, said Benoit Claveranne, CEO International & New markets for Axa Group.

Carlyle still reportedly invested $40 million into an online ticket travelling agency Wakanow.
In 2017, roughly 90 per cent of Africa-focused PE fund sizes were over $100 million, yet only about 15 per cent of African private companies reported revenue over that number.

Moreover, the typical PE time frame of a five-year holding period is often too short in African markets, where companies require more wholesale change, currency risk is a challenge, and exit opportunities are limited.

As global PE giants leave the region, Africa-focused firms continue to grow. DPI, for example, is in the process of raising a third fund with an $800 million target. DPI and competitors like ECP, Helios, Actis, and Ethos tend to focus on smaller deals, often between $70 million and $100 million.

Funds that successfully tap opportunities in some of the world’s fastest-growing markets tend to share the traits of Africa specialization, patient capital, and tolerance and capacity for smaller assets. The big U.S. players appear uninterested in adapting to these realities in the near term.

 

MICHEAL ANI

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