A drop in the private equity ocean

The amount raised for private equity investment in Africa last year may have been an improvement on the previous year’s total, but for a continent with strong growth and countless metrics supporting the case for investment, Africa remains a depressingly small market for the industry.

Helios Investment Partners concluded fundraising for its second fund on $900 million earlier this week, and in so doing set a new benchmark for an Africa-focused private equity fund. Yet it took more than two years to raise this capital, and more importantly, the firm is one of only a handful of general partners able to deploy significant amounts of capital on the continent.

Consider this: private equity funds raised $1.5 billion to invest in Africa last year, according to EMPEA. Yes, that is more than what was raised the previous year, but it’s also a drop in the private equity ocean. It’s less than 1 percent of the amount raised for investment in North America and Europe. It’s a paltry $28 million for each of Africa’s 54 countries. It’s $1.50 for each of Africa’s one billion inhabitants.

At PEI’s third annual Africa Forum held in London this week, delegates thronged the halls, eager to discuss the increasing attractiveness of Africa as a target for investment. Many cited encouraging metrics – GDP growth, the rise in consumer spending, increasing urbanisation – and most agreed that Africa was undergoing a step-change in its economic development. It has abundant natural resources, a youthful population, and it’s also on Europe’s doorstep – just eight miles away, as keynote speaker Bob Geldof reminded the crowd.

But what will it take to translate the encouraging sentiment and into cold, hard commitments from investors, and significant investment from GPs?

One clear impediment is the herd mentality among limited partners, particularly as regards emerging markets. Many LPs hunt in packs and in places that are fashionable, like China is right now. It’s not hard to come up with troubling questions about China as a private equity market, but never mind that: it’s also not that hard to raise institutional capital for China. Nowhere near as hard as it is to mobilise any for Africa.  

So the task then is not just to make clear to individual investors that an investment in, for example, a business in Central Africa versus a comparable business in Asia may have a similar or even better risk-reward profile. Arguably the bigger task is to get the herd to raise its collective head and take notice of the opportunity as a whole.

One person trying to do just that is the aforementioned rock-and-roller-turned-businessman Bob Geldof. The Irishman was instrumental in mobilising an unprecedented wave of charitable giving back in 1985 with Live Aid – the two concerts raised more than £150 million for Africa. He has now turned to private equity, noting a shift was necessary in the way developed economies, and the West in particular, address Africa. “It’s trade, not aid, that pulls people out of poverty,” he stressed at the Forum.

Geldof today heads an Africa-focused private equity firm, 8 Miles (which is hoping to raise more than five times the amount garnered by Live Aid), and thus requiring the same institutional support that Helios managed to garner eventually. Take Africa seriously at last, was his message – and you will profit from it too.

Danny Truell, chief investment officer at the $26 billion Wellcome Trust endowment and a man widely considered a bellwether investor, told delegates his organisation planned to do just that. Wellcome intends to treble its exposure to Africa to $1.5 billion by 2016. “Africa has been a pretty happy experience for us,” he said, “and in the next 20 years the demographics will become more favourable”.

African private equity professionals must hope that Truell will indeed implement the plan – and then also tell the world about it. For it will take the bold moves of influential investors to cause other LPs to sit up and take notice. When they do, private equity – and also other asset classes – in Africa will grow quickly. But until then, the world’s last continent yet to be built will continue to be starved of capital.