Although African private equity has attracted more and more attention in recent years from fund managers – drawn by its strong demographics and burgeoning middle-class – some institutional investors remain distinctly unconvinced.
So a new performance index produced by Cambridge Associates and the African Venture Capital Association (AVCA) – which aggregates returns from 40 institutional-quality African-focused funds raised between 1995 and 2012 – is a useful addition to the debate. “Without systematic coverage of a broad group of funds – both ‘winners’ and ‘losers’ – it can be hard for limited partners to see whether Africa is a valid investment story,” explains Eric Johnson, a managing director at Cambridge Associates.
For the 10 years ending 30 September 2012, the index yielded an 11.2 percent annualised return – on par with the broader Cambridge Associates emerging market benchmark, and better than (for example) the US venture capital benchmark. For earlier 10-year periods, African private equity actually outperformed the emerging market benchmark, with the more mature vintage years also beating stocks – on a Public Market Equivalent basis – in most economic regions.
These findings tie in with another study published by Ernst & Young and AVCA in March, which looked at return information for the 118 exits that were recorded by African funds between 2007 and 2012. The analysis revealed that the average performance of 62 of these realisations – all those for which information was available – was almost double that of the Johannesburg Stock Exchange over the same period.
“Investors still have a lot of misperceptions about private equity in Africa,” explains Michelle Kathryn Essomé, chief executive of AVCA. For instance: the idea that good acquisition targets are rare and expensive; the notion that successful exits remain hard to achieve; and more generally, that there is no systematic proof that the concept really works.
Johnson thinks benchmarks like this will help a number of new LPs, including institutional investors, to take a more serious look at Africa. “Not only are they now able to have a much better sense of how private equity investments in Africa have done, they can also make more intelligent comparisons of the managers they’re looking at.”
They will note, for example, that the vintages 1996 to 1998 have returned a net 2.14x in cash to investors; and that funds dated 2002 to 2004, already paid back to investors, still have a residual 0.62x value in their books.
There are some caveats to remember here, as Johnson admits. Many institutional investors remain wary of investing into first-time funds; they also have big equity cheques to write, and are reluctant to represent more than 10 percent of a fund’s capital base. Given that the bulk of African firms are still relatively young and small, that will necessarily limit the number of managers able to benefit.
Nonetheless, he insists that the benchmark is a crucial first step. “We did the same exercise with emerging market statistics around 2003. At that point returns were in the mid single digits – so not meeting investors’ expectations. But even that provided a baseline: at least investors were able to see that returns were not minus 20.”
Africa-focused GPs will hope that with additional LP backing, they can mirror the sort of performance improvements seen in some of these markets since.