This article appears as part of Private Equity International‘s December/January Emerging Markets special supplement.

For private equity investment to turn the corner in Africa, unlocking large-scale capital is paramount. The challenge? A continued shortage of investable and scalable opportunities.

Deals below $50 million made up the lion’s share of private equity transactions in the region in the first half of 2019, according to the African Private Equity and Venture Capital Association. Size remains the biggest constraint for big-ticket institutional investors trying to find a home in Africa.

As a result, private equity in the region is still mostly the domain of development finance institutions. However, AVCA has been working to mobilise and educate US pension funds and endowments, including Alameda County Employees’ Retirement Association and The University of Chicago Endowment, to invest more in African infrastructure, Enitan Obasanjo-Adeleye, director and head of research at AVCA, tells Private Equity International.

“There is an ongoing process of engagement with US LPs so they can gain comfort with the African private equity landscape, but some constraints remain for the dial to move significantly,” Obasanjo-Adeleye says. “Currently, only a small number of African private equity funds are of a sufficient size to meet the investment criteria of the pension funds, so this remains an obstacle to allocation from US institutions, as well as other global investors.”

Some US institutional investors have been exploring and venturing into Africa to make private equity and infrastructure investments, Obasanjo-Adeleye adds. These include Chicago Teachers’ Pension Fund, which committed $10 million apiece to two funds earlier this year: pan-African manager Development Partners International’s African Development Partners III and Sub-Saharan Africa-focused Advanced Finance & Investment Group’s AFIG Fund II. The $25 billion San Francisco City & County Employees’ Retirement System last year committed $100 million to Denham Capital Management’s International Power SCSp fund, which invests in power generation companies in Africa.

AVCA recently mapped pools of capital available for PE in Africa and found that 68 percent of the institutional LPs were not US-based. Moreover, 71 percent of these LPs were non-DFI investors – an indication of the breadth of the potential LP base that could be attracted into the African PE market, given the right conditions. For instance, in February this year, Danish pensions PKA, PensionDanmark, PFA, ATP, JØP/DIP and PenSam contributed DKr400 million ($60 million; €54 million) each to the DKr4.85 billion Danish SDG Investment Fund. Eighty percent of the fund is earmarked for renewable energy, water and sanitation, microfinance and agribusiness investments in Africa and Asia.

Wary on performance

Africa ranked fifth among the most attractive emerging markets for investment, according to the 2019 EMPEA Global Limited Partner Survey. Political risk, currency risk and the weak exit environment remain LPs’ top concerns. A high proportion of LP respondents also cited historical performance, the scale of opportunities and a lack of established fund managers as impediments to investing.

Performance is certainly a sticking point. The African Private Equity and Venture Capital performance benchmark shows a five-year average produced by 44 Africa funds between 1995 and 2014 of 2.25 percent, lagging behind the MSCI Emerging Markets Index’s 4.06 percent. Compared with Cambridge’s US PE and VC indices for the equivalent period – 14.05 percent and 13.14 percent, respectively – it’s no surprise that US institutional investors have struggled to allocate capital to the region.

Speaking to PEI earlier this year, Alison Klein, manager of private equity at Dutch development finance institution FMO, said returns in Africa were “lagging a little” compared with other regions where FMO invests.

“The biggest factor is the J-curve, which tends to be more pronounced in our African portfolio because we have a high proportion of new managers and because fundraising is taking longer,” Klein said.

“You have to consider that private equity is still relatively new in many African markets and so it can take a long time from a firm making initial contact with a potential investment opportunity to completing the deal and then exiting. This timeframe will shorten.”

Mixed fortunes

Investor caution, of course, affects fundraising. Capital raised exclusively for Africa as of the first half of 2019 was only about $690 million, the second-lowest half-year total since 2014, according to PEI data. In addition, the average time taken to reach final close for Africa’s private equity funds has risen from just eight months in 2016 and 2017 to 23 months last year and 29 months in the first half of 2019.

As well as the concerns picked up by EMPEA in its LP survey, the continent has been “disproportionately affected by what happened at Abraaj”, Clarisa De Franco, managing director of funds and capital partnerships at CDC, told PEI earlier this year.

“It’s taking 50 percent to 100 percent longer to reach first close, even for established managers, and that clearly reflects nervousness on the part of some investors following the collapse of Abraaj,” she said, adding that LPs are taking longer to commit.

“They are focusing much more on operational due diligence so that they can understand the systems and processes GPs have in place. That is adding to the time it takes to reach a decision, while the overall allocation to Africa has reduced significantly.”

Despite investor concerns, firms with local expertise, years of investing in the region and commitment to Africa’s growth are reaping the benefits. Edmond de Rothschild Private Equity, the private asset arm of the global banking group, raised its largest fund for Africa – the €375 million Amethis Fund II – in June this year. Meanwhile, Helios Investment Partners struck one of the largest initial public offerings in Africa this year, with the $1.45 billion listing of telecom tower infrastructure company Helios Tower.