African buyout firms have had a record year with $6.9 billion (€5.1 billion) invested year to date, up 53 percent on the $4.5 billion spent in the whole of last year, according to data provider Dealogic. Four of the five largest buyouts on the continent took place in South Africa and the three largest investments in the continent account for 85 percent of the total volume.
It should be noted the data does not include Colony Capital’s buyout of Tamoil for $4 billion, the largest private equity deal in Africa so far. Dealogic does not regard Colony as a private equity investor as it invests mainly in real estate. This omission may skew the study’s findings.
The buyout sector across the continent is dominated by South Africa. Much of the other significant activity on the continent has been carried out by MENA firms. The Abraaj Capital-led buyout of the Egyptian Fertilizers Company for $1.4 billion in June is the most dramatic example of the significant sums being targetted at North Africa from Dubai.
The lack of sophistication of the existing markets in the rest of Africa has inhibited growth in its buyout markets.
Ngalaah Chuphi, partner, Ethos Private Equity, says: “Investors in South Africa have all the financial products that US or European investors have although the market is not so deep.” Yet in the rest of Sub-Saharan Africa the capital markets are quite narrow and much less sophisticated, which makes it difficult to find leverage for a deal, he says.
Investors tend to circumvent this by investing in entities where they are able to access foreign currency out of earnings, such as export companies. Yet it remains the case that this significantly limits the availability of opportunities for the firms in these regions.
Chuphi says: “If you look at other African countries as a large buyout firm the most obvious sector is telecommunications which has a dollar related return. We then view financial services as a second wave of opportunity.”
The recent flow of deals carried out in the Nigerian banking sector indicate the willingness of buyout firms to expand their reach into the country.
Growth capital investors and buyout firms are mainly attracted by the country’s 140 million strong population but a future advantage may well be that such foreign interest in the country’s infrastructure will provide leverage for other buyouts. However, Chuphi warns domestic leverage will probably not be available in the country within the next year.
Other areas of success across the continent include investments such as mining and power with similar characteristics to infrastructure.
But in a continent of such extremes development agencies, such as the British government-backed CDC dominate the more impoverished countries. These agencies’ investments in areas such as agriculture and microfinance lay the ground for future growth in the continent’s wider buyout space, yet it remains the case many countries in the continent lack the necessary financial structures for buyout firms to blossom.
There are many positive noises being made by firms that have enjoyed success through bringing capitalism to the rest of Africa. For example, Emerging Capital Partners managed to close a $523 million fund for pan-African investment. Yet it remains the case there are huge hurdles for the rest of the continent to match the stellar success of South Africa.