The African private equity market’s unique attributes make it better suited to navigate the impact of the novel coronavirus crisis, industry participants based there told Private Equity International.
According to Runa Alam, co-founder and chief executive of pan-African firm Development Partners International, while the continent is often noted for its lack of sound healthcare systems and poverty, many companies there have characteristics that put them in a better position than companies in the West.
“It sometimes takes longer to import things into African countries, which means all our companies keep much more stock, not just-in-time,” Alam said. “Most of our companies have three months or more of inventory.”
There are constant worries about the next recession in Africa and industry participants there must plan continuously, Alam noted.
“What does that mean? There is significant cash in many of our companies which means that should there be a full shutdown, these companies can survive for many months.”
Companies in Africa also have relatively less or no debt and therefore worry less about breaching debt covenants, she added.
Richard Okello, founder of South African fund of funds Sango Capital, agreed that African GPs are less focused on covering credit/leverage exposure risk.
“If you are a GP in North America, you are probably making sure your companies have reliable bank lines, covering your fund credit lines with drawdowns and ensuring there is enough cashflow to repay debt and cover operating expenses,” he said.
Entry valuations for African companies, which are typically between 5x and 9x enterprise value/EBITDA, also compare well with North American or Asian valuations, which are around 10-15x enterprise value/EBITDA, Okello noted.
“The challenge for high valuations fuelled by cheap debt is that that 10-15x enterprise value/EBITDA has 5-8x debt/EBITDA exposure and often, much more significant equity/EBITDA exposure than you saw in the 2008 global financial crisis. When those company earnings collapse, the impairment on that equity will be significant,” he added.
Adjusted valuations will not be as extreme in Africa because entry multiples are lower and debt levels are modest to insignificant for most private equity-sponsored companies, Okello said.
For most PE firms in the continent, it also boils down to strategy, which is most often growth equity and emerging middle class-focused. According to Alam, many of DPI’s companies have been put in the “essential or emergency services” designation, meaning these companies are continuing their operation during the lockdown periods, including those in pharmaceuticals, food production and education.
The nature of African PE’s investor base – largely development finance institutions – also means it will be potentially shielded from the denominator effect, industry participants said.
Enitan Obasanjo-Adeleye, head of research at the African Private Equity and Venture Capital Association, said the continent’s DFI-heavy LP base does not have the same liquidity issues that some commercial LPs might be experiencing due to recent public markets movements.
“The DFIs are not in the same situation and LP defaults are also unlikely to happen mainly because of their mandates,” Obasanjo-Adeleye said.
Okello characterises this time as a calm capital call environment.
“At this point we haven’t seen any panic-based capital calls. GP capital calls are quite detailed and operate around a very robust governance regime in this region and we haven’t really seen anything in the last month that didn’t make sense to us or wasn’t tied to some underlying activity we expected,” he noted.
Johannesburg-based Sango makes both fund commitments and direct investments in Africa’s mid-market and has received commitments over the years from university endowments and foundations, pensions and family offices from US and Asia.
At a fund level, this also means that financial and technical support for investee companies may be more readily available than in more commercially funded PE geographies, Ann Wyman, a director at Tunisia-based investment firm AfricInvest, told PEI. The firm is working with several DFIs on creating a relief facility to assist companies in the face of the crisis and their role is proving “exceptionally important”, she added.
LPs are also stepping up their response to the crisis and are supporting ways to procure personal protective equipment for their portfolio companies and fund managers, said Obasanjo-Adeleye.
Pivoting to emerging opportunities
While Africa will be negatively affected through many economic channels as a result of the covid-19 crisis, there are a number of opportunities that may emerge.
At a sector level, AfricInvest’s Wyman said healthcare and education, particularly with respect to online services, will present opportunities over the coming year. She added that the firm is aware of opportunities for African companies to become more involved in international supply chains as more international companies seek to reduce their reliance on China and East Asia.
Others such as Swiss impact investment firm Vital Capital have acted quickly. Vital, which has been investing in Africa since 2011, set up an Impact Relief Facility, which will provide loans of about $1 million each to companies in Sub-Saharan Africa. Vital is seeding the vehicle with a $10 million commitment and expects to raise capital from third-party investors to target agro-industry and processing, healthcare, sustainable infrastructure and education companies.
Still, the continent faces headwinds. PEI’s latest LP survey found that appetite for Africa has decreased in the last year and only 16 percent of LPs said they plan to invest in North Africa and Sub-Saharan Africa this year, compared with around 30 percent in 2019.
Industry participants also noted that similar to other global private equity markets, dealmaking and fundraising timelines in Africa are being postponed. According to an AVCA survey from April, the fundraising environment (67 percent) and asset valuations and short-term macroeconomic risks (57 percent each) are three of the greatest challenges to African GPs in the near- to medium-term. Almost half of respondents said they would need additional six to 12 months to deploy all capital due to covid-19 disruptions.
Wyman noted that discussions with its portfolio companies have focused on safety and HR matters, cash forecasts and potential areas of impact such as supply chains, commodity prices, demand for goods and services, logistics, collection, inventory monitoring and financial markets.
“We have asked all our portfolio companies to cut on their [operational expenditure] and delay any [capital expenditure] until we have more visibility,” Wyman said.
“We have also encouraged companies to think about how and when they may restart after the crisis passes.”