Friday Letter: Big in Africa

The growing interest of the global firms in Africa represents an opportunity for incumbent GPs, not a threat

If further proof was needed that Africa is a hot topic for investors at the moment, this week's US-Africa summit in Washington DC provided it in spades.

During the summit, US companies pledged about $14 billion of investment into Africa. And one of the most eye-catching deals involved private equity: a partnership between the Blackstone Group (or to be more precise its portfolio company Black Rhino) and African conglomerate Dangote Industries to invest in energy infrastructure projects on the continent, which will be worth a cool $5 billion over the next five years.

The Carlyle Group also announced a (separate) “strategic investment partnership” with Dangote at this week’s summit; it hasn't specified the financial details, but it will involve Dangote doing deals jointly with Carlyle's specialist energy fund and its specialist sub-Saharan fund. Speaking on a panel at the event, co-CEO David Rubenstein was apparently very bullish indeed about Africa, reportedly claiming that: “the great explosion in private equity, if it is going to occur anywhere around the world in the next couple of years, is probably going to be in Africa, particularly sub-Saharan Africa.”

All of which raises an interesting question: is this increased interest in Africa from the industry’s largest players likely to be a blessing or a curse for private equity in the region?

The glass half-empty view is that this is a sign of frothiness; that this sudden influx of capital and attention could have a distorting effect. After all, history has shown that when a relatively small and nascent market receives a surfeit of capital in a short period of time, it doesn’t tend to end well for investors. Deals are still pretty hard to come by at the larger end of the spectrum; as the big firms look to put money to work, it’s possible that they could make life more difficult for the incumbent GPs by increasing competition and driving up prices – which, over time, could damage returns. And although performance seems to be heading in the right direction in Africa (judging by AVCA’s most recent numbers), some LPs still want to see a few more positive exit stories (i.e. a bit more proof of concept) before they commit.

But this seems an unduly pessimistic take, for two reasons. First, the fact that firms like Carlyle have been fundraising for the region should, if anything, be helpful to the GPs already active on the continent. For one thing, it will help to spread the word about the attractions of Africa to a broader base of LPs; the success Carlyle had (it closed on nearly $700 million, well ahead of its $500 million target) suggests that it was able to assuage any fears investors may have had about political risk, or currency volatility, or the availability of good management teams – or at least to convince them that the growth opportunity on offer in Africa outweighs such concerns. That should be helpful to any GP on the fundraising trail any time soon. And LPs clearly are warming to the idea: a study published by AVCA earlier this year suggested that 70 percent of LPs now think Africa is the most attractive emerging market on the planet.

Equally, the other reason to be optimistic is that the potential opportunity in Africa is just so enormous. With urbanisation accelerating and per capita income on the rise, there’s an ever-increasing need for infrastructure and property and services – all of which require substantial amounts of the kind of capital and expertise that private equity is well placed to provide. And – not surprisingly, given the logistical challenges of building a pan-African private equity business from scratch – there is not an abundance of managers in which to invest, which mitigates any concerns of over-supply. So for the time being, we’re firmly in the glass-half full camp.