There is no question that the funding gap in sub-Saharan Africa is wide. Unfortunately for the private equity industry, that does not necessarily equate to a glut of investable businesses waiting for private capital to come along.
As one delegate told us on the sidelines of this week’s Private Equity in Africa conference held in London, when it comes to Africa, “people confuse need with opportunity”.
UTIMCO chief investment officer Bruce Zimmerman told delegates that the endowment was seeking to increase its exposure to African private equity, and it’s by no means alone. According to EMPEA’s 2015 Global LP Survey, sub-Saharan Africa is the emerging market region where most survey respondents plan to begin or expand investing over the next two years – 11 percent and 25 percent respectively.
The fundraising figures are certainly bearing out this enthusiasm. According to PEI Research & Analytics, $2.88 billion was raised for the region in the first half of 2015, up from $2.7 billion in 2014, $2.16 billion in 2013 and $1.14 billion in 2012.
However, delegates at the conference agreed that it is becoming tougher and tougher to actually spend that capital. Fund managers deployed $2.1 billion into the region in 2014, according to EMPEA data, but just $600 million in the first half of 2015.
Aigboje Aig-Imoukhuede, the founder and chairman of Coronation Capital, a recently formed Mauritian-based private equity and advisory firm targeting financial services, digital technology, upstream oil and gas and real estate sectors primarily in Nigeria and Ghana, argues that the growth of Africa-focused private equity funds in the last 10 years has been aided by a latent stock of businesses that were ripe for private equity investment.
That stock has now gone and the deal pipeline is drying up. As capital continues to accumulate in sub-Saharan Africa-focused funds, the capital overhang will only grow, Aig-Imoukhuede said, unless private equity firms roll up their sleeves and start creating opportunities.
A key difficulty remains bridging the gap between entrepreneurs and private equity. Adiba Ighodaro, a partner at emerging markets-focused Actis, added that in Africa there’s no tradition of angel investing, making it difficult for businesses to grow to a size where they’re viable for private equity investment.
Therefore the issue is not that there’s too much capital focused on the sub-Saharan African private equity market, it’s that that capital is locked up in large funds that are unlikely to make an investment of $5 million, let alone less than $1 million. There are not enough funds at the small end of the scale.
The will is there to create such funds, but they’re a tough sell to international LPs that need to put substantial sums to work. A potential solution is for local pension fund money to plug the gap. According to a 2014 report by the Commonwealth, the Making Finance Work for Africa Partnership Secretariat (MFW4A) and EMPEA, African pension funds have $29 billion that could potentially be invested in private equity and would effectively double the size of the African private equity industry.
But there’s also an opportunity here for GPs already operating in the region to find more innovative ways of transacting. While discipline and adherence to a strategy is important to keep LPs comfortable, there is room for flexibility on the GPs’ part. Opportunities abound for business plan incubation, for longer-term investing and for building out platforms.
There’s no getting around the fact that this capital, now raised, needs to be spent.
One placement agent told PEI this year that in terms of pricing and debt multiples, it’s on a par, if not more, expensive than Europe and the US at the large end of the market as funds compete over the ever-dwindling pool of available assets. The only alternative to engaging in this feeding frenzy is for GPs to put in some hard graft driving their own opportunities and structuring creative deals. Otherwise the inevitable result is reduced returns, which private equity investing in sub-Saharan Africa can ill afford.