Key trends in African private equity

Covid complicates fundraising, but commitments continue

Private equity fundraising ticked up again in Africa in 2019, rising to $3.8 billion from the $2.7 billion recorded in 2018, according to the African Private Equity and Venture Capital Association. The upward trend is indicative of private equity’s renewed growth on the continent, after fundraising dipped from $4.5 billion in 2015 to $2.4 billion in 2017.

Yet 2020 has, of course, brought with it a global health crisis, causing significant disruption to daily life as well as economic implications of a breadth and nature not previously witnessed. In a covid-19-focused survey published in April by AVCA, 49 percent of GP respondents said they expected the covid-19 crisis to affect their fundraising timeline and 29 percent expected it to impact their fundraising target. As Adesuwa Okunbo Rhodes, managing partner at Nigeria’s Aruwa Capital Management, notes: “Our fundraising timelines have realistically been extended for another six to 12 months.”

In addition to the macroeconomic headwinds triggered by the pandemic, lockdowns and travel restrictions are presenting practical obstacles for GPs raising capital.

“The fundraising environment in the coming months will continue to be challenging, as LP commitments are expected to contract in response to covid,” says Sabrina Katz, manager of research at EMPEA.

“Many development finance institutions and other LPs are working to develop more sophisticated remote due diligence procedures, but travel restrictions and short-term liquidity concerns will be a hindrance to fundraising efforts in the short term.”

However, longer-term fundamentals continue to attract investors to the region and capital raising continues, particularly where existing GP-LP relationships are in place. In July, CDC Group and Finnfund announced a combined commitment of $70 million to AfricInvest Fund IV to anchor the fund’s first close at $202 million. The same month, CDC also committed $100 million to Helios Investment Partners’ fourth fund.

Capital deployment is redirected towards recovery

The crisis is also affecting deal-making on the continent, with 49 percent of GPs in AVCA’s covid-19 survey reporting that they are considering delaying or cancelling planned investments. Fifty-seven percent of respondents cite asset valuations as one of the greatest challenges resulting from covid-19 over the near-to-medium term.

Interestingly, however, only 12 percent of GPs surveyed view limited investable opportunities as a challenge. Indeed, the crisis also presents opportunities. “Firms that have dry powder to put to work in the covid era will benefit from depressed valuations in markets where deal competition is already low relative to other emerging market regions,” says Katz. “Moreover, several firms will find opportunities to help businesses emerge from the economic effects of covid lockdowns.”

In addition to industry efforts to support existing portfolio companies through the pandemic, some managers have unveiled initiatives to invest in new assets in need of capital as they navigate the crisis. In South Africa, which has been particularly badly hit by coronavirus among African nations, Ninety One has launched the Ninety One SA Recovery Fund in association with Ethos Private Equity.

Some sectors also remain attractive investment opportunities due to the key role they are playing throughout the crisis, such as healthcare and technology. “We are prioritising deals in our pipeline in essential sectors that are thriving in this new normal,” says Okunbo Rhodes.

Like elsewhere in the world, lockdown measures are accelerating the adoption of technology across a number of verticals, and businesses that can accommodate the demand for online services are among those benefiting from the change in consumer behaviour.

Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association, says: “We have seen an increase in digital innovation, for example health tech businesses are automating aspects of medical care in response to the pandemic. We anticipate digital innovation to continue to be a growing trend as companies try to mitigate the risks involved with providing products and services to customers during strict lockdown measures, while still trying to optimise their business operations.”

Of course, accelerating tech trends in Africa are not solely borne out of the pandemic, they have just been hastened further. In AVCA’s latest industry survey, 43 percent of GPs listed technology as an attractive sector for investment in Africa over the next three years.

“The necessity of tech-centred innovation across Africa will only grow in the coming decades,” says Alexia Alexandropoulou, research manager at AVCA. “Technological solutions have a substantial impact on the development and growth of other industries, such as education or agribusiness.”

Dealmaking diversifies outside of traditional PE hubs

Covid-19 aside, deal volumes have been steadily rising on the continent in recent years, clocking in at a total of 1,046 reported PE deals over 2014-19, according to AVCA data. The agreement to establish the African Continental Free Trade Area, which was ratified last year with the aim of facilitating intra-African trade, is expected to further boost investment activity. As Alexandropoulou explains: “[The agreement] will have the twin effects of positioning Africa as a viable investment market, as well as fuelling investor interest and confidence in the continent.”

Investment activity is also becoming more diversified outside of Africa’s traditional private capital strongholds. “Private capital deal activity continues to be the highest in the continent’s largest economies – namely, South Africa, Nigeria and Egypt. However, Africa-focused fund managers have also found opportunities in some less-active markets,” says Katz.

She points to Meridiam’s investment in Mauritania’s Nouakchott Port through its Infrastructure Africa Fund in 2019 as an example; this is the first private capital deal EMPEA has recorded in the country since 2011.

“Several firms will find opportunities to help businesses emerge from the economic effects of covid lockdowns”
Sabrina Katz
EMPEA

And while South Africa remains Southern Africa’s biggest private equity market by some stretch, accounting for 65 percent of Southern African PE deal volume and 58 percent of deal value in the region over 2014-19, according to AVCA, Alexandropoulou says other countries in the region are increasingly appealing to investors, such as Namibia and Mozambique.

The growth of venture capital is also reshaping investment trends on the continent. While larger economies, such as Egypt, South Africa and Nigeria, are drawing VC capital, startup-friendly regulatory frameworks are also attracting VC investment elsewhere on the continent.

“In Francophone Africa, Tunisia and Senegal have both passed Startup Acts to create a better local environment for innovation and entrepreneurship, and startup legislation is also being pursued in Mali, Ghana, and Rwanda,” says Alexandropoulou.

Exit expectations present a mixed picture

The challenges around valuations at a time of economic uncertainty and the constraints around on-site visits and due diligence while measures are in place to slow the spread of covid-19, mean the pandemic has had a knock-on effect on exits, as well as fundraising and deal-making activity. More than half (53 percent) of the GPs responding to AVCA’s covid-19 survey identify exit opportunities as one of the most significant challenges over the near-to-medium term.

Even before the crisis hit, 76 percent of LP respondents in AVCA’s latest industry survey viewed limited exit opportunities as a key challenge for GPs in Africa over the next three years, up from 65 percent in the 2018 survey and 58 percent in the 2017 survey. AVCA recorded 43 exits last year, compared with 45 in 2018.

Yet not all take such a pessimistic view. “A good company does not lack exit opportunities,” says Vincent Le Guennou, co-CEO of Emerging Capital Partners. “Finding interesting backers is not that difficult, especially when the company is of a ‘reasonable’ size.”

Indeed, in the same AVCA industry survey, 85 percent of LPs said they expected exits to trade buyers as well as exits to private equity and other financial buyers to increase over the next three to five years. Meanwhile, recent transactions have highlighted the region’s exit potential.

“In the largest exit of an African company on record at EMPEA, American Tower Corporation acquired Eaton Towers, an operator of telecoms assets in five African markets, at an enterprise value of $1.85 billion,” says Katz. “This deal facilitated exits for DPI, Capital Group, Ethos and Affirma Capital, and these PE investors supported the company through acquisitions and entrance into new markets during the holding period.”

She states that by expanding businesses through cross-border M&A and inorganic growth, managers can create assets that are both more resilient to country-level shocks and also more attractive to strategic buyers.