Missing the boat on Sub-Saharan returns

Investors are likely to benefit from an impending upswing, according to the chairman of Angola’s $5.1bn sovereign wealth fund.

Private equity firms wanting to deploy capital in Sub-Saharan Africa may need to act fast to maximise returns ahead of an expected market upswing.

The World Bank estimates Sub-Saharan GDP growth to have risen to 2.4 percent this year, up from 1.3 percent the previous year. Growth is expected to reach 3.2 percent in 2018 and 3.5 percent in 2019 as commodity prices stabilise and domestic demand continues to increase.

While those holding Sub-Saharan assets must be licking their lips in anticipation, others may be ruing what could be seen as a missed opportunity to take advantage of subdued valuations. Fundo Soberano de Angola, the southern African country’s $5.1 billion wealth fund, intends to have invested $3 billion by 2020 in a bid to take advantage of these macroeconomic tailwinds.

It had deployed $459 million in the asset class by the end of June.

“In the case of Angola, we’ve looked at these last five years as years when the private sector should have invested,” José Filomeno dos Santos, chairman of FSDA, told Private Equity International. “Or at least should have focused on positioning itself in specific industries … to be poised for better prospects in the future.”

In September, FSDA announced it had turned a profit for the first time since it was established in 2012, returning $44 million in net gains for 2016. The fund’s gains were boosted in part by its infrastructure and agriculture-focused private equity funds, which returned $180 million and $110 million gross respectively.

Agriculture has already contributed to an expected 11 percent GDP growth in Ethiopia, Sub-Saharan Africa’s second-most populous country. Commodities-based economies, such as Nigeria, Sierra Leone and Uganda, may also see a gradual return to form as prices recover from a sharp decline in recent years, dos Santos noted.

“We understand that the recovery period of the commodity or of the extractive commodity-based economies is coming about and assets will obviously grow in value,” he said. “And those which have managed to get those assets at lower prices will obviously benefit from that.”

Early Sub-Saharan investors may already be benefitting from these improved prospects. South African realisations reflected a 2x money multiple in 2016, up from the 1.4x reported in 2015, according to data from the Southern African Venture Capital and Private Equity Association.

There is already plenty of dry powder in the continent to take advantage of this emerging growth. Funds held ZAR 58.2 billion ($4.2 billion; €3.6 billion) of undrawn commitments in 2016, of which 24.6 billion rand was exclusively for South Africa, SAVCA noted.

With this potential for competition in mind, firms lacking exposure to Sub-Saharan Africa or with high levels of undeployed capital may face a race against the clock to secure targets at attractive valuations.

“It continues to be a good time [to invest] but we believe that this time is going to run out fairly soon – over the next two to three years,” dos Santos added. “And then assets will start to increase in price, economies will start to recover and obviously people will be able to earn more from the assets that they get during times like now.”