The next wave of African PE

We often hear about the vast untapped PE opportunity in sub-Saharan Africa.

Proponents of the region will point to steady GDP growth which is outpacing many western markets, and economies that – due in no small part to advances in mobile banking – are developing burgeoning middle classes with cash to burn. Big-name private equity firms have been acquiring everything from music companies to coffee houses in recent years.

The compelling growth story attracted a glut of capital. Firms raised $2.7 billion and $2.4 billion for sub-Saharan Africa focused vehicles in 2014 and 2015 respectively. Among these were Abraaj’s $990 million Africa Fund III, a 2015-vintage, and Carlyle’s $698 million Sub-Saharan Africa Fund, a 2013-vintage.

Whether Africa has delivered on its dealflow promises is up for debate. PE deal values peaked in 2014 at $1.8 billion, but failed to exceed $1.2 billion in the following three years, according to EMPEA data. Spending fell to $800 million in 2017 – a seven-year low.

This discrepancy between dry powder and deal activity has pushed some GPs to rethink plans. In October, Carlyle expanded the investment remit for its sub-Saharan fund to North Africa. In November, KKR went as far as to disband its Africa team due to a lack of opportunities.

Fundraising has also dropped off, with PE firms collecting just $0.7 billion and $0.3 billion in 2016 and 2017 respectively.

An arguably more exciting opportunity for global private equity in sub-Saharan Africa lies in its relatively untapped institutional investors.

Partners Group is among those looking to take advantage. It moved into the region earlier this month with the launch of Helical Capital Partners, which will target $300 million from South African and sub-Saharan LPs for a vehicle that Partners Group will manage and invest alongside its own multi-strategy, multi-regional global value funds.

Africa has not traditionally been a hunting ground for fundraisers. A 2015 study from the Commonwealth, the Making Finance Work for Africa Partnership Secretariat and EMPEA – the most recent available – found African pensions had at least $35 billion available for allocation to private equity, of which just $5.7 billion had been invested.

A couple of recent developments have meant that the likes of Partners Group are paying closer attention.

In February, South African finance minister Malusi Gigaba raised the offshore investment allowance for institutional investors from 25 percent to 30 percent and doubled the allowance for investments into the rest of Africa to 10 percent. The country passed legislation in 2011 enabling its pension funds to invest up to 10 percent of their assets in private equity, up from the previous limit of 2.5 percent.

Ghana is also loosening the restrictions on private equity. In April 2017, the country’s National Pension Regulatory Authority allowed pension funds to allocate 15 percent to alternative assets, with up to 10 percent of total AUM in any one sub-asset class.

And yet the floodgates have been slow to open.

One obstacle so far has been that many pensions on the continent are simply not geared up to establish relationships with general partners. As one Ghanaian pension trustee put it, there is a “lack of capacity and expertise to do this kind of work”.

Perhaps the biggest challenge has been access to international private equity funds. Until now, the majority of Africa’s pensions have been unlikely to be able to stump up commitments large enough or have the necessary connections to catch the eye of blue-chip funds.

“We are looking at some of the pension funds in South Africa who may have $5 million or $10 million to invest but maybe not the $50 million that Partners Group will normally accept directly into their fund,” Helical co-chief executive Craig Beney tells PEI.

It seems highly likely that a number of African institutional investors are developing the means and the appetite to enter PE. If more blue-chips create a direct line to its funds like Partners Group, the trickle of outbound African LP capital might just become a pour.