Outlook 2016: Finding good investments in Africa

Private equity capital is increasingly spreading out of investment hub South Africa, and GPs will continue to find attractive opportunities to invest in Sub-Saharan Africa – if they are willing to work hard, says StepStone’s Marleen Groen.

Private equity has had a slow year on the buy-side, and that story is no different in sub-Saharan Africa. In the first three quarters of 2015 just $741 million was invested in the region, compared to $1.67 billion for the same period in 2014, according to data from EMPEA.

Meanwhile fundraising continued apace, reaching $3.3 billion for the first three quarters of 2015, only marginally behind the $3.6 billion raised for the same period in 2014.

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.

Going into 2016, GPs will need to start putting that money to work, said Marleen Groen, senior advisor to StepStone and director at impact manager African Wildlife Capital.

“The capital overhang in Africa can only last for so long. The good GPs will find attractive opportunities and put the capital to work. They know they’ve got to make investments, they cannot sit on the capital and do nothing,” Groen said.

“The opportunities will be there, companies will continue to have requirements for capital, and even more so as they grow. But like everywhere else, making good investments in Africa is not necessarily going to be easy.”

In order to make the capital work for their investors, GPs will need to focus on buy-and-build and growth capital opportunities, something Groen said the local fund managers are better placed to do.

“The international groups have good funds, they’ve got good fund sizes, but it’s perhaps a bit more difficult to find the right opportunities and to have the patience required,” she said. “If you’re a $1 billion fund in a group that has typical flagship funds of $10 billion-plus, it’s quite a different story compared to being a $1 billion fund with a GP where that fund is the flagship fund.”

Groen foresees a marked push from many governments in the region to stamp out corrupt practices and to improve capital markets structures and regulations to encourage more private capital.

“Where most African private equity to date has been concentrated in South Africa, available capital is now spreading more across the continent, [and] I would expect this trend to strongly continue in 2016,” she said. “PE capital will be more evenly spread, and particularly countries that implement a better capital markets structure and better regulatory and tax environments will benefit from more private equity capital coming in.”

Groen anticipates investor interest in sub-Saharan Africa remaining strong through 2016, as concerns around issues such as political instability and terrorism have “evened out”.

“It hasn’t necessarily lessened, but we’re seeing it in Europe as well, so there is a more pragmatic view that there are opportunities there and that we shouldn’t stop investing in Africa because of the political environment,” she said.

“There are plenty of opportunities but you need to look a lot harder, and that’s what makes private equity in Africa definitely more difficult. But [it’s] not a whole lot more difficult than it was in Europe 20 years ago.”

As to the sectors in which investors are likely to find these opportunities, Groen sees the trend for focusing on the emerging consumer continuing to play a major role next year.

“The industries particularly interesting in Africa are financials, industrials, fast moving consumer goods, and as the population becomes more prosperous these areas are going to continue to be of interest,” Groen said. “An additional opportunity over time will be conservation investing — an essential area from an economic and an environmental perspective and a highly underinvested area to date.”