EMERGING MARKETS SPECIAL: SUB-SAHARAN AFRICA

For Sub-Saharan private equity, 2007 may well be remembered as the year the asset class came of age in the region. Nearly a fifth of emerging markets limited partners now invest opportunistically in Africa, a more than six times increase on last year when only 3 percent professed to doing so, according to industry body Emerging Markets Private Equity Association (EMPEA). Furthermore, only 27 percent of LPs said they had no interest in the region, compared with 58 percent in 2006.

Sub-Saharan Africa funds raised $1.6 billion (€1.1 billion) in the first six months of 2007, EMPEA says. The total includes pan-African buyout firm Emerging Capital Partners' $523 million latest fund and Helios Investment Partners' $300 million debut fund for investment in West Africa.

Since then, South African firm Pamodzi Investment Holdings raised a $1.3 billion resources-based fund in August – ensuring that African fundraising has now topped the $2.35 billion it raised last year.

Private equity in Africa is a far more robust proposition for LPs to consider than at any time in the past

Tom Gibian

Smaller regional GPs are growing in number, such as Nigeria's Travant Capital Partners, which is targeting a $300 million fund, and Venture Partners Botswana, a firm which has widened its focus from targeting solely Botswana to encompassing the entire region with a €150 million fundraising effort.

“Private equity in Africa is a far more robust proposition for LPs to consider than at any time in the past,” says Tom Gibian, chief executive of Emerging Capital Partners. Gibian's own firm is rapidly deploying the $523 million it raised, which was 80 percent invested in October, following a final close in May.

“Africa has reached a tipping point during the last seven years with 5 to 7 percent growth in some countries, accompanied by regulatory change,” says Gibian. He adds that the continent has also seen the end of civil wars in several important countries such as Angola during this time.

Rod Evison, Africa portfolio director at emerging market funds of funds manager CDC, says: “Sub-Saharan Africa is beginning to attract the attention of people who previously thought the best opportunity to make money was in the developed markets.” It will continue to benefit from this more open-minded thinking, he says.

Warmer sentiment about the region is reflected in the statistics. Sub-Saharan private equity investment has gone up from $445 million two years ago to $1.37 billion for the financial year ending June 2007, according to data sourced by EMPEA from the International Finance Corporation. There have been 31 recorded transactions in Sub-Saharan Africa, of which 12 have been in South Africa, since the start of 2006.

DIVERSIFICATION DRIVE
The continent continues to be dominated by the private equity hub of South Africa. Four of the five largest buyouts in Africa in 2007 (to the end of August) took place in the country, accounting for 85 percent of total volume, according to data provider Dealogic. The most recent example came in October, when Brait, one of teh country's leading sponsors, acquired Premier Foods, a baker, for $215 million. At the same time, it is worth noting that investors on the continent are laying the foundations for a more diversified approach.

Andre Roux, chief executive of South African GP Ethos Private Equity, says: “Private equity activity in the Sub-Sahara is dominated by South Africa, but with Nigeria increasingly becoming a powerful force. We are open to opportunities in other parts of Sub-Saharan Africa, and it is becoming a great reform story on the back of the Southern African union (SADC) which has been an extremely positive development due to economic and anticorruption benefits.”

Ethos is set to make its first investment in Nigeria and is considering investing in the East African states of Uganda, Kenya and Tanzania, which are working to create an East African union with a common currency and the removal of tariff barriers.

South African economic growth is a story of emerging market growth on the back of being a commodity exporter and there may well be a slowdown

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Diversification is also becoming apparent in terms of sectors targeted. While the telecoms industry has been historically the principal area of investment for Sub-Saharan private equity, the last year and a half has been dominated by transactions in the financial and insurance sectors, the source of one-third of deals during that period, according to EMPEA.

One of the key areas within financial services has been the Nigerian banking sector, where consolidation has reduced the number of banks from 90 to 25, and where growth capital investments have blossomed. Recent deals in the sector included a commitment of $161 million by AIG Investments and Emerging Capital Partners to Nigeria's Intercontinental Bank, and the Actisled $134 million investment into fellow Nigerian bank Diamond.

Traditionally strong African sectors such as mining and oil & gas have continued to do well. West Africa (Nigeria especially) has been buoyed by the strong oil price while South Africa has been a beneficiary of the commodity super-cycle caused by the demand for materials in India and China, Roux says. In addition, the continent is also likely to benefit from the growing biofuels sector due to its strong agricultural history, Evison says.

NOT SWITZERLAND
But for all the promise exhibited by certain industries, issues of political volatility continue to affect the African business world. Nigeria's president Yar'Adua was elected in April this year amid allegations of vote rigging. He took power after outgoing president and fellow party member Olusegun Obasanjo was prevented from running for a third term by the country's constitution.

Yet despite the controversies, Yar'Adua's election marked the first democratic transfer of power from one civilian leader to another in the country's history. Investors in the country feel this interpretation of the widely-criticised elections is more appropriate because, as Gibian wisecracks: “Africa isn't Switzerland”.

Roux adds: “The change in government was quite controversial as a lot of people did not think the elections were free and fair. Yet given the circumstances it was phenomenal the army did not step in.”

While Nigeria's strong macroeconomic growth continues to act as an antidote to worries about the political backdrop, in South Africa, by contrast, it is the economy causing some concern. While the country has seen a number of buyouts led by the likes of Bain Capital and Goldman Sachs as well as domestic players and emerging market specialists, Roux says there are issues in the market. “South African economic growth is a story of emerging market growth on the back of being a commodity exporter and there may well be a slowdown. Certain headwinds make us a little bit wary, such as inflation and the rising oil price.”

So while South Africa has indisputably established itself as the region's buyout hub, many emerging market firms are now paying attention to the more complex investment landscape in Nigeria. There are hopes that Nigeria's banking consolidation can kick-start the development of another regional hub, where leverage will be as available to investors as it is in South Africa.

Beyond these two countries, which have attracted widespread international attention, lie economies that have yet to see significant deal flow but are beginning to generate a little more interest – such as Kenya, for example. If the rapid growth of the region continues, more mainstream players may venture beyond their tentative steps into South Africa and Nigeria into some of the world's poorer but growing economies.

International investors clearly believe there is a greater possibility to make money in Sub-Sahara Africa than ever before, so the performance of the latest wave of funds will be watched with interest. The 2007 vintage may be looked on as the true pioneers of Sub-Saharan private equity.