Toppling the big two

The energy sector has been a relatively active area globally for private equity investors during the downturn, and Sub-Saharan Africa has seen its fair share of the action. The high water mark came in August last year, when a consortium led by emerging markets private equity firm Actis acquired energy engineering company Alstom South Africa for $700 million.

Since then, the financial crisis escalated and significantly slowed the pace of investment. But while the deals are smaller, investment activity in the energy sector – whether it relates to oil and gas companies, service providers or infrastructure products – goes on.

Examples of deals in the last six months include Kingdom Zephyr Africa Management's $20 million acquisition of South Africa's Buildworks, which builds electrical substations for the power industry, and Emerging Capital Partners' $30 million investment in Finagestion, a water and power supplier for C^te d'Ivoire and Senegal. Travant Capital, a West and Central Africa-focused newcomer to private equity, made the first investment from its debut fund in Dorman Long Engineering, an oil and gas services company in Nigeria, in November.

However, South Africa and Nigeria – the continent's largest economies and the obvious starting point for private equity investment – may be being usurped by smaller neighbours, such as Ghana, Uganda and Namibia, according to Jonathan Berman, managing director at South African energy-focused investor Fieldstone Africa.

“[South Africa] has been a frustrating market for investors in power,” he told delegates at the PEI Global Energy Forum 2009 in May, “not because of investment risk, not because of poor returns, not because of inability to pay or excessive corruption, but simply because investment opportunities haven't always been there. The public sector has resisted private investment.”

Africa's second-largest economy, Nigeria, is dominated by its natural resource reserves: petroleum and natural gas accounted for around 97 percent of the country's exports in 2007. Like South Africa it should be an obvious choice for private equity investment, but corporate governance issues are a continuing deterrent.

Bill Macauley, chairman and chief executive of energy-focused private equity firm First Reserve Corporation, said that even sizeable and established global energy investors, which by the nature of their chosen sector are used to navigating emerging markets, are reluctant to invest in Nigeria.

“We are not anxious to build 20-year assets in Nigeria,” he says. “On the other hand if we can put rigs offshore from Nigeria and can float them away, we are happy to do business in the country.” First Reserve is currently concentrating its efforts on other West African countries with large oil reserves, such as Angola.

Meanwhile the African Energy Infrastructure Fund, a joint venture currently being raised by Fieldstone Africa and Prescient, a South African investment management firm, has lined up its first deal: a conventional gas turbine power plant being developed in Ghana.

Once you find a country in which you can get deals done, the political risk is less acute than people perceive, says Berman. “When you can actually do deals and close them, the historic risk return in Africa – a young industry – has not been bad,” he says. “The only one private power station in Africa that has gone wrong was for purely good old-fashioned engineering reasons, not because of political risk.”

CDC Group, the UK government's vehicle for promoting economic growth in the developing world, recorded a 13 percent decline in the value of its portfolio in 2008, but it outperformed its nearest benchmark – the MSCI Emerging Markets Index – by 22 percent. In 2008, CDC's mandate was revised by its shareholders to make 75 percent of its investments in low-income countries, particularly in Sub-Saharan Africa and South Asia, as part of its mission to alleviate poverty.

Cobalt International Energy, a private equity-backed oil and gas exploration company, has signed a joint venture with Angola's national oil company Sonangol to open up interests in deep offshore Angola. Cobalt was launched in 2006 with a $500 million investment from Goldman Sachs Capital Partners and energy-focused private equity firms KERN Partners and Riverstone Holdings. First Reserve Corporation, another energy specialist, joined the consortium a year later.

Sub-Saharan Africa's largest buyout market still remains log-jammed, according to data provider Mergermarket. In the first quarter of 2009 some sizable M&A transactions were executed in South Africa with a total value of $2.8 billion: an increase on the figures for the same quarter in 2008. Of the 17 recorded deals, however, only three involved financial sponsors: Kingdom Zephyr's acquisition of South African company Buildworks, Investec Private Equity's acquisition of Protea Hospitality Corporation, and Development Partners International's acquisition of Q-Venture.