Africa From tugboat to engine

Africa is on the march. GDP per capita on the continent has grown at an impressive 4 percent in real terms per year since 2008, and economists expect this to increase to 5 percent per annum through 2018. But sustaining this growth trajectory will require huge amounts of new capital. We estimate that African businesses will require over $75 billion a year and infrastructure over $150 billion a year to grow robustly through 2020. 

Institutional money, both domestic and international, can play an important role – while also providing attractive returns to investors. But in the absence of accessible, well-functioning and innovative capital markets, ‘private’ investment could be the best approach for most of the continent. 

Private institutional investing – typically through private equity and infrastructure funding – offers potentially a large pool of investable capital. Our research with leading local and international investors shows that as much as $50 billion could be allocated to African private equity over the next 10 years; direct investments in infrastructure could double that figure again.This pool would come from a diverse set of institutional investors, although the size of the pool still lags those of other emerging markets. 

Unlocking private equity’s potential  

Outside South Africa, the private equity market in Africa is still in the early stages of development. While India and Africa have similar-sized economies and populations, for example, India’s private equity activity is five times that of Africa. 

We mapped the growth potential of private equity across the African continent. We examined 14 different factors – including attitudes towards the asset class, prior existence of a private equity ecosystem, the legal/ tax and regulatory environments, and accessibility to competing sources of financing. We then analysed them in the context of historic private equity activity across more than 75 markets (including most African markets) to understand what helps or hinders PE market development.  

Based on this analysis, we believe there will likely be a step change in private equity in African markets where most of these conditions are in place:

‘Pull’ from past private equity success
One driving factor of private equity activity is often a preference for it. A few established funds associated with successful and high-profile exits can change owners’ attitudes in a region – an effect that can be amplified when sophisticated African talent returns to the market from other parts of the world. 

‘Push’ from evolving ownership structures
The generational handover of family-owned businesses and privatisations in a context of growth increases pressure for outside financing.  

Proactive government/ regulatory stance
An improved investment climate for private equity (e.g. reduced capital controls, a lower tax burden for investors and more business-friendly legislation), the formation of formal ‘public-private-partnership’ frameworks, and the potential for local asset managers to participate in the market all help. 

Weak alternative financing
Private equity’s prospects improve where alternative sources of financing, mainly credit or public investment (for infrastructure), are inaccessible or relatively high cost. 

Inflection points in growth
Countries with booming sectors (more than 10 percent real growth per annum) often experience disproportionately high financing needs.  

 

To find out where these conditions exist, we interviewed 70 leaders in the private equity market, including top GPs, institutional investors, bankers and industry experts. This assessment helped us identify patterns of change in 22 African economies.