Click here for a PDF of the presentation
With two-fifths of Africa’s GDP growth this year, the region is a powerhouse
Morocco and Egypt continue to dominate the private equity industry in North Africa, with 37 percent and 40 percent of private equity deal volume respectively, according to the African Private Equity and Venture Capital Association. No other region accounted for a greater share of African private equity activity by deal value and there is an increasing trend of regionalisation, as North African companies expand across national borders and increasingly into Francophone West Africa.
AVCA figures show the highest percentage of private equity activity in North Africa between 2013 and 2018 was focused on Industrials, at 23 percent. Consumer Discretionary (21 percent), Information Technology (15 percent), Healthcare (12 percent) and Consumer Staples (7 percent) were the other major areas of activity.
Real GDP growth reached 4.9 percentage points in 2018. Debt levels remain sustainable, and the fiscal deficit is expected to gradually shrink following fiscal consolidation, tax reform, the rationalisation of public expenditure, and improvements in the collection of tax revenues, says Enitan Obasanjo-Adeleye, head of research at AVCA. “Even though average GDP growth in North Africa is erratic because of Libya’s rapidly changing economic circumstances, of Africa’s projected 4 percent growth in 2019, North Africa is expected to account for 1.6 percentage points, or 40 percent,” adds Obasanjo-Adeleye.
Much of the growth for North African private equity is expected to come from companies expanding across borders, not just within North Africa but also into Francophone West Africa. As a traditional hub of private equity activity in the region, Egypt will be key to broader fortunes, and the nation’s own economic recovery is encouraging.
Real GDP growth in Egypt was 5.3 percentage points last year, which is the highest rate in a decade, while unemployment also fell to 10 percent. “Economic reforms and a new investment regime have improved the business environment, supporting foreign direct investment and improving the confidence of private equity players,” says Obasanjo-Adeleye.
Education, in particular, is a sector that could see growth. Within Egypt, EFG Hermes and GEMS Education’s joint platform acquired four schools in 2018.
Egypt is now the third most attractive country for private equity investment in Africa over the next three years, according to AVCA’s 2018 LP survey. The number of venture capital deals in the country has grown steadily over recent years, with the continuation of this trend pointing to Egypt becoming a new venture capital hub on the continent.
A number of nations – not just Nigeria – are poised for growth
Nigeria continues to be the standout jurisdiction in West Africa, with more than half the region’s deal volume and almost three-quarters of its deal value. West Africa was the region with the highest reported deal value total in 2017, but a quieter last year has seen the north, east and southern regions post higher totals in 2018.
The most active sector since 2013 has been Financials, accounting for 18 percent of activity, although Consumer Staples is right behind on 17 percent. The other dominant sectors are Real Estate (13 percent), Consumer Discretionary (12 percent) and Information Technology (9 percent).
“In West Africa, Nigeria remains a favourable destination for investors, attracting 54 percent of the total private equity deal volume and 73 percent of the total private equity deal value in the region between 2013 and 2018. Other West African countries showed resilience in the face of economic challenges, with Ghana, Senegal and Côte d’Ivoire expected to be among the strongest growth performers over the period 2017 to 2019,” says Obasanjo-Adeleye.
The World Bank has projected a 7.3 percent GDP growth rate for Ghana in 2019, with an increase in oil production expected. As Ghana continues to go great guns, the stable political environment in Senegal has seen GDP growth there of 6.6 percent, with growth in Côte d’Ivoire even higher at 7.5 percent. Nigeria continues to dominate the region, accounting for 54 percent of the total deal volume, with Ghana next on 22 percent.
“In West Africa, Côte d’Ivoire is an attractive market for private equity due to its fast economic growth and its position as a regional hub within the West African Economic & Monetary Union. The return of the African Development Bank, Africa’s leading lending institution and a major institutional investor in private equity funds, to Abidjan in 2014 signalled a pivotal point in the country’s post-conflict renaissance,” says Obasanjo-Adeleye. The EIB and firms such as AfricInvest, Amethis Finance, AFIG Funds and Emerging Capital Partners have also opened headquarters or regional offices in the country.
Activity in the region is holding steady
Ethiopia may be East Africa’s rising star, with Uganda also recording stable deal activity over the last three years and establishing itself as a promising investor destination – GDP growth reached 6.9 percentage points in 2018 from a low of 3.8 in 2017 – but East African activity is largely concentrated on Kenya, which EMPEA figures show accounted for 17 of the region’s 40 investments last year. The region’s overall figures were very similar to 2017, with the number and share of deals little changed.
The most active sector in East Africa over the last five years has been Consumer Staples, which has accounted for 22 percent of private equity investment. Consumer Discretionary comes next a full 10 percentage points lower, followed by Financials, Information Technology and Utilities.
Between 2013 and 2018, Uganda and Ethiopia each accounted for 11 percent by value, while Tanzania accounted for 9 percent. Kenya had 58 percent of East African deals by volume and 59 percent by value. While other markets are expected to grow, it will continue to be Kenya which dominates regional activity.
The African Development Bank expects East Africa to achieve 5.9 percent growth this year and 6.1 percent in 2020. It is one of the fastest-growing regions within Africa and is experiencing some of the most rapid economic growth in the world. “Between 2010 and 2018, growth averaged almost 6 percent, with Djibouti, Ethiopia, Rwanda and Tanzania recording above-average rates. Positive macroeconomic fundamentals associated with the region’s relatively strong economic growth, an emerging middle class and increasing levels of urbanisation, along with increasing harmonisation among the East African Community members have all contributed to a strong PE environment,” says Obasanjo-Adeleye.
Three deals closed in Ethiopia last year, after there had been none the year before. This jump has been attributed to the growing network of country-focused funds, which have dedicated funding to the growing Ethiopian market, notes Obasanjo-Adeleye. Cepheus Growth Capital Partners, a fund dedicated to exclusively investing in Ethiopia, has achieved a second close of its maiden fund at $100 million, while Zoscales Partners, another Ethiopia focused firm, has closed two deals in the manufacturing and consumer sectors in Ethiopia.
South Africa’s quiet year has affected the whole region
EMPEA figures show that South Africa accounted for 31 of Southern Africa’s 33 investments last year, and for $243 million of the region’s $246 million of disclosed capital invested. With regional activity so concentrated on South Africa, the nation’s low GDP growth (less than 1 percent) and high unemployment, as well as the depreciation of the South African rand, weighed on activity. The nation’s travails affected not just southern Africa, but the whole continent, with a slump in the number of exits in the country playing a key role in holding African exits back from surpassing the total recorded a year before.
The top five sectors over the last five years have been Industrials (15 percent of activity), Real Estate (13 percent), Consumer Discretionary (13 percent), Consumer Staples (12 percent) and Financials (12 percent) between 2013 and 2018.
While South Africa’s regional dominance – it accounted for 66 percent of deal volume and 70 percent of deal value from 2013 to 2018 – is not news, it is not a one-nation region. Zambia accounted for 12 percent in the region, while some relatively chunky deals in Mauritius saw that nation account for just 5 percent of volume but 13 percent of deal value.
“Even though the market beyond South Africa, covering countries such as Botswana, Zambia and Zimbabwe, is still very much in the early stages of its development, we see a rise in terms of private equity activity in Zambia and Mauritius,” says Obasanjo-Adeleye.
Zambia climbed from accounting for only 2 percent of regional activity in 2017 to 6 percent in 2018. While the weak recovery in copper prices weighed on economic growth last year, investment in the tourism industry was strong. Growth of 4.2 percent is expected this year, with 4.3 percent next year.