While it’s a little too early to talk of Africa Rising again, there are definite signs that the continent’s private equity industry is in a more confident frame of mind.

Take South Africa, the traditional powerhouse of the African private equity industry, with more than 40 percent of all the exits in the last decade.

When private equity executives gathered for the Southern Africa Venture Capital and Private Equity Association’s 2018 Conference in February, the mood was glum. “There was a lot of pessimism and negativity,” says SAVCA’s CEO Tanya van Lill.

Six months on, there’s a clear sense that South Africa is starting to put recent political and economic uncertainties behind it. “The business confidence indicators are starting to pick up,” says van Lill. “There’s a definite sense that the private equity industry is moving in the right direction.”

It’s a similar story elsewhere with GPs optimistic the continent is finally emerging from its recent setbacks. As they look to the future, what are the factors likely to set the direction of the African buyout industry over the coming years? Private Equity International sifted through the fundraising and deal data and talked to the major players to find out.

1 – MACROS STILL MATTERS

How important are macro factors to the growth of the private equity industry in Africa? Very. A survey published in November 2017 by the African Private Equity and Venture Capital Association found two-thirds of general partners consider political risk management when constructing their portfolios and 90 percent perceive currency risk as being either important or very important.

“Overall the private equity landscape is looking very different from four years ago when there was all this macro momentum, and everyone was caught up in the narrative of the expanding middle class and the idea that topline economic growth would continue for some time,” says Jeff Schlapinski, director of research at EMPEA.

The Africa Rising narrative came to an abrupt halt with the slowdown in commodity prices since 2015, currency devaluations in Egypt, Nigeria and South Africa – private equity’s three leading African markets – and political upheaval in key nations.

“There’s been a lot more stress the subsequent years. Fund managers have been put to the test across the continent to shore up their portfolio companies, build some kind of resiliency and really create value so they can bring companies along to exit,” says Schlapinski.

Unsurprisingly, perhaps, most GPs (60 percent) named currency and commodity price volatility in the AVCA survey as the macro factors that have had the largest impact on their portfolios over the past three years.

2 – FUNDRAISING HAS STALLED

Talk to any of the major players in Africa and it’s clear the fundraising environment has been one of the major casualties of the macro upheavals. The four Africa-focused private equity funds that closed in 2017 raised just $500 million, down from $1.95 billion in 2016 and $4.41 billion in 2015, when 14 funds closed.

Half of the funds failed to reach their targets in 2017 and the average fund size fell to $125 million from $315 million at the recent peak in 2015.

But there are grounds for optimism. One of the leading firms, Development Partners International, went back into market in May seeking $800 million for its third fund and industry sources expect at least one of the other big players to begin a new fundraise by the end of the year.

Meanwhile, North Africa specialist Mediterrania Capital Partners raced to a first close of $103 million on its third fund after just six months in November 2017, suggesting there remains an appetite for Africa.

3 – INTRA-AFRICAN TRADE IS SET TO GROW

One of the most exciting developments, according to Paul Boynton, the CEO of Old Mutual Alternative Investments, is the creation of a new free trade area. South Africa became the latest country to signal its intention to join the African Continental Free Trade Agreement.

“The opportunity for African countries to trade among themselves is enormous,” Boynton says. “Intra-African trade is about 15 percent compared to within Europe where cross-border trade is 40-odd percent.”

So far almost 50 countries have signed the initial framework and six have ratified the deal. The agreement takes effect once it has been ratified by at least 22 African nations.

4 – CHINA IS BECOMING A KEY PLAYER

One of the more intriguing developments in African private equity is the rise of Chinese investment in infrastructure projects. “Although Chinese investment in Africa is relatively small at about $40 billion in 2016 (around 2 percent of the continent’s gross domestic product), it has grown to 5 percent of total foreign direct investment in Africa in 2016 from just 0.2 percent in 2003,” Moody’s said in a recent report.

“If this growth persists at half of the current rates, China’s investment position would reach $100 billion by 2020, or around 4 percent of African GDP,” Moody’s estimated.

Seventy percent of Chinese investment between 2000 and 2015 was focused on infrastructure, which could help address the continent’s deficit in this area, especially in energy and transport, and boost economic growth.

However, Africa’s rising reliance on Chinese funds – the country’s banks accounted for 80 percent of loans received by African governments between 2010 and 2015 – leaves the continent exposed to political risks. “Future investment in Africa will be significantly affected by any policy changes in China,” the report’s authors warned.

5 – GROWING RECOGNITION OF GOOD GOVERNANCE

African investments have always had a focus on environmental, social and governance issues because of the crucial role played by development finance institutions in drawing up standards. The message seems to be getting through to the owners of businesses, says Johannesburg-based Natalie Kolbe, the head of private equity at Actis.

“One of the big developments over the last few years is a growing desire for good governance among businesses in Africa,” she says. “There is a growing recognition that strong governance is good for companies and industries. We used to have some difficult conversations with business owners and it used to be quite a struggle to find deals where we could align on governance issues; now, people really understand the importance of this and actively ask us how they can improve.”

6 – THE RISE OF SECONDARY BUYOUTS

Exit activity has remained resilient despite the challenging macro environment, thanks partly to the growing number of sales of portfolio companies to private equity and other financial buyers. Secondary buyouts are now the most common route with 37 percent of all exits in 2017, up from 16 percent in 2015 and just 8 percent in 2008. “We have seen a great increase in the number of large international funds buying assets from smaller PE firms through secondary transactions as generally these assets are of high quality and can be easily taken to the next level,” says Albert Alsina, CEO of Mediterrania Capital Partners, a North African specialist.

7 – DEAL TERMS ARE BECOMING MORE FAVOURABLE

One advantage of the challenging economic times is that it has made deal terms more attractive, says Peter Baird, head of private equity at Investec Asset Management. Investors who are still in the market are “able to negotiate more favourable terms”.

“I think it’s possible to find great businesses at lower valuations in African countries,” Baird adds.

Holger Rossbach, a senior investment director at Cambridge Associates, agrees: “Businesses have more imperfections and there is more untapped value in many of the underlying assets than in the US or Europe. There is more low-hanging fruit.”