Too much dry powder in Africa, warns expert

GPs will soon be outpriced for blockbuster deals in Africa, but plenty of opportunity remains further down the market, predicts Africa valuations specialist Rory Ord.

Private equity managers hunting deals in Africa may find it difficult to deploy some $16 billion in dry powder, according to a valuation expert with a particular focus on Africa.

Rory Ord, the head of valuation services provider RisCura Fundamentals, told PEI there are questions about managers’ ability to invest that amount of capital at a time when competition for large-cap deals is strong, in effect boosting prices to uncomfortable valuations for buyout artists.

Dry powder allocated to the continent is only expected to accumulate. As of today, there are 67 Africa-focused funds seeking to raise a combined $15.86 billion, as previously reported by PEI.

Earlier this year, emerging markets investor The Abraaj Group corralled $1.37 billion for two Africa funds, one a Sub-Saharan Africa Fund that closed on $990 million (busting an original $800 million target), and the other a North Africa Fund II that closed on $375 million.

However, that capital may sit on the sidelines as managers observe wild swings in the global equity markets and a drop in commodity prices – which impacts regional economies that rely on exports like oil and coffee – Ord noted.

If so, it would mark a break from the current flurry of investment activity into Africa. In June TPG’s growth fund teamed up with Satya Capital to invest up to $1 billion in African companies in healthcare, info tech, consumer and financial services, among others. Helios acquired 12.37 percent of Africa Oil in May for $100 million, and earlier this month, following US President Obama’s trip to Africa, the Overseas Private Investment Corporation partnered with Atlas Mara for a $300 million lending project.

Ord reckons the industry will continue to raise roughly $4 billion per year for the continent, but said the figure “doesn’t amount to much.” He said M&A activity in Africa amounts to around $50 billion per year, and that private equity historically accounts for 10 to 25 percent, meaning the industry should be raising $5 billion to $12.5 billion to keep pace.

Ord leaves room for hope in his analysis. The headline measure for private equity, he said, is the 10-year IRR, which hovers around 20 percent in his group’s latest private equity performance report, meaning investors should be sold on the continent’s long-term prospects.

“I would hope these short-term changes and challenges don’t put those long-term investors off” he noted, adding that there are capital shortages in different parts of the African private equity market.

For example, there is an undersupply of capital in the lower and middle markets, as well as in the infrastructure and real estate spaces. Most of the capital raised is concentrated in the larger funds and there is a desperate need for funding infrastructure around the region.

Ord was optimistic that devaluing regional currencies would recover. The South African rand sunk to record lows against the US dollar last week.

A good way to mitigate these short-term cycles when investing in Africa is to diversify the portfolios across different countries and economies which are linked and unlinked to commodity fluctuations.

Regional markets have yet to realise the full impact of commodity price drops, he said. Indeed, up to this point, capital has been flowing into the continent “quite easily,” Ord noted.