The Emerging Markets Private Equity Association, in a new report, suggests that the “Africa Rising” narrative of a few years ago is behind us.
Africa is seen still as having enormous potential. But the report also says, “the commodity downturn of the last several years has had a severe impact on recent realized growth. Slower growth and currency volatility have forced many fund managers active in the region to adjust to a less forgiving environment.”
The lead contributor to this report is Isabelle Diop, EMPEA senior research analyst. Aside from EMPEA, Ms Diop has also worked at Amundi and UBS Wealth Management.
The Optimistic Narrative
The period 2014-15 was a peak for the optimistic Africa-rising narrative, with an unprecedented level of fundraising for the PE firms active in the area. That was the period when many of the public pension funds, insurers, and endowments of North America and western Europe entered into Africa-focused funds for the first time.
That was also the period when some global fund managers likewise entered Africa for the first time. The two largest disclosed PE investments of 2014 were: KKR’s acquisition of a cut-flower producer, Afriflora, for US$200 million; and the Carlyle Group’s investment in Nigeria’s Diamond Bank of $147 million as a PIPE. Both KKR and Carlyle were new entrants.
But after all that optimism, in 2016, growth in South Africa in particular came to a halt, and Nigeria entered a recession. Those are the two largest economies on the continent, and between them they have “historically accounted for the vast majority of private equity activity in the region,” the report says.
Egypt has “relatively robust recent growth figures,” but it has not been immune from the pressures working on South Africa and Nigeria.
Funds investing in private equity in Africa are typically denominated in US dollars. This means that they are vulnerable when the host countries depreciate their own currencies, hurting both realized and unrealized returns.
The Chastened Narrative
The depreciation is a hole into which the funds/firms fall–and out of which they have to grow–which can mean longer holding periods than expected.
Speaking of the period of optimism, not so long ago, David Cook, a partner at Actis (a pan-EM alternative assets manager) said: “New managers and LPs were drawn to the region, with some more experienced than others.”
Since then, Cook continues, the market has bifurcated. Some investors with deep experience in Africa are willing to take the long view and others, chastened by the last couple of years are looking for an exit strategy.
What investors need in order to get profit out of Africa are asset managers who have abandoned any “light touch” model, and who are willing to exercise vigilance “across all phases of the economic cycle,” with the benefit of deep industry-specific expertise.
Sectors and Themes
What industries? The report observes that successful Africa-oriented general partners generally have focused on sectors that have grown faster than overall GDP, and these have included health care and education, as well as consumer staples. Speaking of staples (and consumption): the report observes that in 2017, Africa-focused Helios Investment Partners partnered with a Spanish food company, GBFoods. They created a pan-Africa culinary products company. GBFoods needed a partner who already had an Africa presence, and Helios wanted the tie-in with a strategic investor from the developed world.
But the key isn’t just the sector, it’s the sectoral theme. Here, too, Cook of Actis has germane thoughts that EMPEA is happy to quote: “This is not a region with consistent flow of US $250 million deals, but if you’re looking for US$60 million to US$120 million investment opportunities, there are plenty if you understand and can think creatively around the sectoral themes that are emerging across the continent.”
One intriguing sector is payments process, and a theme might be: making the processing system work all along the chain: for governments; retailers; banks; and consumer finance institutions. Actis invested in an Egyptian company, Emerging Markets Payments (EMP) back when Egypt was in the throes of its “Arab spring.” This was, Cook says, what “most people would see as [a] very challenging macro [environment].” Still, it paid off handsomely, an internal rate of return of 27% when Actis sold its EMP stake to Network International in 2016.
The report concludes that “ambitious entrepreneurs motivated to improve their countries and creative GPs who do not bow in the face of adversity can together foster an even better landscape for private investment in years to come.”