Private equity is Africa’s best-kept investment secret

Africa is ripe for investment, a fact that is being acted upon by Abu Dhabi companies with increasing regularity. Etihad Airways just announced that it would expand its African presence with the launch of a daily service to Dar es Salaam, Tanzania. Earlier this month, Trojan General Contracting, part of the Royal Group owned by Sheikh Tahnoon bin Zayed Al Nahyan, is participating in a US$16 billion programme to build roads and railways across West Africa.

These companies are not alone in recognising the potential offered by the continent’s strong GDP growth and expanding middle class over the past decade. Africa is steadily attracting the attention of a broadening investor base. In 2007 sub-Saharan Africa accounted for approximately 3 per cent of total emerging market fundraising, but this figure doubled to 6 per cent by 2010.

Private equity is a long-standing component of Africa’s economic landscape. It is an asset class that can offer deals at low valuations and provides access to sectors that are less well represented on the continent’s often embryonic stock exchanges, such as fast-moving consumer goods and services.

Many investors are making good and consistent returns as a result. A 2014 study by the African Private Equity and Venture Capital Association and Ernst & Young, examining the results of private equity exits from 2007 to last year, found that private equity in Africa outperformed comparable listed equities indexes.

By way of example of the types of sectors available through private equity, our company invests in high-growth companies with excellent management that can take advantage of the rise in consumer spending and increasing trade and regional integration. Our recent investments in Atlas Bottling, Pepsi’s exclusive bottler of carbonated soft drinks in Algeria, and in Nairobi Java House, Kenya’s leading cafe and casual dining chain, are two examples of this.

Over our 14 years of operation, the African private equity industry has evolved and we are happy to see more interest from a broad range of investors, including local African players. There have been a number of developments, such as the introduction of regional funds, for instance in East Africa, or on a country level, as in Nigeria. Lifted restrictions on South African pension funds have also allowed up to 5 per cent of the country’s pension assets to be invested in the rest of Africa.

New African sovereign wealth funds that are focused on developing pan-African investment strategies, such as the Nigerian Sovereign Investment Authority, look at private equity as a means to achieve diversification and above-market returns. International investors are encouraged by this vote of confidence from local players.

However, as Africa enters the global private equity map, sophisticated investors are insisting on greater systemic standards for fund managers to mitigate risk and maximise returns. Many investors now have more stringent requirements relating to track records, institutionalised back offices and reporting than they did in previous years, making it harder for first-time managers to raise capital but allowing seasoned managers with track records to tap into larger investor pools.

In addition, investors are looking at multiple ways to gain access to this market and want to explore investment structures beyond the traditional 10-year blind pool fund. In recent months we have seen an increasing focus on co-investment among investors who are looking to tailor their portfolio, enhance performance and gain access to a new space with a trusted manager who has demonstrated a strong track record while employing international best practices.

Exposure to deal-making when co-investing alongside fund managers gives investors the opportunity to expand their internal capabilities, acquire valuable experience in direct investments and gain exposure to geographies and industries they may not have access to otherwise. It also allows investors to strengthen their fund-manager relationships and build up their internal knowledge of the deal process and execution, making them an attractive partner for the managers. And they become a valuable source of capital for the growth of the portfolio company.

In a rapidly evolving industry, the fundamentals of Africa present growth opportunities for private equity investors across a broad range of countries and sectors for decades to come.

Hurley Doddy and Vincent Le Guennou are co-chief executives of Emerging Capital Partners, a private equity firm with seven offices in Africa

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