Private equity stakes out Africa
Many private equity firms are adamant that Africa is the next hot spot for the industry as its burgeoning middle class continues to bloom, but the pension and endowment funds who invest in private equity funds are more cautious.
Over the past five years, private equity firms have invested nearly $12 billion in Africa and raised almost $10 billion, according to a study by Ernst & Young and the African Private Equity & Venture Capital Association (AVCA).
It is not hard to see what has attracted them to the continent. Over the last ten years, Africa’s economic output has increased threefold to $2 trillion and six African countries have been among the fastest-growing economies in the world.
But the private equity industry in Africa is still a budding one.
Africa from a private equity perspective is new. If you take out South Africa, the rest of the continent is still in its early phase,
Daniel Schoneveld, principal at private equity firm Hamilton Lane told a conference earlier this month. And because of the uncertainty and many risks involved, many pension funds are hesitant.
As Alona Ponomareva, principal portfolio manager for the World Bank Pension Plan, told the conference:
Africa is kind of the last frontier for us. I am gradually taking us in the direction of Africa.
But the allure of its young demographic profile and growing consumer class will continue to attract investors into sectors such as broadband and private housing. According to Hurley Doddy, co-ceo of Emerging Capital Partners:
The number of people who have access to broadband and pay television is still very, very small…we see this as an area that’s just bound to get bigger.
After hitting a six-year low of 14 in 2009, the number of private equity exits – sales or listings – totalled 22 in 2012, the highest number since before the crisis in 2007.
“A lot of multinationals are looking to stake a claim in Africa and very often private equity can be that staging post from family businesses professionalizing and exiting to multinational companies,” said Fash Sawyerr, director at Actis, a private equity firm.
But endowment and pension funds are not piling headlong into the African market.
“We don’t see a clear favourite in Africa…of course Africa is not one country and that’s where the challenge comes,” Ponomareva said.
Investors need to see the possibility of rich returns to compensate for the country, regional, currency and management risk, said Lindel Eakman, managing director of private markets at the University of Texas Investment Management Company. As Jennifer Choi, vice president of industry and external affairs at the Emerging Markets Private Equity Association told the conference:
You don’t get money by getting on a plane. That’s gone.
(Reporting by Julia Fioretti)