Growth prospects see private equity funds increase in EA

Private equity inflows into East Africa are expected to hit record highs this year as business confidence in the region increases and the continent attracts more Africa-focused fundraising activities.

Last year was more subdued due to global economic woes, but now more firms are in the market raising Africa-focused funds to capitalise on growth opportunities in the region, according to projections by business advisory companies Deloitte East Africa and Ernst & Young.

Rising business confidence, consumer demand and improving economic conditions in the region have whetted PE executives’ appetite for opportunities in the technology, mining and financial services sectors.

Increased interest in the East African market marks a huge shift in private equity attitudes toward Africa, which have historically focused more on South Africa.

Analysts said increased PE inflows could help push huge infrastructure projects in the region as well as provide funds for firms across all sectors. New East Africa-focused funds are increasingly targeting high-growth SMEs in consumer-driven sectors.

READ: EA a major market for private equity

Data by Ernst & Young shows that Africa-focused PE funds raised only $1.1 billion in 2012, less than half of what was raised in 2011.

EAC countries were some of the biggest beneficiaries of these funds. “Despite a difficult 2012, the long-term outlook for fund-raising for the region remains strong. Although funds are taking longer to raise across the globe, there are a significant number of funds that are likely to close in 2013,” said Ernst & Young.

Private equity funds investing up to $20 million will likely hunt for deals in the fast growing financial services sector. Other sectors of interest include fast moving consumer goods, manufacturing including agro-processing, and to a lesser extent technology, media and telecoms.

“The bigger players will be looking at large scale mixed use real estate development, whereas players from outside the region have shown an interest in infrastructure related investments, though I expect such investments will take another few years to come to the market,” said Alexander van Schie, the director of corporate finance services at Deloitte East Africa.

Funds are changing from general to sector-specific to capitalise on opportunities in sectors benefiting from consumer growth as well as much-needed infrastructure investment.

Private equity firms are also increasingly diversifying their geographical focus outside the more advanced economy of South Africa to countries like Nigeria, Ghana, Kenya and Ethiopia.

“The large number of SMEs needing growth funding, coupled with strong economic fundamentals and a lack of alternative funding sources, should continue to drive the growth of private equity investment across Africa closer toward the levels seen in other emerging markets,” said Ernst & Young.

While investment sizes in the region remain limited, several large deals have been closed and investors expect deal size to creep up over time.

Key highlights of private equity activity in the region in 2012 included closure of fundraising by Catalyst Principal Partners of $125 million; merger of EAC-focused fund InReturn with Jacana Capital of UK to create a new fund of $75 million to spend in East and West Africa and the entry of new players like Progression, Incofin and Ascent Capital.

The Pan African Housing Fund — a private equity fund for housing projects in eastern and southern Africa — closed at $41.5 million in December 2012.

The money was largely raised from a pool of African and European development financial institutions, and fund raising will continue this year with a target of $100 million.

The Fund will provide risk capital to developers building middle and lower-middle income residential housing in Kenya, Zambia, Tanzania, Uganda, Mozambique and Rwanda.

EAC member states are to benefit from a $500 million real estate fund to be launched at the end of this month by South African financial services company Sanlam.

“We are in the process of establishing a sub-Saharan Africa real estate fund, which will cater to commercial real estate investments in select sub-Saharan countries that leverage off the Sanlam Group footprint,” said Sanlam Investments CEO Johan van der Merwe.

Analysts believe financial services will remain a key focus for private equity because government reforms in the financial services sector, coupled with the growth of the middle class, have increased the attractiveness of the sector.

Attracted by the significant investment potential of this sector, private equity firms have committed nearly $2 billion to 57 deals in the financial services sector between 2008 and 2012, the largest amount of any sector.

The Central Bank of Kenya for instance has in the past year licensed five representative offices for international banks seeking to use Kenya as their regional base.

Future growth

According to Ernst & Young, a large proportion of Africa’s future growth is expected to come from its consumers. Total consumer spending in Africa is estimated to increase from $860 billion in 2008 to $1.4 trillion by 2020.

Growing urbanisation, an increasing formal labour force and declining dependency ratios are contributing to demographic shifts, which are helping African countries continue to grow against a backdrop of low global economic growth. Demographic changes are also helping to transform Africa from a commodities-led growth story to a consumer-led one.

Deloitte East Africa expects that private equity fund managers in Africa will predominantly be active in investing funds, especially the ones that have recently closed, while some of the more mature funds will focus on stabilising and growing their portfolio companies.

Deloitte is currently carrying out the second annual survey among fund managers to get information on the private equity activity, especially about the East African market.

In last year’s survey by Deloitte on East Africa’s private equity scene, nearly 80 per cent of fund managers interviewed said they expected private equity activity to increase in the region.