Africa’s Private Equity Road Ruts

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By: admin

The EMPEA trade association offered a 5-year retrospective on Africa private equity investing in a paper to chart the “road ahead,” and cautioned that traditional fixed-life funds may hamper business improvement and exit. Record fundraising was $6 billion in 2014-15, with US and European pension and endowment pools joining development lenders for the first time. In the aftermath commodity-induced economic slowdown and currency volatility have dented enthusiasm and returns, especially in the leading spots Nigeria and South Africa which had recessions. Even though consumer focus has often avoided the fallout, exchange rate effects battered portfolios, as companies are forced to grow out of depreciation over longer holding periods. From 2015-17 deal flow was only $1 billion annually despite big fund closings by KKR, Carlyle Group and Helios, and rising valuations may have contributed, with earnings multiples at 7.5 times according to one estimate. $100 million-range transactions were considered then shunned on narrow exit prospects, as frustrated investors expected GPs to allocate more industry and risk expertise. Regional strategies are increasingly standard either through organic or partnership arrangements in a so-called “platform model.” By sector technology is the future priority from finance to e-commerce, with East Africa the prime target, as small-firm orientation favored by aid sponsors has lost luster. With scarce capital markets and strategic buyers, fund managers have turned to secondary sales as an outlet. A 10-year life under limited terms may no longer be suitable, and “ever greening” and flexibility will likely be the success formula over the coming decade.  Liquidity provision is an overriding concern, and investments in local securities market deepening will facilitate outcomes at both ends, the organization believes.

Sovereign debt ructions have also affected the asset class, with index spreads widening in particular for frontier market components this year. South Africa was in recession Q1 with mining and agriculture setbacks, as the weaker rand hurt consumption. GDP growth may only be 1% again, as the central bank aims to keep the benchmark rate steady. The fiscal deficit plan is 3.5% of GDP with major union negotiations and state enterprise reforms pending, and new President Ramaphosa due to consider constitutional changes for land redistribution. Sub-Saharan external debt is up 10% from 2015, and budget consolidation is under scrutiny as current account gaps swell at the same time for energy importers. Nigeria’s growth should be 3% heading into 2019 elections, as the PMI manufacturing gauge was almost 60 in May. Reserves are over $45 billion and the central bank has eased the foreign exchange crunch under tight monetary policy with a 14% policy rate. Ghana’s expansion is forecast at 6-7% on good commodity and oil export performance, and a primary surplus has set a path for public debt reduction to 60% of output under the IMF program. Inflation may settle in single digits, and foreign investors have retained exposure to local debt despite currency volatility bouts and an estimated 5% balance of payments hole. Kenya too has twin deficits, and President Kenyatta in his second term has maintained bank lending and deposit rate controls, which may soon be reinforced by new rules on customer fairness to choke private sector credit landing in the ditch after the poll results.

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