Private Equity’s Affected Africa Affirmation
In a paper titled “Embracing the Lion” the African Venture Capital Association and boutique firm Avanz highlight the post-BRIC frontier case, while acknowledging the lagging performance and depth of public equity markets for exit. The document cites low entry costs and penetration at less than 1 percent of regional GDP within the potential universe of 400,000 companies. Over the next five years African economic growth at 5.5 percent will be double the advanced world’s, and better political stability and commodity and infrastructure management should support the trend. 80 percent of the continent has enacted business reforms, according to the World Bank, and inflation, current account and external debt indicators have all improved markedly the past decade. Demographic patterns including urban and labor force growth will drive middle class creation as education and health strides also raise living standards. FDI was $55 billion in 2010 and over 150 dedicated funds with almost $35 billion in assets have closed since 2002, with the majority in the small $200 million range. In the past five years fundraising has been only 5 percent of the EM total with 2011 bringing in $1.3 billion, and pan-African vehicles such as from Kingdom Zephyr, Aureos and Emerging Capital Partners have dominated the landscape. Big global players like Carlyle have announced launches and new independent competitors also inaugurated 15 funds last year. Since 2005 managers have invested more than they raised, in contrast with unallocated cash in other regions. The study adds that local pension funds are boosting commitments to the asset class, with Nigeria and South Africa having respective pools of $15 billion and $250 billion. South Africa’s Venture Capital Association put the total at near $15 billion in 2010 at the portfolio cap of 5 percent which was subsequently doubled. Half of funds follow a generalist strategy while the remainder are single or multi-industry specific. Services, chiefly IT and telecoms, have been the most popular targets along with mining projects.
In South Africa the private equity rate of return the past decade at 23 percent has far outstripped the Johannesburg Exchange’s 14 percent. Development finance institutions, like the World Bank’s IFC, have been major fund investors and report similar results. 2011 exits came to $1.2 billion and ten mainly trade sales have been completed in 2012 through May. The “shallow talent pool” at the company and GP level remains an obstacle to exposure, but the return of the African diaspora to inject entrepreneurship and expertise is a positive signpost. Although public markets are weak “liquidity pockets” in Lagos and Nairobi can be identified as new profit realization outlets as maturity and investment-grade prospects foster a tamer climate, it concludes.
