Africa Remains Ripe For Private Equity

For investors open to new approaches, continental Africa remains one of the most attractive investment strategies.

According to a new report by Boston Consulting Group (BCG), the continent is “ripe” with opportunity for private equity, with real potential of much higher returns than investors would typically expect. The report, Why Africa Remains Ripe For Private Equity, was authored by three Directors at BCG and points to consistent growth opportunities for private equity investors, despite the challenges Africa still faces today.

Alternative investing, flexibility and new types of corporate targets should be sought, says BCG. It is through implementing these and other specific strategies the firm states higher returns can be achieved–despite several economies in Africa dealing with acute economic situations.

An Attractive Continent

Africa, when viewed as an investment, remains one of the world’s growth opportunities for private equity investors, despite the market having surged dramatically over the past decade. With political and economic situations varying by country, BCG points to the more than 200 private equity funds that exist in Africa. Among these, growth in assets under management has spiked–from some $1 billion to upwards of $30 billion since the 1990’s. This rapid growth, however, combined with the recent downturn in some of Africa’s largest economies (South Africa, for example), has raised concerns among some market analysts that a bubble is emerging.

Yet most private equity funds and principal investors tend to invest only in minority stakes, with the goal of better managing their risks by leveraging active local partners. “Also, they overwhelmingly focus on a limited pool of investment targets: profitable companies with annual revenue of more than $100 million and proven track records,” says BCG.

Alternative investment approaches are particularly important if funds are to meet the rising expectations of their investors. More and more, explains BCG, development finance institutions are being joined by global institutional investors, which then places a heavy focus on higher returns. That said, as prices for stakes in large African companies rise, it will become more difficult for private equity funds to deliver high returns.

“To fully capture the opportunities in Africa and earn high returns, private equity funds must adapt to the rapidly evolving market and consider more flexible investment strategies,” said Marc Becker, a BCG associate director and a co-author of the report.

Outlook Remains Positive, Despite Commodities Downturn

Despite the rapid growth in funds and the crash in global commodity prices that have rattled many African economies, BCG points to numerous factors supporting the case for private equity to turn more attention to the continent. For one, penetration is low. The amount of private equity and principal investment capital currently under management in sub-Saharan Africa remains quiet when compared to world standards. A meager 0.1% of GDP in comparison with roughly 1% of GDP in western countries. In addition, macroeconomic fundamentals should remain strong.

Despite recent setbacks, most economists expect that GDP growth in Africa will rebound over the medium term, driven by a swelling middle class, rising foreign investment in infrastructure and a growing skilled labor force.

The pool of investment targets continues to grow steadily. Data show that nearly 11,000 African companies have revenue of $10 million to $100 million and assets of $20 million to $200 million—”and their ranks are growing fast,” the report states. Africa’s investment environment is also improving. As more private equity funds, investment banks and institutional investors establish roots on the continent and establish a truly local presence, they are bringing greater investment expertise. Across Africa, the local pool of experienced lawyers, auditors, and consultants is also expanding.

“These trends are likely to expand Africa’s capacity to absorb private equity investment in the decades ahead,” Tawfik Hammoud, a BCG senior partner and a co-author of the report said. Hammond, who also leads the firm’s Principal Investors & Private Equity practice, sees a market eager for attention and investment. “In fact, they [the trends] suggest that most African markets are still underserved by private equity.”