/ 16 October 2014

SA watches as private equity investments in Africa soar

Sa Watches As Private Equity Investments In Africa Soar

Africa’s growth potential is attracting investors, with global private equity deals worth $1.5-billion completed on the continent in the first half of this year, more than double the same period last year, but South Africa is not seeing the benefits.

This is according to research by the global law firm Freshfields Bruckhaus Deringer, which advises on investments in, among other places, Africa.

Using data from its clients and information on the African private equity market from the research and consultancy firm Preqin and Thomson Reuters, Freshfields found 15 deals were concluded between January 1 and June 30 this year, compared with 10 deals worth $621-million in the first half of last year. This means not only the spend but also the volume of deals increased.

But the research shows that the investors are looking beyond South Africa. The percentage of African private equity investment into South Africa fell from 75% between 2004 and 2009 to less than 10% between 2009 and the first half of 2013.

Freshfields’s corporate partner, Pervez Akhtar, head of Middle East and North Africa, said investors were going where they saw potential for growth. “As we move on from the financial crisis, private equity firms are back doing what they do for a living, which is investing,” he said.

“The private equity market quietened down significantly during the downturn but is now picking up, because many firms have funds that are not being deployed. They are looking for new markets that give them a growth story, and some of the returns we see in Africa are staggering compared to those in developed market economies.”

Assets
Global investment and equity firms, such as Blackstone, Carlyle, KKR and Warburg Pincus, have made large investments in Africa, which showed the assets met the requirements of the world’s top investors.

David Higgins, the co-head of Freshfields’ global financial investors group and a partner, said he believes the interest has been driven by “increased risk tolerance and partly because they’re seeing others do deals in Africa”.

“Sellers are now aware that global funds are willing to transact on the continent and are getting more comfortable selling to them,” he said.

The research found, when analysing data by fund type, a greater geographic spread of investment in recent years.

In West Africa, more than 84% of the money global funds that have been invested over the past 10 years were made in the past two years, and the trend is similar in East Africa. There, 41% of the deals since 2004 have been in the past two years.

Local partners
Not even the conflicts in North Africa have scared off investors, with one sixth of all Africa private equity transactions taking place in that region, according to the law firm.

“North Africa, West Africa, Southern Africa and East Africa are four very different markets, so investors need to have four different strategies. There is greater political risk for particular sectors such as energy or resources, where having a local partner is critical,” said Higgins.

But he warned that there were challenges to investing in Africa, which, for some investors, was still uncharted waters.

“With lots of funds looking at opportunities in Africa, this has led to an increase in relative prices and there are, of course, other issues to overcome, such as foreign exchange controls. But, for the funds willing to invest the time and the effort to understand the local markets, there are real opportunities available,” Higgins said.

“There will be a few bumps in the road, like there always are in emerging markets. But, while political risk in Africa remains, the situation gets easier as more deals are done, the lending banks begin to understand the market, and regulators and tax authorities become more familiar with private equity investors.”