Data & Intelligence

Framing Africa’s Private Equity Landscape in a Pan-Emerging Markets Context

Originally published as a guest post in FT's beyondbrics on 12 November 2014. View the original article here.

Last month, EMPEA took part in the UN Economic Commission for Africa’s Ninth African Development Forum held in Marrakech, Morocco. The theme of the forum was “Innovative Financing for Africa’s Transformation”. David Ashiagbor of Making Finance Work for Africa, EMPEA’s partner for the report Pension Funds and Private Equity: Unlocking Africa’s Potential, also spoke at the forum, where he presented the study’s findings.

Our insights from the Forum discussions may be found below in the context of the latest data from the region and in comparison with other EMPEA statistics on emerging market private equity industries.

Taking Stock of Fund Flows

Global private equity fundraising in 2013 amounted to $333bn, a 51 per cent increase on the total raised in 2012 and the largest amount raised since 2008 (see Exhibit 1). Of that $333bn, $38bn – or 11.5 per cent – was dedicated for emerging markets; and of that $38bn, $1.2bn (approximately 3 per cent) was cordoned off for sub-Saharan Africa.

Since 2008, sub-Saharan Africa has accounted for anywhere between 3 per cent and 6 per cent of total capital committed to emerging market funds, though that figure jumped starkly to 10.8 per cent in the first half of this year on the back of fundraising successes from Carlyle, Amethis and Helios, which together raised 65 per cent of the $2.2bn total (see Exhibit 2).

Is this explosion in fundraising a one-off moment or the beginning of a new trend? I don’t know the future, but an exploration of the landscape of fund managers, private companies and limited partners may provide some clues.

The Fund Manager Landscape – Feast or Famine on the Fundraising Trail

According to surveys of global institutional investors from EMPEA and Riscura, the biggest challenge LPs confront when evaluating private equity commitments to Africa is the limited number of established fund managers. At first glance this might seem hard to believe, as Africa is seemingly abuzz with private equity activity. According to EMPEA data, 144 unique private equity fund managers have executed transactions in Africa since 2008. Moreover, between 2009 and the first half of 2014, 76 Africa-focused fund managers have closed on capital for investment on the continent.

And yet, as one peels the onion on these data, it turns out that the bulk of capital is being raised by a handful of firms. Of the $10.6bn in cumulative capital raised between 2009 and 1H 2014, 10 fund managers secured 52 per cent of the capital, while the top 20 raised 72 per cent. The 56 remaining GPs closed on approximately $2.8bn in capital commitments (see Exhibit 3).

The takeaway – from a global institutional investor perspective – is that there don’t appear to be terribly many Africa-focused fund managers that can absorb a large commitment of capital, which can lead to concerns over deal flow and prospective returns.

The Private Company Landscape – Is There Too Much Capital Chasing Too Few Deals?

Africa is home to some of the most exciting companies and investment opportunities in the world, and private equity fund managers are well positioned to help drive local firms’ expansion. But when it comes to evaluating prospective deal flow, the question many institutional investors ask is whether there is a sufficient number of investible companies to merit the amount of capital that private equity firms are raising.

Data from Bloomberg reveal that there are 26,300 private companies in Africa and the Middle East – it was not possible to segment the data exclusively for Africa. That figure is a fraction of the number of private companies in other emerging market regions (see Exhibit 4). Indeed, according to Bloomberg’s data, private companies in Africa and the Middle East account for only 6 per cent of the total number of private companies in emerging markets, and 1.4 per cent in the world at large.

In a similar vein, Diana Noble, chief executive of CDC Group plc, has commented that a CDC analysis of Capital IQ data revealed 3,186 companies on the continent that generate revenues of at least $50m. Of that figure, approximately 42 per cent are in South Africa while 99 are in Nigeria. That does not leave a terribly deep pool of companies in Africa’s remaining 52 countries.

While I suspect that Bloomberg’s numbers are not entirely accurate and are a bit low, the figure for Africa does raise two potential explanations:

1. There actually is a relatively small number of registered companies at scale that are operating in the formal economy – a finding suggested by Diana Noble’s comments; and,

2. Quality data is extremely difficult to obtain in Africa (a problem across all emerging markets).

Irrespective of one’s preferable explanation, the outcome of either interpretation is the same: it inhibits a greater volume of commitments to private funds in Africa. On the one hand, investors may fear that GPs will be competing for the same deals, thereby bidding up prices and reducing potential returns. On the other, the lack of data may make global investors uncomfortable, and thus keen to explore opportunities in other emerging market regions where data and transparency are relatively more abundant. All of which is to suggest that alternative sources of capital may be needed for the growth of Africa’s private equity industry – particularly those that are comfortable and familiar with local business environments.

The Limited Partner Landscape – The Rise of Local Capital

Traditionally, development finance institutions (DFIs) have been critical supporters and enablers of the private equity industry in Africa. Of the 10 firms mentioned earlier that account for 52 per cent of the capital raised for the continent, at least seven received support from DFIs. I don’t think their role is likely to change in the near future.

At the other end of the spectrum, global institutional investors are increasingly exploring private equity opportunities in Africa. Sub-Saharan Africa has been one of the top three markets in EMPEA’s LP Surveys over the last two years. However, the volume of capital commitments is yet to match the feverish degree of sentiment. Maybe that’s a good thing.

So where shall all the money come from – particularly for the corpus of (increasingly local) managers targeting the lower mid-market and below (the oft-mentioned SME segment)? EMPEA recently worked with David Ashiagbor at Making Finance Work for Africa on a study of pension funds in 10 African countries (see link to report above). The report reveals $380bn in pension fund assets under management, of which $29bn could be mobilised for private equity investment. That figure is three times larger than the aggregate amount of capital raised for the continent since 2009. The rapidity with which local pensions are growing is outpacing product development, and as an asset class, private equity offers alignment with pensions’ long-term actuarial return objectives. Could the stars be aligned for a self-sustaining private equity ecosystem in Africa?

The Audacity of Hope

Given the trajectory of pension growth and regulatory reforms on the continent, I suspect that Africa’s private equity industry could be on the cusp of a profound inflection point. For the rapid accumulation of local savings holds the promise that African capital can be channelled towards productive investment within Africa, driving growth and private sector development. Perhaps more promisingly, the emergence of local capital may yet shift the worn-out narrative from one of aid and reliance on capricious foreign capital, to one wherein Africans have agency over their development path going forward. It is extremely exciting.

Mike Casey is director of consulting services at EMPEA.

EMPEA represents the leading global investors in EM. I look forward to working alongside to drive much-needed capital for financing entrepreneurs and businesses worldwide.

Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited

EMPEA plays an important and energetic role across the markets it represents, driving outreach and research initiatives, and promoting the role of private capital.

Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures

The developed markets have no equivalent to the role EMPEA is playing as a convener and source of trusted information in the emerging markets.

David Rubenstein | Co-Founder and Co-Executive Chairman, The Carlyle Group

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Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments

EMPEA's market and industry intelligence opens doors to new sources of capital.  I look forward to the future success of EMPEA and its members.

Torbjorn Caesar | Senior Partner, Actis

While there are certainly challenges for the industry, the opportunities abound in our target markets and globally, making a global association like EMPEA more relevant than ever.

Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company