Sub-Saharan Africa

The Road Ahead for African Private Equity

This EMPEA Brief investigates recent developments in African private equity—including the increase in capital raised for the continent during the ‘Africa Rising’ years and subsequent macroeconomic downturn—in order to identify key themes that will play a role in how fund managers navigate rising competition, slower growth and volatility to not only successfully deliver returns for their investors, but also contribute to Africa’s ongoing economic transformation.

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Sub-Saharan Africa Q1 2018 Insight 

The private capital landscape in Sub-Saharan Africa is beginning to show signs of renewal after a protracted period of slower growth and currency volatility in some of the region’s leading economies. Fundraising for the region increased by 10%, year-on-year, in Q1 2018, totaling US$493 million. Four first-time funds held closes, led by A.P. Moller Capital’s Africa Infrastructure Fund. However, the number of deals completed in the quarter declined 37% compared to the year prior— representing the lowest quarterly total since Q3 2010. This decline has been especially pronounced in the growth equity space. In the absence of PE deals, infrastructure investments, particularly in the electricity sector, took center stage in Q1 2018. Denham Capital committed US$250 million to establish a new pan-African power platform, Neo Themis. As explored in the EMPEA Brief: The Road Ahead for African Private Equity, regional investments like Neo Themis may become increasingly common as GPs look to build more resilient multi-country platforms. Such deals accounted for 41% of all investments in Sub-Saharan Africa in the first quarter of 2018. While the worst seems to be over in markets like Nigeria and South Africa, fund managers will continue to draw on lessons learned from past volatile periods and adjust their approaches accordingly.

View all Q1 2018 Data Insights here.

#EMPEAMemberNews: Cepheus Growth Capital Partners reaches the first close in its maiden fund. Will target opportunities in Ethiopia’s manufacturing, agro-processing and services industries. Backers include CDC, Norfund and the European Investment Bank. Target size $100m.

Control Investments in Sub-Saharan Africa

Sub-Saharan Africa’s private equity industry is showing signs of maturity—including a record US$8.4 billion in capital raised for funds focused on the region in 2014 and 2015, increasing commitments from commercial investors based both locally and internationally and geographic diversification on the part of GPs. One missing puzzle piece in the development of the industry in the region, however, is control investments. In other EM regions, a rise in buyout activity has accompanied the broader maturation of the PE market. In Latin America and Emerging Asia, the number of buyouts from 2008 to 2016 increased by 43% and 42%, respectively. In Sub-Saharan Africa, only one more buyout was completed in 2016 than in 2008 (see Exhibit 1). Indeed, growth investments accounted for 67% of the number of investments completed from 2008 to 2016, contrasting sharply with buyouts, which accounted for just 14%.

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Africa Insurance M&A: Global Insurers’ Next Frontier

The insurance industry in general, and M&A opportunities in Africa, are still in their infancy, and this brings a range of opportunities for international insurers and investors. In contrast to more developed markets, most international insurers have little or no presence in Africa. This helps to explain the fact that Africa’s global market share in the insurance sector is roughly around 1.5%, and the continent’s average insurance penetration rate is 2.9%, falling to 0.9% excluding South Africa.

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Impact Case Study: Luanda Medical Center

Seeing a gap in the Angolan market for affordable, high-quality healthcare, Vital Capital chose to make a greenfield investment in 2012—initiating, implementing and overseeing the creation of Luanda Medical Center—in order to increase the availability of healthcare and diagnostic services in the country. Today the medical center serves over 7,000 individuals per month, of which approximately 75% obtain access to its services via commercial health insurance. Vital Capital tackled all elements of designing the healthcare facility from its inception, including refurbishing and reconfiguring the space, purchasing and installing medical equipment, and installing the IT infrastructure that would be responsible for the medical, management and financial reporting systems. Vital Capital also prioritized staffing the clinical and management teams with highly qualified locals and expatriates. As of September 2017, LMC has 330 full-time employees, over 60% of which are female.

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Impact Case Study: The Eranove Group 

Emerging Capital Partners (ECP) prioritized maintaining and upgrading the existing subsidiaries’ networks and increasing operational efficiencies. As a result, Eranove saw a 24% rise in clean water production from 2009 through the end of 2015, while maintenance projects and efforts to reduce commercial loss due to fraud contributed to a 5% increase in national network efficiency rates in Côte d’Ivoire from 2012 to 2015. The company also witnessed a 50% increase in electricity and water customers between 2009 and 2016, reaching over 3.3 million combined consumers in Côte d’Ivoire and Senegal. ECP identified international and local investors to facilitate Eranove’s expansion, and has worked with the company to develop a strong pipeline of environmentally sustainable base business and new expansion projects. The combined gas and steam cycle facility CIPREL IV, inaugurated in 2016, contributed to a 70% increase in CIPREL’s total power capacity while resulting in an emission of 500,000 fewer tons of carbon dioxide annually as compared to an equivalent gas-fired turbine.

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Impact Case Study: Umeme Company Limited

Actis worked with Umeme to develop a network refurbishment plan, which included the installation of over 225,000 poles and the replacement of the majority of the network’s dilapidated poles and conductors. In addition to investing in the company’s infrastructure, Actis identified operational and behavioral changes that needed to occur within the business and the broader community to ensure high standards of safety. Umeme’s proactive stance against power theft set a new standard for electricity distribution businesses and contractors in the region. As of March 2016, approximately two years had passed without a single network-related “attributable” fatality (i.e., not related to illegal activity). There has also been a 20%
decline in public fatalities due to network interference and domestic electrical wirings.

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Pension Funds & Private Equity: Unlocking Africa’s Potential

Recent reforms across Africa have created private pension systems that are rapidly accumulating assets under management (AUM) in line with the continent’s explosive demographics. A number of dynamics currently underway on the continent – expanding populations, increasing urbanisation, rising per capita incomes, and a growing and consuming middle class – are all contributing to a pension fund industry that urgently needs to diversify its investment portfolios. The recent growth in the African pensions industry has created opportunities to fund the long-term investment in infrastructure and other sectors that the continent so desperately needs. This is especially true given the current context of dwindling overseas development assistance budgets that have traditionally funded such investments. The growth in assets, which must be carefully managed, also brings supervisory and regulatory challenges. One of the key challenges is how to encourage the portfolio diversification necessary for these systems to manage risk, whilst ensuring that diversification in itself does not become a source of risk as pension funds venture into hitherto unknown asset classes and markets.

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Potential Shareholder & Director Liabilities in Troubled Investee Companies

Recent news out of the Nigerian National Bureau of Statistics (NBS) has confirmed that, as of the end of the second quarter of 2016, the country had gone into recession for the first time in over twenty years. In a news conference held in September 2016 however, the Governor of the Central Bank of Nigeria suggested that the country’s economy may have already hit the bottom, and hence was likely to return to positive growth by the end of 2016. Pending the predicted return to growth however, quite a number of Nigerian businesses have continued to bleed as a result of the inclement macroeconomic conditions and, more particularly, the drastic devaluation of the local currency over the past year and a half, as well as the severe shortage of foreign exchange in the economy.

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Nigerian Foreign Exchange Market Developments & Private Equity Investment

Nigeria’s economy is highly dependent on crude oil, which constitutes a major source of the country’s foreign exchange earnings and government revenue. As a result, the sharp decline in crude oil prices has adversely affected Nigeria’s foreign earnings and reserves, the value of the Naira against major world currencies, the availability of foreign exchange in Nigeria and contributed to widening of the disparity between the exchange rates in the official and the parallel foreign exchange markets. In a bid to control the decline in the country’s foreign reserves, the Central Bank of Nigeria (CBN) has adopted a number of measures to manage access to the official foreign exchange market that has, traditionally, been subsidised by the federal government of Nigeria. These changes portend well for private equity and other investments as foreign investors, following the recent developments, can now convert any capital (brought into Nigeria for investment) into Naira at a market-determined rather than a fixed CBN determined exchange rate, which has been the subject of recent criticism.

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