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Reading the pulse of the private equity sector in East Africa

March 20, 2014

This morning I attended the presentation of the results of the Deloitte and AfricaAssets 2014 East Africa Private Equity Confidence Survey.

PE confidence survey 2014Some interesting key themes about trends in the sector emerged from the presentation and discussion.

  • The volume of deals is increasing. The survey counted 84 private equity deals done in 2013 across Sub-Saharan Africa, 46 of these accounting for USD 3.69 billion (up from USD 1.13 billion in 2012, according to last year’s report). This was close to 2011 levels, implying a dip in 2012 and perhaps a return to a growth trend from 2011. The number of deals in East Africa doubled from 13 in 2012 to 26 in 2013, although still small given the number of funds active in the region (estimated at between 30 and 40). Deal sizes remain relatively small, with the vast majority below USD 10 million and fund sizes remaining between USD 50-200 million.
  • Geographic trends are starting to change. Kenya, Nigeria and South Africa still account for the majority of private equity investment on the continent but their share is decreasing. Investors in East Africa have not yet found many opportunities in Uganda and are ambivalent about the opportunities, especially given the upcoming elections and recent controversial bills enacted. Generally, investors expect the investment climate in South Sudan to remain poor for the foreseeable future due to sociopolitical conflict. Investors remain bullish about Ethiopia but few have managed to close deals there, with Catalyst Principal Partners’ recent investment in a beverage company, Duet and Vasari’s investment in Dashen Brewery and Schulze Global’s recently closed Ethiopia-focused fund being the exceptions.
  • Sector focus remains consumer driven, apart from the heating up of extractive industries. Top sectors for private equity investment in Africa in 2013 were food and beverage, infrastructure, manufacturing, financial services and agribusiness, all driven by the African consumer story. Health care and education are promising sectors as top priorities for consumers, especially given poor public options. This is evidenced by fundraising efforts focused on the health care space, such as Abraaj’s new global health care fund, which will have an allocation to Africa. New opportunities are cropping up rapidly in the extractive industries in East Africa as well, with oil exploration underway in Kenya and Uganda and plans for LNG in Mozambique. Helios, BTG Pactual and Warburg Pincus all did deals in extractive industries in 2013. The financial services sector remains attractive to investors, especially driven by profitability gains from technological innovation. On the other hand, the Silicon Savannah tech boom appears to be largely media hype as the sector continues to be funded mainly through grants.
  • Key challenges faced by private equity investors in Africa are consistent. Investors cited lack of human capital (both in management teams and investment teams), poor governance and lack of transparency, difficult regulatory environments (depending on the country and sector) and the lack of quality deal flow as their biggest challenges. The feeling that there are too many investors chasing too few deals remains, with the focus largely concentrated on major cities, leaving second tier cities largely untapped for deal flow.
  • Exits are on the rise. In this young industry, investors are now starting to pursue exits. Sales to strategic investors remains the most common exit route but IPOs are increasingly becoming of interest due to development efforts of capital markets authorities in the region. This trend may begin to question the traditional closed end fund structure, as some investors may find themselves pressured to exit investments prematurely. Survey results showed that average investment terms were longer than five years.
  • Fundraising is slowing and the local investor pool has yet to be tapped. Survey respondents indicated that they would be spending less time on fundraising than last year, suggesting that after the slew of new funds raised in recent years, investors are focusing on investing and portfolio management. Only one fund has reportedly been able to raise funds from local institutional investors and the majority of funding still comes from development finance institutions (DFIs). Investment flows from the Middle East are expected to increase, mainly coming from sovereign wealth funds. Pension funds remain difficult to crack, possibly due to structures that make private equity a difficult fit, relatively small fund sizes and a general lack of understanding of the private equity industry, potentially fueled by its traditional lack of transparency.

Overall, the optimism for private equity in Sub-Saharan Africa continues from last year, although some of the same challenges remain as other new challenges arise. Despite the growing pains of this young sector, the view that the opportunities on the continent are attractive seems to be spreading as new investors from new areas continue to enter at an ever increasing pace.

Click here to read the full report

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