BCG advises on strategy for African private equity sector

22 March 2018 Consultancy.africa

As the African start-up environment thrives, growth in the continent’s private equity sector is being driven primarily by international firms, hoping to capitalise on the budding market. According to the Boston Consulting Group (BCG), the arrival of these firms has driven the funds under management for the sector beyond $30 billion.

The collective economy of Africa has come to be regarded as a major hub for investment over the next few years. The region is aided by cumulatively favourable economic and demographic conditions, including the youngest population in the world on the threshold of entering the productive age, and a rapid increase in digital access, among a number of others.

While commodity-reliant segments in the economy fluctuate, the business environment continues to thrive due to the favourable conditions. One sector that continues to see a steadily upward trajectory in such a scenario is that of private equity. Investment in the private equity sector offers relatively small, unlisted firms the opportunity to prove their worth.

Such firms are commonplace across the developing African economy, and have successfully attracted the attention of investors, from across the continent and, most significantly, from across the world. As a result, the funds under management for the African private equity sector have pushed past $30 billion, placing it among the most attractive emerging markets in the world, behind India, Southeast Asia, and South America.

BCG advises on strategy for African private equity sector

South Africa and Nigeria are the biggest markets, which comes as no surprise as they represent the two highest GDPs in Africa. Other major markets include Kenya in East Africa, and a number of Northern African countries including Egypt, Tunisia, Cote d’Ivoire and Morocco.

According to management consultancy BCG, the growth of these markets has been driven, to a large extent, by foreign investment, particularly from some key international firms. Firms listed by BCG include Helios Investment Partners from the UK, which runs  $110 million Modern Africa Fund, and has invested substantially in the energy sector in Western Africa; currently undergoing major restructuring.

Another major investor is US Caryle through its Sub-Saharan Africa Fund, which has raised $698 million for more than nine deals since its establishment in 2012. Helios Towers from the George Soros Fund, Black Rhino, Emerging Capital Partners, Actis Capital, Abraaj Group, Development Partners International, and the CDC Group all feature amongst the top investors on the list.

Going forth, BCG offers a number of suggestions to strengthen the dividends from PE investments. Flexibility in investment is the primary recommendation, alongside fresh target profiles. Regarding the latter, BCG calls for investors to look beyond their traditional targets that generate more than $100 million, trying their hand at minority investments and partnerships with lower tier firms.

Nevertheless, investors must be prepared to engage in extra groundwork in the market, given the early stages of development across the African economy. As elucidated by Seddik El-Fihri, principal at BCG; “Africa’s underdeveloped investment environment means that PE firms need to build significant on-the-ground capabilities that they normally do not require in more developed markets.”

Private equity plays an inferior role in African IPO activity

01 October 2018 Consultancy.africa

Despite being a popular method of exiting across the globe, exits via initial public offerings (IPOs) continue to be an unpopular option for private equity firms across Africa, according to a new report from global professional services firm PwC. The report is based on analysis of activity from 2010 to 2017.

In collaboration with the African Private Equity and Venture Capital Association, Big Four accounting and advisory firm PwC has conducted in-depth analysis of portfolio companies in Africa between 2010 and 2017, with a specific focus on their private-equity-backed IPO activity.

The research covered a number of factors, which includes detailed comparisons of the volume and value of IPOs, pricing and performance – spanning both private-equity backed and non-private-equity backed activity. The latter has historically dominated most IPO activity on the continent.Non-PE IPO activity + PE IPO activityOther exit strategies that have been popular in Africa include primary sales to investors on the market or secondary sales to financial investors, or even other private equity firms. As a result, the report found a particularly low ratio of private-equity backed exits on the continent between 2010 and 2017.

In terms of volume, private-equity-backed deals comprised merely 16% of the total IPO activity on average, while this registered a mild increase to 23% in terms of value. According to the report, this is substantially lower than economies across the globe, both developing and developed.

In the UK, for instance, private-equity-backed deals comprise nearly 40% in terms of volume, and nearly 45% in terms of value, while the US registers 36% in terms of volume, generating 45% of the value. Capital markets across Africa are growing rapidly, which indicates the need for private equity to play a greater role in the IPO markets.

A worrying trend registered by the report is a decline in private-equity-backed IPO deals since 2010, when the numbers stood at five deals generating over $1 billion. By 2011, the number of deals had dropped to 3 deals, which generated less than $200 billion, followed by a further decline in value for 2012.Volume and value of PE-backed IPOs by industry2017 saw an increasing role for private equity from 2016 – with 4 deals generating nearly $400 billion, but was still considerably lower than 2015 in terms of value, when 4 deals cumulatively generated over $600 million. Non-private-equity-backed deals also saw a considerable increase between 2016 and 2017. 

Zooming in, the highest number of private-equity-backed IPOs on the continent were registered by the Johannesburg Stock Exchange and the Bourse de Tunis, although the former generated a much higher value of nearly $1.9 billion compared to just short of $200 million generated by the latter.

Viewed by sector, the consumer goods and financials industries dominated the number of private-equity-backed IPOs in terms of volume, comprising 23% each, although the healthcare sector dominated the segment in terms of value generated with 38% of the total proceeds from just 17% of the total number of deals.