JOHANNESBURG – Once the darling of private equity investors, Africa no longer garners the same interest it did just a few years ago, but there remain a number of fundamental forces driving the growth of this asset class on the continent.
This is according to Andrei Vorobyov, who leads management consulting firm Bain & Company’s South Africa private equity practice.
Already, says Vorobyov, some $4 billion has been allocated to Africa investments in recent years from the likes of Ethos, Helios and Abraaj, with a number of other international private equity funds establishing Africa teams, including TPG Capital, KKR & Co and Carlyle.
But as Europe and the US, perceived to offer more stable economies, deliver “spectacular” returns from this asset class, raising money to deploy into Africa – large parts of which face commodity crises and political issues – will remain challenging in the near term.
Generally speaking, Bain expects a period of “normalisation” in deal and fundraising activity in private equity (PE) globally.
Consistent growth since the global financial crisis has led to record prices now being paid for PE investments and remarkably high return thresholds.
As assets are bought in an expensive environment, the risk is that they will face economic headwinds, even recession, over the next period of ownership, cautions Andrew Tymms, leader in Bain’s global PE practice.
“That puts an onus on recession-proofing those businesses and working quite hard to accelerate their performance, because if you don’t do that now when the timing is good it is very likely that the returns will be under pressure,” he tells Moneyweb.
PE funds raised less money for new buyout funds in 2015 than they did in 2014, which was also lower than the industry’s record year in 2013, according to Bain’s Global Private Equity Report 2016.
Deal value for announced global buyouts, meanwhile, reached $282 billion in 2015, the strongest year since the global financial crisis.
Asset sales were “just shy of their all-time peak”, the report finds, reaching $422 billion last year (2014: $456 billion).
Africa’s long-term fundamentals remain strong
While there are fewer good assets for sale in Africa, and PE funds would like there to be a greater number of bigger-ticket deals, they are nevertheless very active in the middle market, according to Tymms.
By way of comparison, the size of a large-cap PE fund in the US or Europe would be in the region of $10 billion to $15 billion, while in Africa a $1 billion fund would be considered large cap, adds Vorobyov.
“The medium-term prospects [for PE in Africa] are quite bright and the asset class is likely to grow in size and scale,” says Tymms.
“With a positive returns story already in place, there is – subject to some timing on fundraising once the currency and political clouds dissipate – ongoing growth in African economies where a planet of small- and mid-cap companies need access to capital to grow.”
Pointing out that commodity prices will not remain depressed for the next decade, which is within a typical time horizon for a PE investment (generally five to ten years), Vorobyov highlights that investments made in an economic downturn may still yield handsome returns over time.
“You can actually make money when the economy is down since the fundamentals are still there,” he says, noting that the funds delivering the highest internal rates of return in the US today (in the mid 30s) are of a 2009 vintage, which was generally a period of “doom and gloom” in that country.
“Population growth is still there, penetration of financial services is still low so there are still a number of fundamental forces that could drive PE growth in Africa,” he adds.
As the continent sees more successful exits (think private equity firm, CVC selling its 51% stake in Virgin Active to Brait SE for around R9 billion) and awareness of the asset class develops, appetite for PE funding will grow, Vorobyov maintains.
Asked about Bain’s views on South Africa’s prospects more generally, Tymms says the firm is confident in the country’s long-term prospects.
“We’re not thinking three to nine months, but five to ten years. That’s why we’re investing, we’re hiring people,” says Vorobyov.