Africa is soaring in its attractiveness to global private equity investors. In a survey by Coller Capital (www.collercapital.com) and the Emerging Markets Private Equity Association (www.empea.net), over the next 2 years, nearly 30% of global private equity investors (Limited Partners or LPs) investors plan to expand their PE investments in sub-Saharan Africa (including South Africa, SSA) and nearly another 10% plan to start investing. This puts Africa is ahead of markets such as Turkey, the Middle East and North Africa region, Russia/CIS, and Central and Eastern Europe.
According to an article on top African private equity website, www.privateequityafrica.com, fundraising for Africa is also growing fast. Year-on-year fundraising for sub-Saharan Africa was up 56% in 2009, compared to declines for Russia, Middle East and North Africa, India, Emerging Asia and the collective Central and Eastern European region and Commonwealth of Independent States.
Problems highlighted include 47% of LPs saying there are too few established fund managers in SSA and this is a primary deterrent to committing capital to the region. Political risk was a concern of 39% (highest in the world after Russia/CIS where it concerns 63%) and about 25% said the scale of opportunity to invest in SSA is too small (second to Middle East and North Africa, where 33% were concerned). Only 14% of respondents said they were discouraged by the difficulty of exiting their investments and only 2% said valuations are a problem (compared to India, where 58% said entry valuations are overheated, and 45% in China).
Erwin Roex, partner at Coller Capital, comments: “In reality, where competition is increasing in emerging markets private equity markets, it tends to be concentrated within a handful of sectors or a particular tier of the market where deals are large enough to attract global funds. Investors recognize there are still plenty of opportunities for skilled managers to supply value-added capital and to create returns for LPs.”
Two thirds of the LPs said they expect to boost the dollar value of their new investments in Emerging Markets in 2011/12, compared to new commitments in 2009/10. Three quarters look for economic growth as the main driver to increase commitments to emerging markets. More than half of LPs expect their emerging markets private equity commitments to generate returns of at least 16%, with about a quarter expecting this to be as high as 21% over the next 3-5 years. Only 33% of the respondents expected annual net returns of 16% from their global PE portfolios. Asia is the region that ignites the highest return expectations and Brazil replaces China as a top environment for fund managers (General Partners orGPs).
Two thirds of LPs (78% outside North America, 52% in North America) said environmental, social and governance compliance influenced their fund investment decisions and choice of fund manager (GP). They would also like to see higher participation from local investors, although some saw a potential misalignment of interests as likely to cause the friction.
Coller Capital partnered with EMPEA in the annual survey, undertaken in Jan-Feb 2011, which covered 156 global LPs, including 32% in fund of funds, 15% were direct foreign investors, 14% were pension funds, 13% bank and asset managers and 11% represented government-owned organisations.