Deals for private equity are getting harder, particularly for larger deals, and there is a “logjam” of funds hunting for cash, according to this interesting article in the Financial Times. Journalist Katrina Manson quotes pioneering Africa investor Miles Morland: “In Africa there are hundreds of deals but you have to go and look for them. In the west, investment bankers bring you deals . . .[but], in Africa, investment bankers are way down the food chain. You need to go and hang around the bars . . . to find the deals,” Mr Morland says.
Everyone has been talking for the last few years about the overwhelming case for investing in Africa, particularly sub-Saharan Africa. The region is growing fast and growth is starting to move from resources to a domestic consumer class fuelled by a giant and fast-growing population. Africa also lags the rest of the world in private equity, it constitutes 4% of emerging markets private equity asset class, compared to 63% for emerging Asia.
The history of private equity in Africa has been chequered. In the 1990s the business climate was still hard and even good investments got hammered by collapsing local currencies. Then came the “noughties” (2000-10) when there were giant returns on some deals, particularly in telecommunications. The sector moved higher on the global radar in 2005 when Kuwait’s Mobile Telecommunications Co (MTC), later renamed Zain, acquired pan-African telecommunications provider Celtel International for an enterprise value of US$3.4bn. Many private equity investors achieved at least 250% return on their investments, and AIG African Infrastructure Fund, managed by a forerunner to Emerging Capital Partners, said in a press release it received approximately $214m, or 4.3x its $50m investment. But other investments were often not performing.
Morland says: “In the current 2007-17 cycle, making money will be harder. An internal rate of return of over 20% will look good. It is a time when careful investors rather than cowboys will do well . . . The phone game is over.”
Meanwhile all the big talking about Africa’s opportunities area bringing a glut of new private equity investors heading to Africa from Brazil, the Middle East and the US, following the big managers who entered in recent years such as Carlyle and KKR. Fundraisers are going for “big ego” funds, writes Manson, with Brazil’s BTG Pactual and others aiming for $1bn and they will be seeking large deals that the continent’s fragmented market can rarely offer. She quotes Marlon Chigwende, Carlyle’s Africa co-head: “When you start going up to writing equity cheques in excess of $75m, there aren’t so many [deals].” Roger Leeds, founder of the Emerging Markets Private Equity Association (EMPEA), says the smarter money is targeting middle market deals worth less than $50m, which he believes have stronger growth prospects: “The fund managers are happy to take investors’ money but it puts tremendous pressure on them to do bigger deals and they’re going to run out. They’re all complaining they’re finding trouble finding deals and they’re competing with each other and driving up valuations.”
One investor also refers to a “traffic jam” of fund managers seeking capital from investors. Data company Preqin says 57 Africa-focused private equity funds (half in South Africa) are looking for $13.1bn. Over the last 2 years emerging market fundraising increased 72% overall to $40bn but fundraising for sub-Saharan Africa fell 3% to $1.45bn last year – well below its peak of $2.24bn in 2008.
However, some investors who do it properly are scoring. Carlyle’s sub-Saharan Africa fund is expected to close above its $500m target in the 3rd quarter, made its first investment in 2012 by taking part in a $210m equity injection in ETG, a Tanzanian agri-commodities trader. Morland’s Development Partners International raised a $500m fund in 2008 and has invested it in 9 deals. It is raising a new fund of the same size.
Manson concludes: “As the African growth story attracts more and more funds, the going is getting tougher. That is one reason why resourceful and locally based management teams matter so much more today than in the past.”
For the full article including views and news from African experts and funds such as Harith, Actis, Ethos and Aureos, now bought by Abraaj Capital from United Arab Emirates, check here for the full article.