Private equity funds are broadly understood as investment vehicles forming pools of private shareholder capital, managed and operated by a fund manager, which invests in non-publically listed companies and asset classes where equity is not publically tradable and/or conduct buy-outs which result in a de-listing of public equity. Equity and capital commitments are usually raised at the time of inception, with set capitalization targets, and form a fixed term limited partnership (renewable in certain funds), typically for periods between 5 and 10 years, which generally lock-in investor contributions for the lifespan of the fund.
Private equity funds adopt a wide range of investment strategies. Most funds tend to focus on venture capital investments which invest in start-up companies to support their launch and early development, growth and expansion and mezzanine (a mixture of debt and equity) investments which invest in established companies to facilitate the expansion or restructuring of operations, distressed investment which invest in unsecure and financially stressed companies, and buyouts which acquire assets from pre-existing stakeholders. Some private equity funds also specialise in specific sectors such as infrastructure, real estate or natural resources. Some also adopt indirect investment strategies, such as secondaries funds which invest in existing private equity assets, and fund of funds which do not conduct direct investments but keep a portfolio of investments in other investment funds.
Strong growth, improving investment climates and high return potentials that have come to characterize many African markets have helped foster the emergence of domestic private equity capacities and supported a rapid expansion and diversification of private equity markets across the continent. According to a recent sector assessment report produced by the Prequin research firm, by late 2010, 172 fund managers featured an African regional focus with only 20 percent of all private equity firms actively focusing on Africa having their headquarters on the continent. African fund managers are mainly concentrated in a handful of countries, with South Africa home to 59 percent of all private equity firms operating out of Africa, and Egypt, Mauritius and Morocco home to respectively 9, 7 and 6 percent.
Investment trends in Africa are equally concentrated in a few sectors namely the extractive industries and the banking sector but increasingly expanding to other sectors such as food and beverages, healthcare and telecommunications as well as specialized niche sectors such as agribusiness and renewable energy.
While the scale of private equity in the region remains modest compared to other markets (according to EMPEA, Sub-Saharan Africa, for example, accounted in 2010 for only over 6% of total capital raised for emerging markets private equity), significant ratio growth prospects are expected in the mid to long term thanks to newly developed vehicles in frontier markets as well as to the availability of sizable pools of international capital.
Moreover and while the global economic and financial crisis did affect the African private equity market, fundraising appears to have been relatively resilient, with 20 funds accumulating an aggregate capital of USD5.65 billion in 2008 and 14 funds raising an aggregate capital of USD3.41 billion in 2009. By late 2010, Prequin data indicated that 71 Africa focused funds were in the works, aiming to collect an aggregate USD24.9 billion in capital commitments.
Private equity funds have also become an increasingly important tool to impact economic growth for many development agencies and development financing institutions (DFIs) notably through their private sector development strategies. DFIs are particularly active in facilitating access to private equity for SMEs who would otherwise not be able to do so because of the high risk factor that private operators would incur.
In one hand, DFIs, which often play the role of first movers, can address this gap through various mechanisms including using local private equity funds as intermediaries or intervening on creating an enabling legal and regulatory environment for the industry.
On the other hand, Investment firms with private equity capabilities to capitalise on promising opportunities offered in selected niche markets where the usual banker and investors are not looking are potential privileged partners of aid donors, opening untapped avenues for collaboration.
As such, private equity funds can play an important role in helping to bridge financing gaps, and can promote growth and foster private sector development. Many African enterprises face important impediments to raising capital; access to private credit from commercial banks and other financial institutions is often difficult, and most African stock markets and corporate securities markets are still in their early development stages.
To address these constraints, private equity funds can potentially provide another option to local and foreign investors to invest in African emerging markets and present alternate complementary sources of funding for private firms. Their medium-term investment horizon also presents potentially attractive sources of funding to firms and projects which face important start-up costs and take longer to become profitable. Private equity investments in emerging markets have tended to focus more on growth then financial gearing, potentially providing more stable funding sources for long-term growth. Private equity investments which feature active investors also often provide technical and/or managerial capabilities, which can also promote human capital and knowledge development.
Investment in Africa still however faces several constraints including the lack of availability of human capital with adequate management skills including the ability to indentify, grow and exit firms although this trend is improving due to several highly trained Diaspora managers choosing to return home as an effect of the global financial crisis. Other constraints include limited access to reliable market information, poor corporate governance practices and most importantly an exit environment, prelude to the development of the private equity industry.