Perspectives on the Private Equity Market in Africa

Africa continues to punch above its weight

Since its inception in 2013, Bright Africa has taken various forms depending, in part, on the availability of meaningful data in any given year. Overall, the intention has been to set the scene for investment into Africa by looking at the drivers and enablers of investments and the challenges and changes apparent in the current investment landscape. It is an ongoing research endeavour presented by global investment firm, RisCura together with external resources and data showcasing our unique, on-the-ground perspective.

We launch Bright Africa this year with our perspectives on and analysis of private equity (PE) markets in Africa, looking at fundraising, deal activity and pricing over the last 10 years. The process of compiling this report again highlighted the marked structural differences between regions in Africa.

The rebound of most economies following the global Covid-19 pandemic will likely provide an additional boost and shift investor sentiment back towards emerging and frontier markets as investors’ risk tolerance increases, although this may be affected in the short to medium term by the events in the Ukraine. The economic recovery in Africa is driven by world-wide economic trends such as elevated commodity prices, a relaxation of lockdowns and travel restrictions, and increased global trade. The continent has also experienced good agricultural harvests in many regions. Economic recovery in Africa was initially slow because of low vaccination rates and the deterioration of the fragile fiscal position of many African governments. This is expected to rebound more strongly in 2022. Central banks face a tricky balance between taming inflation and supporting economic growth. Monetary policy will continue to play a pivotal role in curbing inflation, which is becoming increasingly more prominent, driven by temporary supply shortages and heavy stimuli. The ongoing Russia – Ukraine conflict has exerted some economic challenges for many African countries, with market forces directly impacting the oil price as Russia sits on one of the world's largest reserves. The rising prices have a ripple effect on many supply chains – with households most pinched by the impact on food prices.

Africa's natural resources are favourably positioned to capitalise on the dependency shift away from Russia's reserves. Economies such as Nigeria, Algeria and Egypt hold considerable gas and oil reserves. Countries like South Africa stand to benefit from natural resources such as Palladium and Gold, thereby increasing the demand for emerging market currencies such as the Rand, which has been particularly resilient in recent times against its peers.

Even during this difficult time, some positive structural and regulatory changes on the continent are nurturing the green shoots of economic recovery. The most important of these has been the development of the African Continental Free Trade Area (AfCFTA), which could result in up to USD450 bn more income and significant wage increases. Other long-awaited positive developments include the unification of exchange rates in Sudan, fuel subsidy reform in Nigeria, and opening investment into the telecommunications sector to the private sector in Ethiopia.  Africa’s financial systems have progressed well over the past 20 years. However, according to the World Bank, it has not yet translated into more accessible financial services, especially credit, that reaches the majority. On average, banks in Africa are well-capitalized and liquid. The benefits of deeper, broader, and cheaper finance can be reaped via considerable investment opportunities in tech-enabled financial services businesses.

With high economic growth and significant tailwinds for investment, the PE industry in Africa has shown strong growth over the last decade from a very low base. This has resulted in temporary mismatches in supply and demand of capital. During the year 2021, we have observed the normalisation of pricing on the continent, partially because of the slow pace of commitments during the pandemic period. With the size of the industry continuing to grow, the industry should be less subject to mismatches in supply and demand of capital due to the inherent lumpiness of fundraising for the PE industry. This speaks favourably to the returns going forward, with investors entering the PE market at equilibrated prices, allowing them to earn appropriate market-related returns over the investment period.

Broad-based passive investments have not always proven to be the most efficient investment strategy in a less efficient market such as Africa. Risk-related returns are achieved by understanding the nuances of the investment environment and actively investing in companies that address the needs of the population. A positive economic and regulatory environment and competent management teams enable this to happen. Such opportunities sometimes exist in exactly the areas that have structural inefficiencies, which the private sector can address, occasionally allowing for more efficient uptake of new technology. In the current period, this trend of targeted investment can be observed with tech-enabled businesses attracting large amounts of funds.

As a result of the need for more active investment strategies in African markets, the PE industry continues to grow, with deal activity still increasing and asset prices remaining robust. The growth of Africa’s pensions and institutional asset under management, and the resulting increase in local capital available for investment, also provide a significant opportunity for increased interest in PE. In February 2022, the draft amendments to South Africa’s Regulation 28, which sets the prudential capital allocation limits for pension funds, specifically addressed investment into Infrastructure. These amendments introduce maximum limits for the trustees of retirement funds to invest for the long term in various forms of infrastructure projects. This has normalised the investment in Infrastructure by pension funds.

Later this year we hope to launch further research that covers Listed, Sovereign Debt, Infrastructure, and Real Estate. Our Bright Africa Pensions research will conduct an in-depth analysis of the pensions market in Africa. This research will also illustrate how the pool of institutional capital on the continent may be able to contribute to increasing amounts into the PE market.

Please click here to download the full report; and do not miss our exciting webinar on the findings of the report with industry experts.

About the authors

Heleen Goussard
With almost 20 years’ experience, Heleen heads up the alternative investment team at RisCura – a market leader in investment solutions in emerging markets such as Africa and China, with $200bn in assets under management. Under her leadership, the previous core independent valuations service offering has been successfully expanded to include a wide-range of alternative investment services that cover asset classes such as private equity, infrastructure and private debt. 
She also oversees industry-recognised research such as Bright Africa and the RisCura-SAVCA South Africa Private Equity Performance report. Heleen is an expert on alternative investments and her knowledge and experience is often called on by industry bodies for comment on key industry papers. In addition, her thought leadership articles are often published by well-known media outlets. She is a regular speaker at prominent industry events where she provides insight into the industry and RisCura’s research. She previously worked as a corporate finance partner at PKF Inc. Heleen has a CA (SA), is a CFA charterholder and has a master’s degree in finance, focused on valuation from UCT.

Daiyaan Edwards
Daiyaan provides expert independent valuations of private companies across Africa for a range of clients, including private equity funds and institutional investors. He is involved in analysing entity and market information to identify major valuation and risk drivers, develop and interpret financial models, and determine the enterprise and equity values of an entity. He was part of RisCura’s Bright Africa 2021 Private Equity in Africa report and is involved in business development tasks including preparing client proposals and seeking new business opportunities for the Alternative Investment Services team. Before joining RisCura in 2021, Daiyaan completed his SAICA articles at Ernst & Young and served academic articles at the University of Cape Town in the College of Accounting’s Taxation department.