Valuations Set to Surge as Uninvested Capital for Sub-Saharan Africa Hits US$6.9B

Business Day

N2.7 trillion (US$6.9 billion) of the aggregate committed capital by Sub-Saharan Africa private equity (PE) investors from 2011 to 2016 were uninvested by the fund managers, indicating that the industry may have witnessed a drought of investment opportunities within the period.

Data from the emerging market private equity association (EMPEA), the global industry association for private capital in emerging markets, showed that PE managers raised N6.3 trillion (US$16 billion) between 2011 and 2016; they made investments of just N3.6 trillion (US$9.2 billion) within the period.

Jeff Golman, Chairman of Mesirow Financial, Chicago-based investment firm, said in an article for the Forbes online magazine that when PE firms are awash with cash from successful fundraising efforts, they face the risk of limited investment opportunities that may depress their performance through subdued returns.

Sub-Saharan Africa PE Fundraising and Investment
Year Amount Raised (US$ Million) Amount Invested (US$ Million) Uninvested Capital (US$ Million) Uninvested Capital (%)
Q3 2016 1,100 1,100 0 0%
2015 3,900 1,400 2,500 64%
2014 4,500 2,100 2,400 53%
2013 1,800 1,900 -100 0%
2012 2,400 1,300 1,100 46%
2011 2,300 1,400 900 39%
Total 16,000 9,200 6,900 43%

Source: EMPEA, BMI Analysis

“It’s simple economics: the pent up demand from expiring capital and low supply of high quality deals will support increasing prices of companies over the next couple of years,” Golman said in a Forbes article.

An awful lot of money will be chasing the best investments, pushing up prices and potentially forcing some funds to make do with less attractive opportunities.

Data Insight, a publication of EMPEA, said that fund managers raised a combined N3.3 trillion (US$8.4 billion) for Sub-Saharan Africa in 2014 and 2015 as fundraising for the region declined year-on-year by 49 per cent, to N790 billion (US$2 billion) in 2016.

Data Insight noted that despite the decline in fundraising, PE fund managers have started to put the record amounts raised in recent years to work, leading to a 10 per cent year-on-year increase in capital deployed.

Energy and health topped the list of industry areas that attracted the interest of PE investors in 2016, with some of the regions managers displaying substantial interest for companies in the Fintech, education, and consumer products and services industries.

The EMPEA report said that managers showed particular enthusiasm for energy, both oil & gas and renewable power.

“The largest transactions recorded in 2016 were The Blackstone Group’s US$300 million investment in the Horn of Africa Pipeline and Denham Capital Management’s US$250 million commitment to renewable power platform GreenWish Partners.”

A private equity industry report released by the African Private Equity and Venture Capital Association (AVCA) said that the number of exits made by the region’s PE firms increased in 2016. Multinational financial investors accounted for the largest share of financial buyers; interest from local financial investors increased.

South Africa dominated the PE exit landscape in 2016, accounting for 42 per cent of total PE exits in the region in 10 years (2007 – 2016); 5 countries accounted for 70 per cent of PE exits in the region for the period.

Nigeria and Egypt each accounted for 9 per cent of PE exits. Kenya accounted for 6 per cent of the exits; Ghana made up 5 per cent of the regions PE exits.

The AVCA report said that the number of PE houses achieving exits in 2016 increased slightly to a new high of 31 PE houses, indicating that the African PE sector continues to mature despite recent economic headwinds which a number of African economies have experienced recently.