The Road Ahead for African Private Equity

This EMPEA Brief investigates recent developments in African private equity—including the increase in capital raised for the continent during the ‘Africa Rising’ years and subsequent macroeconomic downturn—in order to identify key themes that will play a role in how fund managers navigate rising competition, slower growth and volatility to not only successfully deliver returns for their investors, but also contribute to Africa’s ongoing economic transformation.

In Summary
  • An unprecedented level of fundraising for African private equity in 2014 and 2015, as well as the entry of global players into the market for the first time, has been followed by a period of slower growth and currency volatility in many of the region’s leading economies.
  • Although Africa’s near-term economic picture has improved marginally, a bevy of capital raised, especially at the larger end of the market, may also be driving up transaction pricing. At surface level, a dearth of large established businesses in the region appears incongruous with the number of US$500 million-plus funds that have raised capital in the last few years. However, fewer big incumbents across many industries also means more blank spaces that can be exploited to build national and continental leaders. These structural nuances point to the limitations of a ‘light-touch’ model for PE in Africa.
  • Successfully managing investments across all phases of the economic cycle will necessitate turning to new tools for value creation, including operational enhancements driven by deep industry expertise. A ‘hands-on’ approach to managing investments will also mean more intensive use of buy-and-build models as GPs seek to create multi-country platforms that can better withstand economic shocks and attract higher offers at exit.
  •  Tech-enabled business models across new verticals like e-commerce and distributed power generation are increasingly relevant for investors in the region, especially if such companies can more effectively support the growth of mass consumer markets than traditional small- and medium- sized enterprises (SMEs). While venture capital (VC) players have only recently begun to invest at greater scale in Africa, VC-backed startups hold the potential to alter the competitive dynamics in many industries, as well as generate additional deal flow for larger GPs who can support theirgrowth at a later stage.
  • Appetite from strategic buyers for PE-backed companies in Africa has waned as many of the region’s economies have stumbled, meaning longer holding periods for some investments. While traditional funds will continue to be the mainstay for many investors committing to private equity in Africa, in some cases, they may limit GPs’ ability to do the ‘heavy lifting’ necessary to improve businesses or lead them to exit investments prematurely to take advantage of volatile windows of buyer interest. Thus, for some strategies, the time to consider evergreen vehicles as an alternative to fixed-life funds has arrived