African economies have continued to diversify over recent years and are still among the fastest growing in the world, with some countries’ growth rates exceeding 7 percent over a sustained period. This represents a growing opportunity for private equity players to tap into the potential of Africa on the back of a rapidly emerging middle class and demand for quality products.
Africa represents robust opportunities for private equity investors and return on investments can be significant compared to other emerging markets. Not only are PE players set to achieve returns on their investments, African Governments are also likely to benefit from the capital influx into the region thus positively impacting the overall commercial ecosystem.
According to a new study commissioned by Baker McKenzie with The Economist Corporate Network, from 2010 to 2016, private equity firms invested around $25.6bn in Africa. The top five sectors by investment in the period were telecoms, media, and communications ($5.5bn), business services ($3.7bn), energy and utilities ($2.2bn), materials ($2bn), and consumer discretionary ($1.6bn). Therefore, the role of private equity is undoubtedly set to become an even more important partner for African economic development.
Below are some of the key trends that we will witness in the private equity space during 2017:
Smarter Financing
The primary shift has been from public to private financing, largely due to the dramatic fall in oil and commodity revenues and the inherently weak financial markets across the continent. Private equity has become inextricably entwined with Africa’s economic fortunes. What the outside world may perceive as challenges in doing business in Africa, are actually opportunities in the making for African investors.
Within the region, it should be noted that African private equity investors are more able to take higher perceived risks than their foreign counterparts. They have an inherent understanding of how things work, which buttons to press and what kinds of opportunities are likely to succeed. They may be savvier in buying commodities that are at the bottom of the value cycle – a tremendous opportunity that global investors in 2017 should explore.
Investors should also be taking a close look at the fastest growing industry sectors in 2017 and beyond: natural resources, transportation, energy, housing, healthcare, education and hospitality. Capital investment in these rapidly expanding industry sectors is playing an important role in addressing the needs of Africa’s growing population; in job creation, innovation, skills, exports and a robust and diverse value chain. Therefore, these are sectors which to some extent offer a greater defence from global headwinds and offer solid long-term returns.
Fiscal discipline
Macroeconomic stability must underpin the entire system: particularly borrowing rates and inflation. In 2017, it is likely that Africa’s fundamentals will remain settled. Even in nations that have suffered extensive financial damage from the slump in oil and commodity prices, stability has been ensured through central banks use of currency controls, interest rates and fiscal restraint (Angola is a good example of this).
Levels of Foreign Direct Investment (FDI) in Africa may also experience an uptick in 2017 because of sluggish growth in the EU and uncertainties surrounding the economic approach of the new administration in Washington; which will add financial strength to the region. Private equity firms themselves also contribute to economic stability because as well as injecting capital, they very often contribute to financial discipline, strong governance practices and the widening of access to capital markets.
Balanced, low-risk and long-term
In the current context of international private investor caution, many firms will be directing their clients towards some of Africa’s safest industry sectors, including the growing services sector. The EY annual report, Private Equity Roundup Africa, suggests that ‘Growth is being driven by investment in infrastructure, a robust services sector and strong agricultural production, especially in the region’s lower-income countries.’ Hospitality is a sector that offers significant opportunities for private equity investors because of its role as business-critical infrastructure. QG Africa Hotel LP, for example, announced its acquisition of the landmark Mövenpick Ambassador Hotel Accra from Kingdom Holding Company (KHC) in January 2017. The hotel has demonstrated outstanding growth through the highly-rated and reliable delivery of world class hospitality facilities to its international and local customers.
In infrastructure, 2017 is almost certainly going to present investors with even more interesting opportunities. Right now, we are seeing major investments in national infrastructure through Public-Private-Partnerships (PPP’s). Right now, we are seeing major investments in national infrastructure in Angola including the country’s first deep-water port in the northern province of Cabinda: a project worth hundreds of billions of dollars in the form of a public-private-partnership. This grand-scale project forms an entirely new logistics corridor that enables Angola to position itself as the new west coast gateway to the continent.
We can expect to see many multiplier effects from this project over the coming years – particularly in terms of transport and connectivity. We are also seeing long-term, sustainable investments in the nation’s natural resources – the sustainable timber plantation company Estrela da Floresta has been granted concessions to develop much-needed plantations that will help meet the country’s need for wood and contribute to wider economic diversification. In March 2017, it planted its first seedlings, marking the start of an entirely new chapter in Angola’s timber export and wood processing capabilities.
Another case in point would be of Nigeria Government’s strategy for infrastructure financing in 2016 and beyond is committed to diversification of the economy, particularly in areas of agriculture, agro-processing, manufacturing, solid minerals and petrochemicals. The objective is to strengthen Nigeria’s external economy’s balance sheet and improve foreign exchange earnings. The private sector has a key role to play in this regard and we can expect to see many multiplier effects from this strategic diversification program over the coming years – particularly in terms of food self-sufficiency and increased export.
The long term
In the short-term, it is highly likely that Africa will continue to experience GDP growth that far outpaces the rest of the world. But private equity firms need to fully understand the risks in this extremely complex region of over 50 nations – and they need to advise their clients to proceed with care.
From a political and economic perspective, parts of Africa have dramatically improved in the past decade: it is more investor friendly than ever before. There is a greater focus on transparency and government-led efforts to eradicate legacy issues of corruption (such as money laundering). Algeria has now been rewarded for its anti-money-laundering strategy by being removed from the FATF grey list. This is important, significant change. Alongside peace and political stability, Africa is better placed to welcome investors than ever before. In addition, low interest rates in developed countries are likely to be here to stay, offering meagre returns. Property prices in major growth hubs like London have peaked and there is very little in the way of infrastructure development. It’s clear that in this context, Africa offers excellent long-term investment prospects and 2017 is likely to be a particularly good year for investors who choose Africa.
