Private equity in Africa

Against a favourable economic and socio-economic backdrop, the investment climate for Africa is conducive to generating superior returns, despite the current global financial market crisis and falling economic growth prospects. Additionally, we believe the following regional trends further support African private equity.

Large and Rapidly Growing Consumer Market:

The new story in Africa is one of domestic consumption. In the last four years, the surge in private consumption of goods and services has accounted for two thirds of Africa's GDP growth, with the number of emerging middle class numbering as much as 300 million (Vijay Majahan, ''Africa Rising''). This has led to a sustained consumer-driven economic expansion, further supported by an attractive demographic profile. Africa also has the fastest-growing population and the fastest urbanisation rate in the world, with the United Nations projecting that the continent's population could double in size by 2050, from its current population of 1 billion people. This trend helps the development of the consumer market, as a relatively greater share of working age population tend to save, as a result of reduced spending on dependents, thereby accelerating capital investment. Sectors that stand to benefit include consumer goods and services, retail, financial services and telecommunications.

Furthermore, Africa has recently witnessed an accelerating trend of well-trained individuals from the African diaspora returning to the continent from the developed world in search of opportunities. This provides a critical pool of skilled labour required for corporate growth.

Viable Exit Opportunities

In the context of strong economic growth, liquidity in Africa has improved significantly. Increasing interest among strategic operators provides viable exit opportunities via trade sales, with growing appetite among multinationals in core sectors for African acquisitions. The overall environment for IPO's has improved as domestic equity markets have experienced capital growth. Reforms made in many African countries to the pension and savings scheme have also led to a sustainable change in domestic demand for listed equity assets. Many pan-African companies are now looking to access international equity markets via dual listings, for example the Johannesburg Stock Exchange (JSE) or the London Stock Exchange (LSE).

Deregulation and Privatisation:

There is a growing trend in Africa for governments to withdraw from businesses and stimulate the private sector as a sustainable way to generate jobs, promote competitiveness and alleviate poverty. A good example of this can be seen in the telecommunications sector, where traditionally local governments have owned and operated the incumbent public operator. This is now changing and half of all Africa’s fixed line markets are now subject to competition and nearly half have private sector participation, with 25 African telecoms operators having been wholly or partially privatised. Generally, with regulatory changes and a movement toward more indigenous ownership, the result is undercapitalised businesses gaining access to attractive opportunities in capital-intensive industries or needing capital to meet regulatory changes. Private equity funds would look to seek out these situations.

Free Trade:

African tariffs have dropped significantly over the past decade, with regional integration and increasing cross-border investment being encouraged and driven by the regional trade bodies such as SADC; ECOWAS; COMESA; EAC and AMU. This allows private equity teams to apply ''platform building'' strategies where similar companies are acquired to consolidate the industry and build pan-regional businesses that benefit from a larger market and economies of scale. Trade liberalisation facilitates Africa's re-integration into the global economy, with cheaper imports potentially boosting domestic consumption and business activity.