Over the last decade, private equity has significantly grown in sub-Saharan Africa from less than US$1 billion in 2009 to over US$4 billion in 2014. The trend is likely to continue as global private equity funds turn to what is widely considered the “final frontier”.
The Ritesh Anand Column
Private equity is a form of equity investment into private companies not listed on the stock exchange. It is a medium to long-term investment, defined by active ownership. Private equity builds better businesses by strengthening management expertise, delivering operational improvements and helping companies to access new markets.
This form of equity has grown steadily over the past five years and is likely to continue growing.
According to the World Bank, sub-Saharan Africa needs more than US$90 billion for just infrastructure investments, while the African Development Bank estimates that Zimbabwe requires over US$14,2 billion for infrastructure development alone. Such investments require long-term capital, which is best suited to private equity.
Global investors are turning their attention to Africa. Helios Partners recently announced their Africa-focused private equity fund closed at US$1 billion; Abraaj Capital is likely to follow suit.
Global private equity firms such as Carlyle and TPG have contributed to Africa-focused funds with Carlyle raising US$698 million for their inaugural Africa Fund.
Much of the early investment went into businesses based on fixed assets, such as mobile phone masts. Now retailers, packagers, restaurants and payment systems have all attracted investor interest.
In 2012, ECP invested in Nairobi Java House, a Kenyan coffee house chain and has since helped it to build Planet Yogurt, a group of frozen yogurt outlets.
In 2013 Helios bought 1 600 franchised Shell service stations across sub-Saharan Africa, not just to get into the fuel business, but also to develop the convenience shops attached to such stations.
In general, African entrepreneurs have begun to appreciate how private equity can help their businesses expand as well as improve internal processes and corporate governance making the businesses more robust.
Often, those African firms bought by private equity had been relatively well-run by their founders, albeit in a rather rudimentary fashion. A number of African businesses have been family-owned with a poor corporate governance record.
Private equity investors can often boost their performance by, for instance, refining the measurement and analysis of data as well as improving corporate governance. They can also provide cash to modernise businesses and make them more efficient.
Private equity investors are keen on local businesses with a dominant market share, strong management teams and solid cash flows looking to expand into the region or globally. Such businesses are difficult to find and often require more than five years, which is the typical investment period for private equity. This has led some investors to opt for a holding company structure, which adopts a buy, improve and hold strategy. Typical investment period would be 15-20 years.
Despite the recent flurry of fund-raising, only about 1% of global private equity goes to Africa. Even so, too much money is pouring into too few funds, chasing the few big deals on offer.
However, the recent collapse in commodity prices, weaker currencies and greater political unrest across Africa, will likely see private equity flows to decline in the short-term.
According to some fund managers, this is not such a bad thing as it will scare off fair-weather investors and bring down the prices of overvalued businesses in some parts of the region.
Unfortunately, Zimbabwe has not benefited from the surge in private equity flows to sub-Saharan Africa. Most funds have excluded Zimbabwe citing political risk, sanctions and policy uncertainty as their primary reasons. This is likely to change with the removal of sanctions and greater political stability in Zimbabwe.
What is required is clarity on Zimbabwe’s investment policies. The country has tremendous investment opportunities and is likely to benefit from the next wave of interest from private equity investors.
It requires over US$25 billion across all sectors of the economy over the next decade. The focus should be on creating an enabling environment to attract such long-term capital to ensure sustainable and robust growth.
A number of countries like Kenya, Nigeria and Mozambique have benefited from the surge in private equity investments in recent years, now it’s Zimbabwe’s turn.