PE exits in Africa – a market gaining momentum
September 2015 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
Africa’s abundance of resources and potential for expansive economic growth continues to attract an ever-growing number of investors looking for significant returns on their investment. In the private equity space, this is particularly evident with a record volume of deals having taken place in Africa in 2014.
With such positive deal activity for African private equity, appetite to invest in the continent is clearly growing. However, as with all emerging markets, apprehension remains due to perceived risks and lack of knowledge about the investment environment in the region. In our experience, one of the major question LPs have regarding African private equity is the number and quality of routes for exits. Though the industry has done much to encourage discussion about the benefits of private investment in Africa, there hasn’t been enough done to counter the perception that Africa has a weak exit environment.
We believe that emphasising the various ways investors can achieve successful exits for their investments is a significant factor in demonstrating the sustainability and potential of African private equity.
In fact, data on the market challenges the commonly held misconception that Africa is a weak exit environment. A recent study by the African Private Equity and Venture Capital Association (AVCA) revealed that there were 249 private equity exits in Africa between 2007 and 2014. 2014 was also a record year for exits on the continent with 40 exits announced by private equity firms. While South Africa continues to lead in exits, the last few years have seen an increase in activity in East Africa and Southern Africa highlighting a market showing increasing momentum for private equity exits.
AVCA research shows that trade sales accounted for more than half (55 percent) of 2014’s exits and private equity firms were more active than ever before as buyers of other firms’ portfolio companies. We envisage strategic sales like these will continue to prove a powerful source of exits to investors in the near term.
Aside from strategic sales, there are a growing number of options for private equity investors to exit. The improving investment environment in Africa, coupled with economic growth in the region, has supported the development of the listed space in Africa.
So while historically, public markets on the continent have been criticised for their lack of depth, there has been a concerted effort by African governments and industry to improve public markets and encourage liquidity. The last 25 years have seen the number of African stock exchanges multiply from five to 29. South Africa’s Johannesburg Stock Exchange (JSE) saw equity trades increase by 19 percent in the past year and stock market capitalisations in Sub-Saharan Africa are increasing, albeit from a low base.
There is, however, still a gap between the level of development, size and liquidity of stock exchanges across Africa. Africa still has a long way to go, with the northern stock markets stronger than the rest of Africa. However, organisations such as the African Securities Exchange Association (ASEA) have exerted much of their efforts to enhance governance, reporting, technology and data availability to promote rapid improvements across the exchanges and encourage the listing of local companies to facilitate the ease of investing.
With increasing interest in African high growth companies from the global investors, there are also opportunities to achieve exits through international equity markets which should not be ignored. An increasing amount of Sub-Saharan African (particularly South African) stocks are listed on international exchanges and we expect that opportunities to exit via this route will continue to grow.
Another viable method for exits is through the effective structuring of deals with a put or share buy back mechanism. This is particularly useful should an investee company be unable to be listed on an exchange or find an avenue for a strategic or trade sale. That’s why we would always recommend that exit solutions be identified and put in place from day one, tailored for the investment in question and built into the long-term strategy.
Our experience shows that as the African PE landscape matures, LPs expect GPs to provide viable exit strategies. With an increasing number of first time foreign investors entering the African market, the importance of GPs that have established track records on exits accompanied with trustworthy and reliable local networks to manage and support portfolio companies’ continues to increase.
As Africa continues to go from strength to strength, we expect that the opportunities for exits will improve across Africa making the continent increasingly attractive to investors seeking to diversify their emerging market private equity investments.
Hurley Doddy is the co-chief executive officer and founding partner at Emerging Capital Partners.
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Emerging Capital Partners