Private equity in Africa



FW moderates a discussion covering private equity in Africa between Graham Stokoe at Ernst & Young, Hugh Naylor at Trinity International LLP, and Roddy McKean at Webber Wentzel.

FW: How would you describe recent deal activity involving private equity firms in Africa?

Stokoe: Following the announcement of a number of PE transactions over the last few months, African PE deal activity has definitely turned the corner and is on the increase once again. PE in Africa is now in a very exciting space. This increased activity follows a quiet period during the second half of 2008, 2009 and 2010. Over this period, PE activity in Africa’s largest economy, South Africa, was particularly limited and more investment activity occurred in West and North Africa. PE investment activity in South Africa is, however, once again on the increase. Despite the global economic uncertainty that exists at present, I do not expect the recent uptick in deal activity to subside. If we look at the trend in fundraising, both in terms of funds raised and being raised, this also supports the view of increased Africa PE deal flow.

Naylor: Deal making remains tough with transactions taking a considerable amount of time to close. Outside South Africa, and to a lesser extent Nigeria, the focus remains on growth capital transactions rather than traditional buy outs with capital being used to grow the business, increase corporate governance and expand into new markets and sectors. Again, outside South Africa deals are generally falling within the small to mid-range with Helios and Vitol’s acquisition of Shell’s downstream assets being one notable exception. Trade buyers, especially from other emerging markets, are increasingly focusing on the continent and the number of funds reaching first close has increased, meaning greater competition for marquee assets. There have been a number of exits recently, mostly trade sales, but the increased focus of the larger international funds on the continent may increase the number of secondary transactions while listings remain high risk given the worldwide volatility of equity markets.

McKean: Deal activity in Africa – outside South Africa – has remained reasonably active through the recent financial crisis, although I would say that activity levels have definitely increased over the last 12 months. GPs are becoming more opportunistic and are broadening their investment horizons by looking at new countries and market segments. Much of this investment is providing expansion capital to companies who are looking to take their businesses to the next level, who are seeking synergistic acquisitions or wish to develop a regional footprint, and who would benefit from the kind of strategic and management disciplines which GPs can bring. This generally involves taking a strategic stake, rather than pursuing the kind of traditional buyout that would be found in more developed markets, and does not normally include leverage.

FW: Which key sectors are these PE firms targeting, and why?

Naylor: Agriculture and food processing and mining/mining services have experienced substantial activity with many sector-focused funds closing in 2010 and 2011. Infrastructure continues to be extremely active, particularly given that investors/funds tend not to distinguish between private equity and infrastructure to the extent they do in the US and Europe. Within infrastructure, there is an increasing focus on renewable power. While historically active sectors such as telecoms are seeing reduced deal flow, support services remain strong, especially the telecom towers business where PE-backed towers companies have raised substantial funding to acquire assets being sold by mobile operators. Finance remains a source of opportunities as domestic banks, despite having avoided the credit crunch, struggle with bad debts and increased capital requirements with consolidation inevitable. There is an increasing focus on technology and IT, particularly in relation to the provision of IT services and the use of technology to develop new markets and products, with various technology-focused funds, such as Adlevo, closing.

McKean: Specialist industry focused funds continue to invest in natural resources and energy, and we are also seeing more activity in the real estate and agriculture space. However, it is clear that many PE firms see consumer-facing businesses as providing many opportunities across a range of services such as financial services, healthcare, hotels and leisure, retail, and fast moving consumer goods. Africa has the highest rate of urbanisation in the world and very favourable demographics in terms of future working population, which, combined with strong GDP growth forecasts, mean that it is predicted that more than 200 million new consumers will enter the market in Africa by 2015. The growing middle class in Africa is seen by many GPs as providing increased market opportunities for many new businesses.

Stokoe: The sectors being targeted are largely those linked to the greatly expanding middle class population. Sectors being targeted thus include fast moving consumer goods, financial services, manufacturing companies with products targeted at the growing middle-class population, and so on. Other areas of focus are investments in the services sector and other sectors that would support or benefit from the extensive level of infrastructure investment required and expected to occur across Africa over the next decade. Renewable energy is also seeing a lot of focus, particularly in South Africa. We are also seeing more sector-specific funds being raised. 

FW: Are you seeing attractive opportunities for investment in Africa’s developing infrastructure?

McKean: Africa’s infrastructure needs are well documented with the World Bank forecasting the annual infrastructure gap to be around US$93bn per year for the next 10 years.

Different countries are dealing with this in different ways and some major projects, particularly in the energy field, are under way. South Africa is investing considerable amounts in its renewable energy REFIT programme while other countries such as Uganda and Ghana are developing infrastructure projects on the back of their new found oil discoveries. While undertaking these projects is the realm of the specialist infrastructure funds, many GPs are looking at businesses which provide goods or services to the infrastructure companies as providing good investment opportunities. 

Stokoe: We have seen PE firms looking at opportunities to invest in Africa’s developing infrastructure, however, due to the different nature and dynamics of investing in infrastructure, these investors are more often those that have funds focused on infrastructure investments. Most PE firms are looking to invest in those companies or sectors that are expected to benefit from infrastructure investment, particularly in the short and medium term, including those companies that provide services linked to these infrastructure projects. PE firms are seeing these opportunities as more attractive as they can more easily play a traditional PE role with active management support, as opposed to the actual infrastructure projects where this is more difficult and the potential returns are often more constrained.

Naylor: Infrastructure remains the key issue in many African countries, whether through the lack of power, transport issues or otherwise. Where the right deals can be struck, with all the appropriate stakeholders properly engaged in the process, it can be a very attractive investment. The recent final close of The Africa Infrastructure Investment Fund 2 at $500m is a welcome fillip for the asset class. There is an increasing focus on renewable power, especially in South Africa, and this is also being driven by development finance institutions. This focus on renewable energy is only likely to increase following the climate change talks in Durban.

FW: What incentives and policies have African governments introduced to actively welcome foreign private equity into the country?

Stokoe: The short answer is that African governments could do and need to do more to encourage PE investment. African governments are, however, starting to become more familiar with the opportunity that foreign PE investors can offer to a country. Mauritius has done a lot in incentivising private equity investment through lower tax rates and has recently introduced legislation covering limited liability partnerships, which will further encourage PE funds being incorporated in this country. In South Africa, the government has started to do more to encourage venture capital funding and pension fund legislation has allowed for increased investment allocation to the PE asset class, however more can still be done to encourage PE investments. Incentives and policies that encourage PE investment in Africa are, however, not only required by African governments, but also by all the major countries involved in PE investments in Africa.

Naylor: Historically, South Africa has always been welcoming of private equity and recent legislation enabling pension funds to allocate funds to PE will enhance this, as will certain tax reforms. Similarly, legislative changes in Nigeria allow pension funds to invest in PE funds and Nigeria has also set up a sovereign wealth fund. Governor Sanusi of the Central Bank of Nigeria has promoted the positive role private equity and venture capital can play. In a speech this summer he espoused the opportunities private equity presents but tempered this with the acknowledgement that a holistic approach needs to be taken to develop a robust and beneficial PE industry, increased awareness and understanding of private equity, and engagement with the relevant stake holders, including the government, entrepreneurs, advisers, the banks, and investors. Although Governor Sanusi was speaking of the challenges and opportunities private equity presents in Nigeria, his comments apply equally throughout the continent.

McKean: South Africa has recently changed its pension legislation to allow pension funds to invest more of their funds into private equity as an asset class, which previously was quite restricted. It is estimated that potentially this could make available up to US$10bn of funds for investment in private equity funds which would be a positive move to encourage local institutional support for the asset class which has historically been supported by DFIs and international institutional investors. Similarly, in Kenya there have been moves by the regulators to encourage and enable pension funds to look at private equity. Otherwise a number of African countries are reviewing their investment incentive regimes generally to attract international investment, particularly in key industries for each country. On the other hand, more governments are introducing legislation or general policies to encourage local participation in new projects to benefit the local community or workforce. This is not necessarily just focused on equity participation and can take many forms, including skills development and training, construction of related infrastructure, as well as CSI programmes. 

FW: What general advice would you give to PE firms on how to structure and negotiate buyouts in Africa, with a view to minimising risk and maximising future value?

Naylor: While generalisations are always dangerous and, cognisant of the fact that Africa is a continent of over 50 countries, investing in Africa is no different from investing in any other market.

Patience, and an understanding of local culture, are absolutely imperative and there is simply no substitute for focused and effective due diligence. Understanding in-country regulations and structuring transactions to take advantage of international conventions and bilateral investment treaties is paramount. Corruption, political risk and criminality are significant issues which need to be analysed on each investment but these issues are in no way unique to, or greater in, Africa. Political risk insurance can be available, albeit at a price, and exchange rate risk can, in certain transactions, be ameliorated by focusing on businesses with strong exports or dollar based earnings. Perhaps the key is to approach opportunities with both an open mind and a degree of cynicism but with the overarching mindset that investments are rarely ‘investment ready’ in the way that investors in the US and Europe would expect.

McKean: Africa is often viewed as being more risky than other emerging markets. However, increasingly international investors realise that this perception does not reflect the reality on the ground. Africa is not a country and each of its 54 countries needs to be approached differently. Many of the perceived risks such as political/country risk, corporate governance and transparency are similar to those in other emerging markets and the key to minimising risk is to carry out in depth analysis of the country, the industry, the regulatory framework and due diligence on the target. Choosing the right local partner is key to any successful investment in Africa, although finding good management teams can sometimes be a challenge. With a lack of liquidity in many African stock exchanges, exit remains a concern and the majority of successful exits have been through strategic sales. This is an important factor in considering how to develop portfolio companies in particular markets to make them an attractive target for trade buyers.

Stokoe: Finding an appropriate local partner that has the same views on risk, corporate governance, controls, and so on, will take a PE investor a long way in minimising its risk and also maximising future value. Investors should take the time required to identify appropriate local partners – an investor should not feel that they are ‘rushed’ into a transaction. Using high quality advisers with a local presence, but which ideally have a combination of local and international experience, will also assist greatly. Investors should be more wary of government influence in regulated industries – such as oil and gas, mining, telecommunications, energy and infrastructure – and local partner selection and involvement is even more important in these investment areas. PE in Africa is more aligned to ‘growth capital’ and investors should consider lower leverage levels than more mature markets.

FW: What tax considerations do PE firms need to make when conducting operations and executing buyouts in Africa? Have there been any recent regulatory changes in this area? 

McKean: The structuring solutions developed in other parts of the world to optimise tax efficiencies for private equity investors do not necessarily work well in an African context. Private equity is relatively new to many African countries and so the tax regimes do not necessarily provide certainty with regard to tax treatment. African countries tend to impose high levels of withholding tax on cross-border cash flows, including dividends, interest, and management or advisory fees. Minimising these taxes through the use of appropriate tax treaties can present challenges because, with a few notable exceptions, most African countries have few tax treaties. Mauritius has deliberately sought to build an attractive treaty network with African countries and has developed its regulatory framework to attract GPs to base their funds in Mauritius with a recent example being legislation to allow limited partnerships to be used as fund vehicles. South Africa is seeking to compete with Mauritius as a gateway for investors into Africa and has recently introduced a new headquarter company regime under which some of the more onerous tax provisions which would otherwise apply are not applicable.

Stokoe: Tax is another area where African PE investments often differ from those in developed markets and I highlight three particular features. One is that the finance cost of acquiring a company’s shares is rarely tax deductible. This reflects a desire for an even-handed approach, given that domestic dividends are usually untaxed. Another is the challenge of extracting profit across borders, owing to the withholding taxes applied by many African countries to dividends, interest, royalties, and fees paid to foreign investors. The third feature is that PE investments may be liable to capital gains tax – or normal tax – on disposal, although with careful planning, the effect of such taxes may be reduced. Significant legislative amendments are currently proposed to the South African tax laws which, if promulgated in their current proposed form, may impact the ability of taxpayers to conclude ‘debt pushdown’ transactions. The relevant amendments will apply retrospectively with effect from 3 June 2011. In terms of the proposed amendments, where certain of the corporate relief rules are utilised in a manner which, in terms of normal rules, would achieve a tax deduction in relation to interest expenditure, the tax deduction of such interest will be disallowed unless specifically approved by the South African tax authorities. From a PE perspective, investors need to closely consider their level of gearing as well as whether debt is obtained from local or international funders, as these factors will be taken into account by the tax authorities in deciding whether a tax deduction of the interest expense will be allowed.

Naylor: Structuring the proposed transaction to take advantage of double taxation treaties and related conventions is very important and often investments are made through low tax jurisdictions such as Mauritius, Cayman Islands or Guernsey.

The tax regime applicable to each transaction needs to be analysed on an investment by investment basis and will feed into the financial model used to justify that investment. Outside of South Africa there have been little, if any, changes to local tax arrangements to encourage the development of the private equity industry but this may happen as the opportunities private equity and venture capital bring are acknowledged. Generally, there is an increasing trend towards updating, or introducing, competition and antitrust laws as well as consumer protection legislation. Basel II and III will inevitably increase financial services legislation and, in many countries, there is an increasing focus on foreign ownership rules. In certain countries, local content and empowerment rules are becoming more prevalent, especially in relation to natural resources.

FW: What trends do you expect to see in private equity activity through 2012, and beyond?

Stokoe: I expect to see an uptick in investment activity in 2012 driven by more activity from global PE firms that are increasingly looking at Africa for investment opportunities. Due to this, I expect that investments will continue to be focused on the larger African economies. There is a growing role of regionalisation taking place and I expect PE to play a key role in transforming sector leaders within a particular country to regional sector leaders. From a fundraising perspective, I also expect to see an increase despite the sizeable PE funds raised in 2011 to date. The best part, though, is that I see 2012 as still being in the relatively early stages of a longer term trend of increased PE investment across Africa.

Naylor: While 2012 is likely to be another tough year for fundraising, a substantial amount of money is waiting to be deployed. However, as low or negligible growth prospects grip Europe, and the US grapples with its deficit, investing in Africa will become increasingly attractive and, following the examples of Carlyle and WalMart earlier this year, global funds and international corporations are increasingly focusing on the continent. International banks, to the extent their balance sheets survive the ongoing crisis in Europe, will look to deploy more capital in the continent which, increasingly, is being seen as a safe, or safer, haven. Infrastructure will remain extremely attractive and private equity outside South Africa is likely to continue to focus on growth opportunities rather than buyouts. There will be strong competition for good assets but the real opportunities will be in investing in strong, often family run, local businesses and expanding their market share, geographical reach, and so on. Increasingly, albeit from a low base, acquisition finance will play a greater role in buyouts though, with the possible exception of South Africa, the market remains a long way from the financial engineering which typified many European and US private equity transactions.

McKean: More GPs are allocating a larger portion of their fundraising to deals in Africa rather than staying focused on South Africa. With the current financial difficulties in the Eurozone and continuing doom and gloom in North America, I see this benefitting African M&A activity levels as more investors realise that the returns on investment in Africa can be very attractive and the risk/reward ratios of doing business are equivalent to more established emerging markets such as China and India. Depending on the outcome, the result of some upcoming presidential elections in Africa could have a very positive effect. Similarly, if the position in North Africa becomes more settled following the Arab spring, this will have a beneficial effect on what was previously regarded as a very attractive region for PE investment.


Graham Stokoe is an associate director in Transaction Advisory Services at Ernst & Young and leads Ernst & Young’s focus on Private Equity across Africa. Mr Stokoe advises clients on the acquisition or sale of businesses in South Africa and across Sub-Saharan Africa. His transaction advisory experience includes buy and sell-side due diligence, M&A sell-side, working capital reports for stock exchange purposes, and advisory and support in respect to IPOs. He can be contacted on +27 11 502 0370 or by email: For more information about Ernst & Young’s Africa Business Center, visit

Hugh Naylor is a partner and head of Private Equity at Trinity International LLP. Mr Naylor specialises in private equity and growth/development capital transactions both in the UK and internationally, with a particular focus on Africa and other emerging markets. Mr Naylor has a broad range of experience advising sponsors, management teams, co-investors and companies that are raising funds privately. He also focuses on funds work, specialising in private equity fund formation and acting for investors in private equity funds. Mr Naylor can be contacted on +44 (0)20 7997 7049 or by email:

Roddy McKean is a partner at Webber Wentzel in South Africa, and leads the firm’s Africa Group. He was previously a partner at international law firm Lovells in London and Hong Kong, where he gained experience of significant cross-border M&A transactions across a broad range of emerging markets in Asia. Over the past few years he has expanded Webber’s African footprint considerably over many industry sectors. He has  been involved in numerous private equity transactions in various African countries including Botswana, Ghana, Kenya, Malawi, Tunisia, Uganda, Zambia, and Zimbabwe. Mr McKean can be contacted on +27 11 530 5289 or by email:

© Financier Worldwide



Graham Stokoe

Ernst & Young


Hugh Naylor

Trinity International LLP


Roddy McKean

Webber Wentzel

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