Africa is comprised of a range of distinct investment destinations, with a multitude of cultures, business practices, as well as political and economic circumstances. African private equity (PE) activity has remained steady over the past seven years, with investors positive about the long-term attractiveness of Africa, especially when compared with developed markets.

Hurdles

Predictably, political risk (particularly elections), currency and commodity price volatility, corruption and weak governance, as well as limited exit opportunities, continue to dampen investment mood. Additionally, local regulatory frameworks often create barriers to PE operations, including limited access to local capital, exchange controls, local content requirements and ownership restrictions. Sourcing quality, competitive deals is frequently a challenge for PE firms, and there is still a large gap in reliable data pertaining to private companies, which makes it difficult to achieve reliable valuations and peer comparisons, resulting in African companies being mispriced against international peers.

In order to maximise return on investment, fund managers are adopting a hands-on approach to managing investments, requiring time and human capital to engage more actively with and nurture portfolio companies. This often proves challenging where portfolio companies remain majority family owned and controlled, with significant owner resistance to perceived investor interference with the operation of the business.

Trends

Looking to generate 22 African nations to support the initiative, the African Continental Free Trade Agreement aims to stimulate and facilitate intra-African trade, which should fuel investor confidence, particularly in the ever popular consumer goods sector. Additionally, Africa's middle class is growing, with rising disposable incomes, stimulating investment into telecoms, consumer and financial services.

Consumer driven industries (such as financial services and consumer goods), healthcare and education remain stable investment bets, and the agricultural sector is set to hold strong as agro-processing increases and global food demand spikes. Infrastructure creates a substantive opportunity for PE support, with a need estimated at between USD130 and USD170 billion being unmatched by the continent's capital.

Technology is the highest interest emerging sector for PE investment. Historically, this sector in Africa struggled to access funding due to the lack of understanding of the industry, as well as poor connectivity that, in spite of improvements, still plagues the continent. However, tech-enabling solutions in the consumer discretionary spending space, as well as technology driven financial solutions, are hot topics for 2019. Kenya, Malawi and Rwanda are already deploying technology in the agricultural sector, including aerial imagery from drones or satellites, weather forecasts and soil sensors, all of which are making it easier for farmers to manage their crops in real time, while financial solutions are connecting smallholder farmers with credit, financial institutions and greater market access. Funding in tech start-ups surged by 51% in 2017, and continues to grow exponentially, with development capital set to carry the sector to new heights.

Interestingly, it is anticipated that more PE firms will participate in later stage million-dollar venture capital deals, as more businesses look to scale-up after proving the viability of their business models. Sponsor exits by way of initial public offering (IPO), which remained stable over the past few years (amounting to a total of 16% of all IPOs in Africa between 2010 and 2017), are anticipated to continue into 2019, particularly with the growth and maturing of Africa's stock markets, including the Nigerian Stock Exchange and the Kenyan Capital Markets Authority.

Investor activity

China leads in active engagement with Africa, with seven heads-of-state summits under its belt to date. However, Chinese support has mainly taken the form of loans to governments and state-owned entities, with foreign direct investment (FDI) making up only 5% of total global investment in Africa. Nonetheless, two-way trade has grown exponentially and now exceeds USD200 billion. China has also established more than 10 000 firms across Africa, becoming the most integrated investor into the continent.

Japan has opened dialogues and is working closer with East Africa (including Rwanda), as well as Ethiopia, however, Kenya, Nigeria and South Africa top the list with this investment giant.

The European Union (EU) has sought to strengthen its collaboration with Africa, with the fifth EU-Africa Summit held in 2017, two-way trade exceeding USD300 billion, and the pledging of more than EUR44 billion in sustainable investments by 2020. Furthermore, the EU is firming up its preferential access to markets across the region, with the Economic Partnership Agreements already signed with over 40 nations in sub-Saharan Africa. Germany and the Netherlands are emerging as the fastest growing investors in Africa, increasing their project counts on the continent from 2017, while the United Kingdom remains solid and dependable in its commitment to FDI, second only to the United States (US).

While the US is the largest direct investor in Africa, it is lagging in its collaborative efforts, engaging with few countries (primarily South Africa, Lesotho, Kenya, Mauritius and Ethiopia), two-way trade being at a fraction of other nations', and only having ever held one summit with African leaders back in 2014. However, the US is set to increase investment into the continent in a bid to counter the narrative that China's influence in Africa is rising, while US influence lessens.

As at the end of 2017, South Africa shared the top spot with Morocco for attracting FDI, followed by Kenya, Nigeria, Ethiopia, Egypt and Ghana. It is likely that the trend will continue into 2019, with increased investor appetite for East and West Africa, and Egypt and South Africa, the traditional darlings of FDI, being displaced by Morocco and Ethiopia.

In a nutshell…

Over the past few years, Africa has emerged as an exciting investment destination. Despite being afflicted by concerns of political and economic instability, currency and commodity price fluctuation and infrastructure deficiency, as well as questionable governance, the continent continues to attract investors eager to diversify portfolios and dip into sectors and industries which, though challenging, have significant room for growth and high return. 2019 should see investor appetite growing as several countries such as South Africa, Nigeria and Kenya continue to see undeniable returns for those willing to venture into some of the choppier waters of African private equity.

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