Drop in Africa deals forces firms to be more inventive

African investment veterans Helios closed the first billion dollar African fund, and fundraising by private equity firms reached a six-year peak at $ 4.3 billion in 2015, according to research compiled by the African Private Equity and Venture Capital Association. Yet with record levels of capital ready to invest, dealflow has plummeted. The value of deals completed has fallen to just $ 109 million in 2016 to 21 June, the lowest figure for a six month period since the second half of 2010.

Currency troubles

There were several reasons for this fall. Natalie Kolbe, head of private equity at emerging markets investor Actis attributed the fall in investment activity to the effect that currency volatility has had on the continent’s three biggest private equity markets – Nigeria, Kenya and South Africa.

Kolbe said: “One of the biggest concerns for investors has been currency. We’ve seen a lot of volatility in South Africa [the rand fell to record lows earlier this year] and steep devaluation in Egypt, this has caused some investors to think twice about investing and some have sat on the side so far this year.”

Currency volatility and ongoing concerns around the Nigerian naira to US dollar exchange rate has meant investors have remained wary of putting money into Nigeria, Africa’s largest economy, according to Marlon Chigwende, co-head of the Carlyle Group’s Sub-Saharan Africa buyout advisory team.

Henry Obi, the chief operating officer at private equity firm Helios agreed, adding: “the FX uncertainty in Nigeria has resulted in a lot of economic transactions being put on hold while people ascertain exactly what is likely to happen there.”

Need to adapt

The effect of the currency volatility in Nigeria, South Africa and Egypt has caused a slump in the value of deals completed as these are the only markets in Africa where private equity firms can “put a big lump of money to work”, Spencer Baylin a partner at Clifford Chance said.

The lack of deals in the African continent’s biggest markets has forced firms to become increasingly inventive to deploy the mountain of capital they have raised.

Baylin said: “The big private equity houses in Africa don’t just look at private equity, they also look at power, infrastructure and direct lending. Pure private equity in the bigger markets has been less busy but money has gone to different jurisdictions.”

Obi also noted the importance of a flexible approach to investing in Africa, in terms of sectors, geography and the types of deals firms do.

He said: “We aren’t constrained by what our deal tactics are – we can do startups, big buyouts of transnational corporations, we are au fait with all types of deal.”

Firms have increasingly been looking at countries such as Kenya, Tanzania, Ethiopia, Mozambique and francophone Africa to source these deals as well as targeting investments in more stable, government-secured assets.

Investments in the power sector have been particularly common so far in 2016, particularly in West Africa. Baylin said his firm have been “stuffed to the gills with these types of deals” and they have been particularly popular as they offer solid, government-backed revenues and firms only have to put a very small cheque up front though they may invest $ 300 million over the total course of the deal.

Build where you can’t buy

Firms are also having looking to build scale where they can’t buy it. A 2016 Ernst and Young survey on African private equity found that geographic expansion was a key driver for growth in 75% of companies exited in 2014-2015 as against just 31% in 2007-2013. Kolbe said that building businesses out across the continent was a key driver for growth in companies Actis invests in.

Baylin offered Actis’s recent exit of Emerging Markets Payments, which was established in July 2010 as a “buy and build” platform, as a good example of how firms can build scale themselves. The firm initially only invested $ 20 million in the business but completed a number of add-ons of electronic payment companies across Africa and the Middle East. By the time Actis exited the company in a $ 340 million deal in March 2016, EMP was active across 45 countries in the Middle East and Africa and serviced more than 130 banks and 35,000 retailers.


Another barrier to dealflow in Africa historically has been the ability of private equity firms to exit investments, though there are signs that this is changing. As the African market is relatively immature, compared to Europe or the US, exit options have been fairly limited largely to selling to trade or in the more mature African markets, initial public offerings.

In a sign that the private equity market is maturing the number of exits completed by buyout firms in Africa has risen steadily from a low of 21 in 2009 to a nine-year high of 44 in 2015, according to the EY African survey. Exit routes have also broadened. Henry Obi said that Helios will typically target a trade buyer or look to float a company on a western stock exchange, London’s for example. He noted that the firm does not really sell to other private equity houses as there are “very few” in Africa with the firepower to buy Helios companies.

Kolbe offered a different perspective. She said: “our exit routes are equally balanced across trade, secondary and the public markets. We have done IPOs right across the continent including in East Africa, North Africa and South Africa.”


Sanjeev Dhuna, a partner in the banking practice of law firm Allen and Overy, predicted that the effect of Brexit and ongoing political uncertainty in Europe was likely to lead to an uptick in deals in Africa. He highlighted the shifting risk/reward profile of Europe against emerging markets as an explainer for why people may view higher growth emerging markets.

He said: “Africa’s risk and returns are still at the same level [following Brexit]. EU returns are still the same if not worse and we have seen the risk multiply. Growth markets look like they are better value.”

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