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Global PE funds completed 15 deals collectively worth $1.5bn in the period between 1 January and 30 June 2014, up from 10 deals totalling $621m in the first half of 2013. As a proportion of total African PE spend (83% in 2014 H1) and deal volume (44% in the same period), global PE firms are now more active on the continent than ever before.
The strong start for global PE players this year follows a turning point for African PE investment more generally in 2013. PE firms based both domestically and globally invested $4.26bn last year, more than at any point since the global financial crisis. The previous high was in 2007 when PE firms poured more than $7.6bn into assets on the continent.
Commenting on the study, corporate partner Pervez Akhtar, head of Freshfields’ MENA practice, said: ‘As we move on from the financial crisis, private equity firms are back doing what they do for a living, which is investing. The PE market quietened down significantly during the downturn but is now picking up, because many firms have funds that have not been deployed. They are looking for new markets that give them a growth story, and some of the returns we see in Africa are staggering compared to those in developed market economies.’Fellow corporate partner David Higgins, co-head of the firm’s global financial investors group, added: ‘The increasing interest from the biggest funds is partly as a result of increased risk tolerance, and partly because they’re seeing others do deals in Africa. Sellers are now aware that global funds are willing to transact on the continent and are getting more comfortable selling to them.’
‘With lots of funds looking at opportunities in Africa, this has led to an increase in relative prices and there are of course other issues to overcome such as foreign exchange controls. But for the funds willing to invest the time and effort to understand the local markets, there are real opportunities available.’
Analysing the data by fund type reveals a greater geographic spread of investments from global players in recent years. As global investors increase their exposure to Africa, they are looking beyond South Africa, historically the destination of choice for private equity investors. Between 2004 and 2009, 75% of their investment was in South Africa. Between 2009 and H1 2013, this figure was 10%.
More than four-fifths (84%) of the money global funds have invested in west Africa since 2004 has come in the past two years. They are also beginning to show significantly more interest in east African assets, with 41% of their deals in the region since 2004 coming in the past two years. Despite the conflicts that have scarred north Africa’s recent history, one-sixth of Africa’s PE transactions over the past decade have been made in the region.
David Higgins says: ‘North Africa, west Africa, southern Africa and east Africa contain very different markets. Investors need to take the regional and jurisdictional diversity into account. There is greater political risk in particular sectors such as energy or natural resources, where having a local partner is often critical.’
‘There will be a few bumps in the road, like there always are in emerging markets. But while political risk in Africa remains, the situation gets easier as more deals are done. The lending banks begin to understand the market, and regulators and tax authorities become more familiar with private equity investors.’
Rob Cant, a senior associate in Freshfields’ global financial investor group, who regularly advises on private equity transactions in Africa, says: ‘It’s clear that the biggest global firms will become more prominent in Africa in the future. The fact that firms like Blackstone, Carlyle, KKR and Warburg Pincus – whose LPs have invested in their funds based on global mandates – have all made sizable investments on the continent shows that assets can be found that meet the investment profile of the world’s most sophisticated financial investors.’
‘As recently as two years ago, only a handful of the global funds were realistically considering investing in assets in the Middle East and north Africa. Today, we have advised many of the world’s top 10 funds as they actively pursue assets in these markets. We are starting to see the same patterns emerge in Sub-Saharan Africa, suggesting that global PE players will continue to look to the continent for future growth.’
Read more in Freshfields’ report: Into Africa: the rise of private equity
Freshfields Bruckhaus Deringer studied deal data from 2004 to the present day, identifying a series of trends in the African PE market using Preqin, Thomson Reuters and its own deal data. Analysis of the African private equity market categorises the data according to three types of investor:
By breaking the data down in this way, we are able to identify more specific trends and draw more accurate conclusions about Africa’s growth as an investment destination and its attractiveness to the world’s most sophisticated private equity investors.
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