The Q4 2017 exit of private equity firm, Kohlberg Kravis Roberts (KKR), one of the largest assets managers in the world, from the African continent reverberated, but is not a surprise in many corners, especially if you get many fellow African investors behind closed doors.
For more on private equity in Africa see Funding Africa: Private Equity Needs A New Approach
Still, pessimists have deemed KKR’s exit the preamble to the decline of African private equity and have already selected some subsequent chapter titles: (a) Atlas Mara‘s Recapitalization (after struggles with initial investments), (b) Carlyle Group‘s Trials in Nigeria (on Diamond Bank‘s >75% drop in share value since Carlyle’s 2014 share purchase), and (c) Bain Capital‘s Struggles in South Africa (on losing control of retailer Edcon Holdings to creditors in debt-for-equity swap).
Despite KKR’s exit, deal flow should be strong
Optimists will make their case this year. Deal flow is likely be up, with some hungry and creative investors leading the way. Indeed, the latest Oct. 2017 survey of limited partners by the African Private Equity and Venture Capital Association (AVCA) finds that 88% plan to increase their allocations to Africa over the coming three years, and 63% see Africa as a more attractive destination than all other emerging and frontier markets over the next decade.
Small and mid-cap firms will lead the way
The aforementioned struggles in the African private equity landscape are largely concentrated with large cap investors. Small and mid-cap private equity firms, on the other hand, have outperformed their peers on average. (AVCA data shows that small and mid-cap private equity firms account for a greater percent of the firms that outperformed the reported 4.4 percent annual internal rates of return net of management fees for limited partners over a five-year period ending Dec. 31, 2016.)
These same firms will continue to lead the way in 2018 as African small and medium-sized enterprises (SMEs) are the greatest opportunity for growth in both challenging and boom times.
Rising oil prices as a catalyst
Higher oil production and oil prices are helping oil giants and, subsequently, the balance sheets of some big players on the African continent.
Some analysts are increasingly bullish on Brent oil prices averaging north of $70 in 2018, particularly backed by ongoing drawdowns of oil inventories according to the U.S. Energy Information Administration (EIA).
Those price levels, combined with higher production, will strengthen forex in many African countries, including regional giants Angola and Nigeria. As bigger giants return to the scene with larger government coffers, the entire continent could benefit.
Borrowing rates and inflation remained constant in 2017, with many countries implementing spending and related fiscal restraints to buoy this stability.
An increase in oil prices—hopefully with continued fiscal restraints—should be a boon for private equity investment across Africa.
A larger role for investors from the Far (& Middle) East
Chinese investors have generally been described as large government-backed companies providing cheap loans in Africa and, while simplified, there are grains of truth in this storyline. But the caricature of Chinese investors as hyper debt peddlers to Africa misconstrues the growing role that Chinese debt and equity investors currently (and will continue to) play in the African growth story.
Although considered part of the competition to many Western investors, Chinese investors are actively engaging Western investment banks and private equity firms to place more capital in Africa.
If the West and the East become joint as well as complementary investors in Africa, this will be a major boon for the African continent and could open the doors to greater partnerships between private equity and government investors.
Middle East investors may join the party on the back of rising oil prices and consequently increased liquidity, as they seek to aggressively grow funds necessary to support projects at home over the long term.
Increased competition for capital between East and West Africa
The aforementioned growth in oil prices will help West Africa particularly. Nigeria as a more active player in Africa cannot be understated, especially when combined with the already strong growth in Francophone West Africa (e.g., Senegal & Cote d’Ivoire) and high projected growth in Ghana, north of 8% according to the World Bank.
The pitching by West African governments to attract more private equity investment has been conspicuous despite efforts to wrap it in high level policy agendas. And East Africa continues to make efforts to maintain its place as the top investment destination in Africa, led by Kenya (looking to rebound post-election) and Ethiopia (maintaining its quick economic pace of recent years), and with Tanzania and Uganda striving to attract significant investment capital.
The great thing for both East & West Africa is that increased competition could jointly grow the pool of capital, rather than cause one region to lose out to the other.
Increasingly attractive investment environments across the entire African region, underlined by strengthened financial markets & legal frameworks, as well as reduced red tape, will continue to benefit private equity investment across the continent and subsequently boost growth and opportunity for all Africans.