Africa’s challenges have tended to over-shadow its potential, says Derrick Roper, Chief Executive of Novare Equity Partners, “and our view is that this stage of the economic cycle presents significant opportunities for future returns.”
In sub-Saharan Africa, private equity funds offer investors access to competitively priced assets that have strong growth potential in a region where stock exchanges are still developing and access to investments with the scope for higher returns can be limited.
Within private equity, there’s a long-term investment case to be made for the real estate sector, particularly commercial property development based on positive demographics, urbanisation and growing personal incomes.
“Although not without their risks, emerging markets are increasingly seen as relatively dependable against the background of rising political risk in regions like the US and Europe,” says Roper.
“Adding to the investment case is pent-up demand, with the retail sector in sub-Saharan Africa among the most under-penetrated globally. As Africa urbanises and middle class populations grow, so does demand for products and a modern shopping experience”.
Sub-Saharan Africa has had to battle economic headwinds after the slowdown in commodity prices saw exporters in West and Southern Africa suffer current account deficits, worsened by depreciating currencies. In contrast, countries like Kenya, Tanzania, Ethiopia, Côte d’Ivoire, and Senegal are growing rapidly and have benefited from the low oil price. More recently, there’s been stronger demand for commodities, supported by the global manufacturing recovery, rising inflation and growth in China.
“One consequence of slower growth is that African assets are cheaper. Low valuations can be expected to bring buyers back into the market, boosting private equity funded transaction activity and growth,” Roper adds.
However, because prospects vary between countries and economic sectors, adequate diversification is a strong defence for private equity fund managers against increasingly prevalent and unexpected local and global geopolitical events.
Roper notes that higher interest rates in the US, which look increasingly likely, could present problems to emerging countries that depend heavily on external financing. They can also be expected to have a negative impact on emerging stocks and currencies as higher dollar rates reduce the appetite for riskier assets.
That said, the World Bank expects growth in advanced economies to edge up to 1.8% in 2017 from 1.6% last year. Emerging and developing economies will see growth accelerate to 4.2% from 3.4%.
Lower commodity prices, together with foreign exchange pressures, have also provided an incentive to boost manufacturing in many African countries working to overcome expensive dollar-denominated imports and to source foreign currency.
“Foreign currency shortages and exchange rate fluctuations are amongst the biggest challenges faced by private equity investors in Africa. We account for currency fluctuations in our investment decisions aimed at building portfolios that deliver returns and withstand volatility,” Roper says.
Novare Equity Partners employs a pan-African strategy, mitigating risk by spreading its real estate investments across economies, including Nigeria, Mozambique and Zambia.
As a result, Roper adds that the group is well positioned to take advantage of a global trend by institutional investors to allocate more money to private markets to diversify their revenue streams and find alternative sources of alpha in a world of low growth.