In the context of a global search for returns, investors eager to obtain exposure to frontier markets in Africa — one of the world’s fastest-growing consumer markets — are increasingly exploring the sub-Saharan African private equity market.Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), says that, as private equity is still under-represented in Sub-Saharan Africa, the asset class presents an opportunity for investors to invest in a region that is experiencing strong economic growth and which is generating robust returns.
According to the Search for Returns survey1, 80% of the investors expect African private equity to outperform African listed equity over the coming decade.
Van der Merwe adds that the South African private equity industry in particular has delivered healthy returns for investors. She believes that the industry, which has a thirty-year track record of deal-making, exits and fundraising, and which now has an expanding regional reach, is set to play an important role in the continued growth of the asset class in other African markets.
The latest RisCura-SAVCA South African Private Equity Performance Report shows that, by mid-year 2015, the South African private equity industry delivered a ten-year internal rate of return (IRR) of 21.7%, up from 20.5% in March 2015. This performance compares with the 17.1% return from the FTSE/JSE All Share Total Return Index (ALSI) over the equivalent ten-year period.
Van der Merwe says that the South African private equity industry, representing more than R170bn in assets under management, gradually is maturing. “This is demonstrated by the emergence of specialist funds, dedicated to focused sectors, as well as by the trend towards the establishment of funds with a multi-country focus, with many new South African-managed funds now having a mandate to invest outside South Africa. Both of these factors are characteristics of a more developed industry.”
She adds that South Africa also has a proven track record in exits, and has demonstrated to investors that there are a range of viable exit options in this market – and thus a way to realise returns. “With this track record, and the ability to attract funds from institutional investors from across the globe, the industry is becoming a notable role-player in drawing capital into the broader sub-Saharan Africa region: South African private equity fund managers are deploying capital for deals in Southern, West and East Africa, for instance, and moreover are providing the strategic, financial and operational support to their South African-based portfolio companies to expand into new African jurisdictions.”
She says that private equity will play an increasingly active role in funding infrastructure on the continent. “By partnering in capital-rich projects ranging from power plants, renewable energy and water infrastructure, private equity is helping to boost productive capacity and economic potential. Further, on a continent where capital markets are still in the early stages of development, private equity is an important source of capital and of strategic guidance to small, medium-sized as well as large businesses, across industry sectors.”
Van der Merwe adds that the further development of African private equity will benefit African economies and businesses from a governance perspective.
“The SAVCA-DBSA Economic Impact Study (2014) — a survey conducted amongst companies into which private equity funds are invested — revealed that private equity drives good corporate governance (70% of respondents indicated that this was a key value add from their private equity partners) and is valued for its strategic guidance (62% of respondents). The survey also revealed that businesses reported notable employment gains during the private equity partnership (on average, up 40%),” concludes van der Merwe.
1 The Search for Returns: RisCura, AVCA, SAVCA; 2014