• 85% of global institutional investors expect to increase their exposure to African private equity over next two years.
 • African private equity perceived to be more attractive and profitable than other emerging markets.
 • Over three-quarters of respondents said they would consider a first-time fund.

LAGOS, 2ND APRIL 2014: Africa’s resilience to the global economic growth slow-down, attractive demographics, and its many economic, political and social reforms have all contributed to cementing the continent’s place as the most attractive investment destination for global emerging market private equity investors.

As the African private equity (PE) landscape evolves and expands, investors’ (Limited Partners’, LPs’) continent-wide search for returns becomes ever more complex. An inaugural study, The search for returns, conducted by the African Private Equity and Venture Capital Association (AVCA), RisCura, and the South African Private Equity and Venture Capital Association (SAVCA), charts investor attitudes to African private equity, providing an effective benchmarking and investor insight tool for both new and well-established industry practitioners. The research launched today at the 11th Annual AVCA conference.

In an industry that has been pioneered by the Development Finance Institutions (DFIs) decades ago, there is now a plethora of global LP investors in African PE, ranging from family offices, endowments, foundations and fund of funds (FoFs), to multi-asset managers, pension funds and insurance companies. The research demonstrates that – despite the occasionally disparate nature of their investment goals – global institutional investors are extremely optimistic towards African PE, with 85% of surveyed LPs indicating that they plan to increase their exposure to the continent’s PE over the next 24 months. Within the spectrum of investor-type, the research indicated that funds of PE funds anticipate the largest increase in African PE allocation (at 5%). This compares with an expected 2% increase in allocation from pension funds, which currently have the least exposure to African PE (1% of portfolios), resulting chiefly from changes to pension fund regulations and strategic asset allocation limits. Changes to the interest and investment intentions of African pension funds could represent a new source of capital for private equity funds in Africa.

Commenting, Michelle Kathryn Essomé, Chief Executive Officer at AVCA said, “With this survey, we are confirming a significant uptick in appetite for African private equity among global LPs, particularly among the newer investors in Africa: fund of funds and pension funds, largely based in the US. We are also seeing an increase in the appetite of African LPs for opportunities across the continent. These trends really place a spotlight on Africa, and highlight its increasing relevance as a global investment destination.”

AFRICA IS MORE ATTRACTIVE RELATIVE TO OTHER EMERGING MARKETS

Over two thirds of the surveyed LPs believe that Africa is more attractive compared to other emerging markets (EMs). Only 20% of LPs surveyed said that Africa’s attractiveness is on par with other EMs, while just 10% of surveyed LPs feel that Africa lags behind other EMs in attractiveness due to the relatively nascent stage of the industry. In addition, over 70% of LPs surveyed expect African PE returns to outperform EM PE returns over the next 10 years, with 24% of LPs expecting an outperformance of 5% or more from their African PE investments.

“Our research finds that although a majority of institutional investors believe Africa is more attractive relative to other emerging markets, investor views are mixed when it comes to identifying the most attractive region within the continent: 28% of institutional investors surveyed are of the opinion that there is no single most attractive region,” commented Rory Ord, Head of RisCura’s private equity valuation business. He continued, “However, there is a clear indication of sectoral preferences among investors, with consumer-oriented businesses being by far the most attractive to institutional investors in the next three years.”

When asked to identify the main drivers of PE returns in Africa over the next 10 years, an overwhelming 71% of LPs identified earnings growth as the primary driver of PE returns in line with high GDP growth rates forecasted for most African countries.

PROMISING OUTLOOK FOR FIRST TIME FUND MANAGERS

The study showed a positive outlook for fund managers raising their first fund, with the majority (76%) of respondents expressing a willingness to consider investing in a first-time fund manager in Africa, particularly if the team had other experience to draw on from prior roles at other firms, or if the team could show experience of executing transactions on a deal-by-deal basis from investment through to exit.

Erika van der Merwe, Chief Executive Officer at SAVCA commented, “Despite this openness to first-time fund managers, the survey did indicate a clear preference amongst investors for fund managers to be based locally in Africa, with 60% of respondents saying that African managers should be based in their most significant target market.”

PERCEIVED CHALLENGES TO INVESTMENT

When asked about the specific challenges facing African PE, the relative youth of the African PE industry was the main concern, resulting in relatively few established GPs and a perceived weak exit environment. Despite the degree of unease and caution that political risk normally evokes from investors, it is interesting to note that in line with the reduction in political risk in Africa in the last decade, investors now cite political risk as only the third biggest barrier to investment.

Similarly, the report found that when evaluating an African PE fund manager, LPs consistently cited track record and operational expertise among the three most important considerations.

Michelle Kathryn Essomé commented, “Unlike global private equity, African PE is predominantly growth capital. It creates jobs and supports local communities, and helps to build sustainable economies.” She continued, “While market and operational experience is still a key component in manager selection, the study showed that only a minority of LPs surveyed see increased competition and high entry valuations as a barrier to African PE investment.” 

GOVERNANCE IS THE KEY COMPONENT AMONG ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) IMPROVEMENTS FOR LPS LOOKING AT AFRICA

An important part of PE’s value-add in Africa is improving the ESG practices of portfolio companies. Work in these core areas improves not only company performance, but also mitigates risk and provides confidence ahead of exit.

When asked to evaluate the importance of ESG factors in selecting fund managers in Africa, around half of LPs surveyed placed a greater importance on governance in Africa (as compared with other EMs). The governance aspect focuses on initiatives such as compliance factors, bringing in independent non-executive directors, and putting in place solid financial reporting and protocols, among other processes.

The results of this inaugural survey, The search for returns: Investor views on private equity in Africa, are based on data collected from 48 limited partners from different regions of the world. These limited partners range from endowments and family offices, to pension funds and development finance institutions. Collectively, the limited partners have over US$150 billion in global private equity assets under management and undrawn commitments of US$50 billion.

More information?

For more information, please contact Rory Ord via email or on +27 (0) 21 673 6999, or contact Erika van der Merwe, CEO: SAVCA via email, or Michelle Kathryn Essomé, CEO: AVCA via email. 

Media contacts

For media enquiries in South Africa, please contact Courtney Ellis via email or on +27 (0)21 673 6999. In the UK, contact Kate Boyle via email or on +44 (0)7930 442 883.