How competition could hamper deal flow in Africa  

Private equity (PE) firms are turning to Africa in search of higher returns, attracted by a large and growing population, a burgeoning middle class, and more stable politics. Global firm, the Carlyle Group recently raised $698 million for their maiden Sub-Saharan Africa Fund – exceeding the initial target by almost $200 million which highlights investor optimism over the continent’s growth prospects.

Looking at deal activity, 2013 was one of the busiest years for private equity deal-making in sub-Saharan Africa since the 2008 financial crisis. The Bright Africa report by RisCura recorded investments during the year with a total enterprise value of over $5 billion. These booming businesses in Africa, driven by the continent’s strong fundamentals have become targets for private equity investors seeking to be part of the African growth story.

Large sums of money are being committed by investors to pursue deals, but a wide gap exists between what is committed and what’s being invested. This begs the question, are there enough deals to be pursued in the first place? Private equity is a relatively new financing vehicle on the continent and private equity managers face tough challenges including convincing tightly held family businesses to open up to private equity investors after years of being run successfully with limited external influence.

As expected, there is stiff competition for good deals in Sub-Saharan Africa and as more PE firms enter the market, the competition will get stiffer. There is further competition from corporates looking to makes strategic acquisitions within their sectors. Large consumer-oriented businesses have found themselves in situations where they are sitting on multiple offers from a number of potential suitors. This search for higher returns can lead to a decline in the number of executable deals and as the East African experience has shown – through increased valuations, investments are becoming more complicated for PE firms as it becomes harder to make high risk-related returns demanded by investors for Africa. 

While the recent successful fund raising efforts by PE funds are a reflection of optimism in the continent’s growth prospects and superior returns, it may be a case of too much money chasing too few deals, which may end up having an adverse effect on deal flow and potential returns, particularly at the upper end of the deal size spectrum.

– Malimu Maseru
Senior Analyst, RisCura Fundamentals

Sources

Bright Africa report
Institutional Investor: Private Equity Seeks to Unlock Africa’s Promise
Euromoney: Carlyle leads the case for African private equity
EFinancial News: US buyout giants bolster Africa deal teams
Forbes: Private Equity Shifts Gears In Emerging Markets
The EastAfrican: Are there enough Equity deals in East Africa for the hunters?

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