African private equity (PE) investment has always been seen to be riskier that investment in other regions, but for those willing to invest long-term, and sustainably, the region provides real opportunities that will outlast current economic shocks. With plenty of dry powder around for PE transactions (Prequin reported last year that almost US$ 2.5 tn in capital was waiting to be deployed in PE investments globally), currently, PE investors are studying African markets carefully to find good value opportunities in the region.
Due diligence in PE investments has always been a crucial aspect of the investment decision and is expected to be more in-depth and last much longer in a post-pandemic environment. PE investors will, in addition to looking at a target country’s approach to governance and corruption, now also consider GDP, ability to deal with social issues, and how all of that is impacting on the population, economic growth and the interplay between them. They will study policy and regulation, location, infrastructure and pricing. They’ll look at the impact of COVID-19 and how respective governments have responded to the crisis. Savvy investors will also be aware that no two countries in Africa are the same, that each market is unique and that they must be nimble and adaptable in their approach. In the short term, country specific restrictions such as restrictions on movement and travel may have an effect on transactions and the ability to conduct on-the-ground due diligence and site visits.
A different type of investor
PE investments in Africa are distinct from those in other parts of the world in that they tend to require holding investments for longer than in developed markets, use less debt and improve corporate strategy and governance, investing in the growth of their investments. Returns for PE transactions can also be far higher than in developed markets and at the same time, PE investors are known to play a catalytic role for much-needed investment in Africa, which is crucial to the continent’s post-pandemic recovery.
Post COVID-19 (or even in some cases under current circumstances), PE investors with strong market positions will want to capitalise on the opportunities available in the most challenged sectors, such as retail, transport, energy, construction, hospitality and leisure. The oil and gas industry and non-core infrastructure sectors are also facing significant stress, which will produce opportunities for buyers. There are also opportunities in the sectors that have performed well during the pandemic, such as those in technology, healthcare and Fintech.
The demand for affordable healthcare was growing rapidly on the continent before COVID-19 and has now become imperative. Investors who are in it for the long-term, who understand individual markets and work with local partners and governments to improve access to public healthcare will do well. Tech is also disrupting this sector, specifically the focus on technology-focused healthcare delivery models, which allow for easier access to medical advice and care.
Investment has also continued to grow in the energy sector, particularly in renewables, with many governments looking to the sector as a way to address access to power and boost post-pandemic recovery.
Environmental Social and Governance (ESG) investing has become a key focus for investors in Africa. General Partners (GPs), and the limited partners, prioritise ESG elements such as energy efficiency, sustainability, carbon footprint, community involvement, workplace health, education, skills development, and governance, for example.
The bottom line is that there will be very few sectors who have not been affected by the pandemic, and many will produce good opportunities for fast moving private investors who have done their homework and who have the right approach to sustainability.
Furthermore, with corporate M&A in Africa having decreased substantially in the first half of 2020, and corporate investors standing back to assess their options, potential will be created for PE investors to take a first look at investment opportunities in the continent. In the Sub-Saharan Africa (SSA) region, M&A volume decreased 24% to 254 deals in the first half of 2020, compared to 338 deals for the same period last year. Total value of M&A deals went down 56% to USD 6.8 billion in the first half of 2020, compared to USD 15.3 billion in H1 2019.
PE investment in Africa faces numerous challenges, however. In general, post-pandemic investment has been impacted by the sentiment that life will never be the same. Investors are thinking carefully about which businesses and sectors will be winners and which will be losers, and where the pandemic has created opportunity to acquire quality assets at a discount. It is safe to say that this will require a smart and collaborative effort to get deals over the line. GPs have had to address new risks brought on by the pandemic and stabilise their investments, while sellers are holding on to their assets, waiting for an increase in value. Currency volatility has also put the brakes on PE deals across Africa in recent years and the devaluation of certain of the local currencies has an impact on the hard currency value of deals.
When it comes to funding, most GPs expect to raise most of their funding offshore (mainly in the US and Europe), due to a lack of African institutional capital. With the global decrease in bank lending in a post-pandemic environment, private debt funds may fill in the lending gaps and provide bridge financing for PE investors. African pension funds also have a key role to play as an additional pool of capital in Africa. New and better access to African savings pools have been identified for a while now as something that could act as a catalyst for further PE investment in Africa, and recently we have seen pension reforms to encourage investment in specific asset classes being mooted, or in some cases enacted, for example in South Africa, Nigeria, Kenya and Namibia.
Post COVID-19, exits strategies will be important as many sellers will be waiting for conditions to improve before exiting the market. The rebound, however, might be quicker than would be the case in a normal economic recession, resulting in a flurry of exits as conditions start to improve. Currently, inactivity in the capital markets in Africa, made worse by COVID-19 uncertainty, has meant that asset sales have been the dominant form of exit for PE investments of late. However, a growing category of exit in the region is sales to other GPs and financial buyers.
Even in tough commercial operating environments, GPs are generating good returns in Africa because there are still good opportunities and assets are cheaper. Fund managers that are well plugged into local networks are unearthing choice assets in Africa, with the continent providing definite opportunities for those who can work through the challenges and dig in to discover the opportunities available on the continent post COVID-19.
AUTHOR: Wildu du Plessis, Partner, Head of Banking & Finance, and Marc Yudaken, Partner. Corporate/MA, Baker McKenzie Johannesburg