European private investors are hungry for shares in unlisted African firms and could provide the needed shot in the arm for a continent that has taken a beating from the financial crisis the West is emerging from, reports LEE MWITI
The uninspiring granite exterior of the London Stock Exchange provided the quiet backdrop for a meeting that would almost have gone unnoticed, if it did not have such a strong bearing on Africa’s growth prospects. A fortnight ago, Rwanda President Paul Kagame, former British Prime Minister Tony Blair and African Development Bank (AfDB) chief private equity officer Martin Poulsen were on the roster of speakers at the one-day executive summit on private equity placements in the continent.
Insiders at the discussions say new growth opportunities topped the agenda with leading industry group Emerging Markets Private Equity Association (Empea) reporting that fundraising activity in sub-Saharan Africa has almost tripled from $800 million in 2005 to $2.2 billion in 2008.
Analysts interviewed by Africa Insight spoke of a gradual shift in thinking, with the private sector being seen as providing the needed growth momentum for a continent that has taken a beating following the financial crisis that western markets are emerging from. The credit squeeze halved Africa’s growth rate from 5.7 per cent in 2008 to 2.4 per cent in 2009, according to World Bank estimates.
The Nigerian bank crisis — in which banks were left holding toxic assets following a loaning spree— means that investor confidence in the continent’s public equity has taken a knock and they are now looking at private equity—the taking of shares in unlisted companies – as a more viable option.
“If investing in Africa has to face the downsides of private equity, it should have the upsides as well, hence the greater focus on private equity and special situations opportunities,” said Mr Michael Hugman, Emerging Markets Analyst for the South African Standard Bank.
President Kagame’s presence may have been interpreted to mean that while investors were willing to pump in more money, they will also need reassurance that their investment would be safe in a continent where returns are high, but the risks even higher.
Increased money from natural resources and better business policies are seen to be driving the increased interest from yield-hungry Western investors looking further afield as they seek to diversify their portfolios. Rwanda, with a driven reform project, was the top gainer in this year’s Doing Business 2010 Report, indicative of the President’s quietly effective crusade to sell the tiny eastern African nation as a business hub.
The AfDB also seems to have latched on to this thinking. The bank is set to commit some 20 per cent of its private sector budget –about $200 million – to private equity lending on the continent. It will, however, be seeking to strike a balance between its development mandate and investors’ appetite for big returns. “Africa equity is a sector that is unproven,” Mr Poulsen said, adding that risk was the big factor in the reticence by equity funds to put their money in the continent.
The expected renewed investment means that countries such as Nigeria, Kenya and Ghana, which have advantages of scale, are likely to be the big gainers, as are those such as Rwanda, which have a stable macroeconomic policy and limited political risk.
Mr Blair, who last year formed his Africa Governance Initiative, has been an enthusiastic supporter of private sector investment in the region. “Many still hold a number of misconceptions about Africa which are no longer valid; there are a large number of untapped opportunities. The time is right to invest in Africa,” he told the London summit. Mr Blair is an unpaid adviser to Mr Kagame and Sierra Leone President Ernest Koroma, whose country was named the easiest place to do business in West Africa.
A trade fair attended by the Prince of Wales, Mr Blair, representatives of the UK and US governments, including the UK International Development minister, Mr Gareth Thomas, and hundreds of potential international investors demonstrated the growing interest in the region.
Billionaire George Soros—worth $7.2 billion—was among the speakers at the Sierra Leone Trade and Investment Forum in London and attended by a high-level Sierra Leonian delegation led by Mr Koroma.
The UK’s CDC group—a development finance institution— recently announced that it would invest $5 million in the Sierra Investment Fund (SIF), which makes investments in small and medium sized businesses in the West African nation, the first international financier to do so. Given the illiquid nature of private equity, the region’s numerous trouble spots could well miss out on the expected boom. Giant
British energy firm Globeq has just pulled out of a Ksh46 billion wind farm power project in Kenya due to what it said was its inability to secure a controlling stake in the project, suggesting that investors will be demanding more clout – such as leveraged buyouts – in any deals they cut on the continent in order to mitigate against risk.
“The risks inherent in emerging markets investments mean that investors will expect signs of added commitment from general partners,” said Ahmed Heikal, the founder of the giant Citadel Capital, which has a reported $8.3 billion in investments in the Middle East and North Africa, according to equity tracker Private Equity International (PEI). However, there is a growing feeling in the market that the traditional fundraising model in emerging markets has to evolve if it is to meet investor needs.
Africa’s private equity market is still modest by global standards, with South Africa fund managers controlling up to 80 per cent of the sub-Saharan Africa. Nigeria has about 10 per cent of Africa funds. The private equity landscape in the region is still largely uncrowded and competition thin, but the industry is evolving as investor appetite has fundamentally changed over the last several years.
The 2009 EMPEA/Coller Capital Emerging Markets Private Equity Survey reveals that institutional investor interest in Africa has grown, with 38 per cent of private equity firms surveyed currently investing in Africa versus only 4 per cent in 2006.
Infrastructure and services have been particularly attractive to speculators, and are likely to see even more interest with a new World Bank report released last week pointing to potential opportunities on the continent. The study prescribes an annual investment of $93 billion a year—15 per cent of the region’s GDP—to meet the continent’s needs.
Africa Insight is an initiative of the Nation Media Group’s Africa Media Network Project.