While Africa’s private equity (PE) sector is at an early stage of development, it is growing steadily and providing good returns, with a record R25.7-billion of PE funds from Africa returned to investors in 2011, up from R18.1-billion in 2010, a KMPG survey has revealed.

This was the result of Africa now being viewed by PE houses and fund managers as a priority investment destination, explained KPMG Nigeria corporate finance and financial advisory services partner Dapo Okubadejo.

“As growth in other economies has slowed in recent years as a result of the 2008/9 recession and the current crisis in the eurozone, investors have been looking to emerging markets and economies that will provide higher return rates. Africa is continuously proving its business case for investment in this regard,” he said.

The continent was currently one of the fastest-growing regions in the world, with the International Monetary Fund expecting seven of the world’s top ten fastest-growing economies by 2015 to be in Africa, and predicting that the continent’s gross domestic product would grow to $2.6-trillion by 2020.

“We are seeing growing interest and activity from both international and Africa-based PE investors in energy and natural resources, infrastructure, consumer goods, financial services and the entire agriculture value chain, which capitalise on Africa’s growth opportunity,” Okubadejo added.

According to the Emerging Markets Private Equity Association, about $1.1-billion worth of new investments were made in sub-Saharan Africa in 2012, and about $1.4-billion achieved in fund raising, which was expected to increase as more companies looked to Africa for alpha returns.

However, while some investors made direct investments into new and uncharted regions or countries, more cautious PE houses and fund managers had used their existing investments and portfolio companies in South Africa, where between 40% and 50% of all African PE funds were currently invested, to springboard their investments into the rest of the continent.

“Whenever we speak with investors or potential investors about Africa, we always advise them that Africa is about having the right risk-versus-reward approach,” continued Okubadejo.

“While it is true that Africa faces many risks and challenges ranging from weak infrastructure, government bureaucracy, a weak legal and regulatory framework and a volatile judicial system, a long-term investment horizon can broadly evaluate the risks against significant growth potentials and investment incentives.”

As many PE firms jostled for deals, and were backed by strong interests from strategic investors and development finance institutions, the PE landscape in Africa would rapidly evolve.

He believed that successful PE firms now had the challenging task of demonstrating their true value proposition, which was not just about providing capital, but about forming the correct partnerships with portfolio companies and providing adequate operational support that would yield significant value uplift through strong earnings growth.

“Having a robust value-chain approach and adopting a roll-up strategy, as well as having deep local knowledge and experience to navigate through each market’s unique complexities is pinnacle to achieving desired investment returns,” Okubadejo advised.