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Private equity outperforming other asset classes in Africa – study

3rd April 2014

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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Private equity (PE) in Africa is becoming a more established asset class in the region’s investment landscape and continues to outperform comparable listed equities indexes, the second yearly joint study by the African Private Equity and Venture Capital Association (AVCA) and professional services firm EY revealed on Thursday.

The study, titled ‘Broadening horizons’, examined the results and methods of PE exits between 2007 and 2013 and recorded a total of 207 realisations by PE fund managers in Africa, for transactions with an entry enterprise value of at least $1-million and where PE firms had fully exited their investments.

AVCA CE Michelle Kathryn Essomé said this was an indication that the asset class was outperforming its peers.

“PE in Africa continues to outperform comparable listed equities indexes, confirming it is a key asset class to access the astounding growth fundamentals of Africa,” she noted.

“Even more positively for the industry, our analysis shows that PE’s outperformance has increased for companies exited since 2011, attesting to the greater experience that it has gained and used to its advantage since the early years of investing in Africa.”

According to the study, exits were being achieved across the African continent and increasingly outside of South Africa – the continent’s most developed market.

As expected, South Africa accounted for just under half of the realisations by number and value, at 41% and 4 % respectively, but West Africa saw more than one-quarter of the number of exits (28%) and their value (26%).

Financial services accounted for the highest proportion of exits in Africa, at 19% between 2007 and 2013.

“This sector has been long popular with the region’s PE houses, particularly as technological innovations, such as mobile payments, have made financial services products more accessible for even the remotest of communities, and as banking reforms in many markets have led to consolidation,” Essomé held.

In terms of industrial goods, the sector accounted for 12% of exits in Africa, followed by agriculture/forestry and telecommunications, both at 9%.

Meanwhile, construction and technology both accounted for 8% of PE exits by number and food and beverage for 7%.

EY Africa transaction advisory services head Sandile Hlophe added that the focus on investing in sectors that serviced the growing middle class in Africa was clearly reflected in PE investments and, ultimately, in exit patterns by sector.

Another key finding which the partners believed demonstrated the maturing of the PE sector in Africa was the increasing diversity of the exit routes.

The biggest rise in recent years was the proportion of exits to other PE firms, which was up from 14% in 2012 to 22% in 2013.

Additional key findings were that entry multiples had crept upwards; intermediated deals had outperformed those companies that were acquired through proprietary transactions; local offices were increasingly a key factor in being able to deliver superior returns; and organic revenue growth had been the main growth driver.

“The stage is set for the continued growth and development of the PE industry in Africa, as PE firms uncover opportunities in the rapid economic growth across the region and complement this with increasing sophistication in value creation techniques,” the report noted, adding that PE in Africa continued to outperform public markets.

EY Africa private equity leader Graham Stokoe added that, with the “ever-increasing” levels of interest in Africa, the firm expected the number of exits to increase in 2014 and beyond, potentially even to record levels.

“There is an increasing number of PE-owned companies that were acquired in the peak investment period from 2006 to 2008, which PE firms now need to exit,” he concluded.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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