Every 0.01% increase in private equity (PE) investment penetration into Africa’s gross domestic product (GDP) would inject an incremental $1.1-billion investment over the next five years, providing a critical source of growth capital to Africa’s commercial sector.

This is according to a report by economic advisory services provider The Economist Corporate Network (ECN). The report, ‘A growth engine: Trends and outcomes of private equity in Africa’, notes that, last year, PE investment was equivalent to 0.18% of Africa’s GDP.

The report highlights that, from 2010 to 2016, general partners (GPs) raised around $2.7-billion a year to invest in Africa-based companies. Last year, while Africa’s GDP grew at a sluggish 1.4%, GPs raised about $2.3-billion, compared with the $2-billion raised in 2014, when economic growth was significantly higher and the commodity cycle peaked.
Deals above $250-million accounted for just under half of all funds invested, amounting to $12.5-billion from 2010 to 2016. The average size of deals concluded by GPs during the period was about $40-million, highlighting the key role GPs play in Africa’s commercial ecosystem, particularly in assisting relatively small businesses to grow.
The report also found that investment by GPs was focused on sectors serving Africa’s growing consumer class. From 2011 to 2016, about half of all investments were made into consumer-serving sectors.
West, Southern and multiregion African deals dominated GPs investments, accounting for 70% of deal value from 2010 to 2016.

“GPs that are successful in the region have a competence for helping investees, particularly family-owned and closely held businesses, to upscale and corporatise,” says ECN Africa director Herman Warren.
The report notes that this differs from the approach GPs tend to take in other regions of the world where there may be “financial engineering” objectives that can involve loading an investment with debt, embarking on a cost-cutting exercise and exiting an investment as soon as possible.
However, the report found that GPs in Africa tend to use relatively little debt to fund transactions, with the general objective in structuring Africa-based deals focusing on equity capital raising, which is primarily used to expand an investee’s footprint, and invest in human capital and other resources, as well as to improve strategy and governance, to grow the enterprise.