Bullish outlook seen for SSA private equity investments as consumer-focused sector to gain most

Consumer-focused sectors, which include food and beverages, healthcare and pharmaceuticals, agriculture and agribusiness, as well as financial services, rank among the top PE sector focus areas in Africa, with West and East Africa taking the lead, according to the 2017 Deloitte Africa Private Equity Confidence Survey.

Both the IMF economic growth projections as well as survey respondents’ expectations anticipate a more positive outlook for sub-Saharan Africa (SSA) over the 2017-18 period, the survey findings indicated.

“The current private equity (PE) landscape across SSA’s regions exhibits a high demand for quality assets and a need to maximise returns from portfolio companies,” the report of the survey said, adding that looking ahead, PE activity is expected to increase over the next 12 months.

Most respondents across all three regions of SSA, say they are investment ready and expect to invest more over the next 12 months.

Competition for new investments is expected to increase, particularly in East and West Africa.

Anticipated increased competition results in respondents expecting entry multiples to increase, most strongly in East and West Africa.

Consumer-focused sectors, which include food and beverages, agriculture, healthcare and financial services, rank among top focus sectors for respondents.

Particularly, West Africa is seen having several characteristics that could attracting funds, including a large, young population that is urbanising with a growing middle class.

“Food and beverages, agriculture and agribusiness, healthcare and pharmaceuticals, and financial services sectors are key focus areas for investment in West Africa. Manufacturing and industries has also emerged as a new focus sector,” the report noted.

Majority of respondents expect PE activity to increase over the next 12 months and most prevalent in West Africa.

West Africa is singled out as the most optimistic region for an improved fundraising environment, and that fundraising sources are expected to vary between regions from mainly governments/DFIs in West Africa, to mostly pensions/endowments in East Africa, and private individuals and governments/DFIs in Southern Africa.

Respondents say they mostly manage mid-size (US$51m-US$200m) to large-sized funds (above US$200m) in each region.

For West Africa, more than half of respondents say they manage large funds (over $200m), followed by mid-sized funds.

In Nigeria, most PE firms that are investing in the country have an international reach with specified Africa funds. These funds mostly have a fund size exceeding $200 million. However, there has also been a rise in indigenous funds with fund sizes of between US$51m and US$200m.

“Given the general uptick in SSA’s economic outlook, most respondents expect the volume of exits to increase or remain the same over the next 12 months, with the average lifecycle for investments expected to be more than five years,” the report claims, adding that West Africa’s exit environment is expected to improve in the next 12 months, with East and Southern Africa expected to see limited changes in the exit environment.

The most anticipated exit routes are sales to strategic investors and secondary sales to PE funds.

Equally, increased debt finance access for transactions is expected to be most evident in West Africa with Europe is expected to be a favoured geographical source from which to raise capital.

However, the report indicated that there are three key challenges across the region issues bordering on corporate governance – the distinction between managers and owners, corporate governance itself, and
transparency.

Another potential challenge seen affecting PE in SSA is the issue of the UK leaving the EU, although most respondents expect this to have a minimal impact.

The majority of respondents across all regions indicate that they expect lower foreign aid from the US following Donald Trump’s ‘America First’ campaign.