Covid-19 knocks Africa’s $24.4bn private equity fund industry

• $1.1bn raised in funds in 2020‭, ‬with 81‭ ‬deals worth‭ $‬700m in H1
• Financials‭, ‬IT‭, ‬consumer discretionary took 49%‭ ‬of deals by volume
• Pandemic stimulates new interest in education‭, ‬healthcare
• Nigeria’s 73%‭ ‬of W/Africa’s‭ $‬10.7bn PE tops Africa
• South Africa seeing 0.7‭ ‬GDP increase from PE

Africa’s private equity fund industry (PE) worth some $24.4 billion as of 2017 has been hit by the current Covid-19 pandemic and has further exposed some of the inherent weaknesses in the continent’s PE industry, says a new report put together by Oxford Business Group in collaboration with African Private Equity and Venture Capital Association.

Due to the continent’s relative lack of cases, the dominance of development finance institutions (DFIs) and its prior exposure to crises, partners fear the pandemic’s impact on exits, as the continent’s private equity industry had been partly shielded by the impact of Covid-19, according to a report.

Titled ‘Covid-19 Response Report’, it found that the Africa-focused industry raised $1.1bn in funds and arranged 81 private equity deals totalling $700 million in the first half of 2020. It was discovered that financials, Information Technology (IT), and consumer discretionary accounted for 49 percent of deals by volume.

Meanwhile, the pandemic, which has been estimated to cause 27 countries and regions in the continent to face food crisis, has sparked renewed interest in education and healthcare – with the latter accounting for the largest share of PE deals by value at 24 percent.

For instance, an AVCA survey in April this year found that 49 percent of respondents expected a six to 12-month delay in capital deployment. While more than 90 percent of those surveyed gave Covid’s financial impact as their top concern. Over half said they worried by a potential global recession, with others seeing a dip in consumer confidence. Confidence around exits has been impacted, with 57 percent saying that exit opportunities were the greatest challenge in Africa in the small to medium term. For instance, in H1 of this year, only 13 exits were recorded, compared to 25 in the corresponding period in 2019 and 45 for the year. Exits are further complicated by travel restrictions, which are impeding the ability of investors to carry out due diligence, says AVCA.

Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.

How does private equity work? To invest in a company, private equity investors raise pools of capital from limited partners to form a fund—also known as a private equity fund. Once they have hit their fundraising goal, they close the fund and invest that capital into promising companies.

AVCA says that the prominent role of development finance institutions (DFIs) in Africa’s private equity industry offered resilience, with some DFIs introducing strategies to shield their investments from the pandemic and most investments already armed with strict environmental, social and governance criteria. Other DFIs have pooled their expertise into working groups to respond to the crisis.

For the AVCA, African fund managers were rather better able to offer support and allow continuity at portfolio companies, having already dealt with tasks in Africa including shorter supply chains, more debt and less inventory.

It was reported that between 2012 and 2017, some 953 private equity deals worth US$24.4 billion were raised in Africa. The main sector focuses for the PE investments in 2017 were consumer discretionary and IT; while others were in financial services, education, healthcare and agribusiness.

However, between 2016 and 2017, total value of African PE fundraising went south to $2.3 billion from US$3.4 billion in 2016. Analysts attributed the decrease largely to the fact that a number of big funds had achieved final closes in prior years.

Nigeria, Africa’s largest economy with a GDP of about $500 billion according to the IMF, accounts for 73 percent of the $10.7 billion value of private equity funding in the West African region. The country is also the continent’s top PE domicile. Analysts say they do not see this as surprising, considering a quantity of PE deals decided in the country between 2012 and 2017 –such as the $350 million private equity investment in Port Harcourt, Rivers State based Japaul Oil; the flurry of PE firms that participated in the bid for 9mobile, and the proposed $100 million investment into Nigerian mid-cap companies by Arkana Partners.

But all that may have changed with the country’s recent second recession plunge.

Down south of the continent, the African PE fundraising addition was also recorded. The Southern African Venture Capital and Private Equity Association (SAVCA) said the total size of PE investments in the Southern Africa region more than doubled in 2017, rising from R15.5 billion to R31.3 billion, which was well above the annual average of R14.7 billion over the preceding ten years. SAVCA further reported that, in 2017, South Africa’s private equity capital penetration rose to 0.7 percent of GDP. Notably, the country’s financial sector regulation act, which took effect in April 2018 was expected to bring about a major transformation of the country’s financial services regulatory and risk management framework.

AVCA ranks Kenya as the second most attractive country for PE investments in Africa over the next three years to 2021, after Nigeria. Kenya, East an African economic giant already accounted for KES70 billion of the KES100 billion PE fund inflows into East Africa in the first seven months of 2018. Investor confidence and interest in Kenya was increased following the outcome of its past presidential election. The PE market was on standby to witness bigger deals and attract more funds into the economy.

Despite the boom picture seen in the African PE window up to 2019, the Covid pandemic has exposed some of the continent’s private equity industry’s inherent weaknesses such as: weak exit environments, political risk and currency fluctuations, which have been worsened by the pandemic, with African governments unlikely to offer financial assistance to their distressed companies. This uncertainty has led fund managers in sub-Saharan Africa to close their funds at smaller sizes during the pandemic, which takes the continent to 2020-end. It was reported that some fund managers were anticipating a reduction in capital inflows, particularly from European commercial investors and Asian institutional investors.

Yet, several high-profile exits have been concluded this year, including the $288 million acquisition of DPO Group, a payments company by Dubai-based Network International in July, and the $500 million acquisition of Sendwave, a remittances firm by World Remit in August. All these are suggestive of investors’ retention of faith in the longer-term, the potential of compelling Africa-focused companies.