Recent Private Equity Deal Activity in Africa

LAGOS, Nigeria, Capital Markets in Africa: There have been a number of recent investments in 2015 into private healthcare and pharmaceuticals in Nigeria and into agriculture in Nigeria, Ethiopia and Kenya, and into life insurance and financial services business across West Africa, particularly Ghana.

Telecommunications businesses across Africa also remain attractive.

Regrettably a number of deals have collapsed or been put on hold (often indefinitely) due to the commodity slump (in particular the low oil price affecting the viability of renewable and gas projects) and African currencies depreciation against the USD.

Key sectors
Private equity fundraising for investments into Africa increased from USD 2.5 billion in 2014 to USD 3.8 billion in 2015. European funds need to invest as yet unspent committed capital and there is increased political stability across many parts of the African continent, so investments from Europe into Africa may increase.

We envisage increased investments into the following key sectors: agriculture, education, insurance, banking and financial services, telecommunication, infrastructure and real estate. Recent fundraising activity and announcements from Africa focused PE houses reflect what sectors they are focusing on and where they believe they will make their returns for investors, for instance:

– Abraaj Group in March 2016 announced the formation of a project development arm to extend its investment capabilities in energy infrastructure;
– Verod Capital in January 2016 announced the final close of Verod Capital Growth Fund II at USD 115 million, which will invest across manufacturing, consumer goods and services, business services, agriculture, education and financial services;
– Prudential Financial, Inc. and LeapFrog Investments in January 2016 announced the launch of a USD 350 million investment partnership to target investments in leading life insurance companies in Africa;
– Abraaj Group announced in August 2015 that it had reached final close of its North African Fund II, having secured funding of USD 375 million. This fund focuses on North African companies that could mature in their respective markets and could stand to benefit from a growing middle class spending more on consumer goods and services, business services, materials, logistics and healthcare; and
– Helios raised USD 1.1 billion in what is possibly the largest African focused fund (Helios III) in January 2015. Helios III focuses on businesses that increase business efficiency and reduce costs for consumers and business in their respective countries.

Preparation for exit
Exits by African focused PE funds increased in almost all major private equity hubs (excluding South Africa) for the year ended 2015. This trend may not continue given the current and prospective challenges faced by emerging market economies.

Holding periods for PE investments are affected and potentially lengthened as a result of relatively weak financial markets (with the exception of South Africa), illiquidity of most capital markets and complex and inconsistent regulatory frameworks, each of which could create unnecessary barriers to exit.

PE funds invested in businesses in which shareholders’ and managers’ interests are aligned, which use sophisticated financial reporting systems and which comply with legal, tax and regulatory requirements, and apply good governance, are easier to value, package and sell.

The exit process often takes between 3-6 months or longer depending on local law requirements. Preparation for exit should begin as early as when the initial investment is made so as to ensure all stakeholders are prepared for what is required of them to facilitate a clean and timely exit.

Well conducted and managed due diligence, evaluation of buyers, pricing, data room access and content, transaction structuring and negotiations are all factors that in our experience facilitate an efficient exit.

Market timing is also key. Given the current economic climate we believe that all exits will need to be carefully considered by PE houses. The weakening African currencies add to the difficulties facing managers to accurately forecast returns on exit.

Upcoming trends in private equity through 2016 and beyond
There was a marked increase of exits in 2015 by PE funds from consumer goods and services, retail investments and financial services. It appears that these exits may have more to do with PE funds trying to avoid losses than about achieving profitable returns to investors, given the outlook on the state of the African economy.

The increased amount of financial services exits, coupled with the decrease in exits from technology business, may be because of the large consolidation of banking and insurance business across Africa with an uptake in mobile technology and access to financial services, which remain in high demand.

Recent investments suggest a continuing appetite for banking and insurance investments, and an increasing appetite for industrial and agricultural investments. We expect these trends to continue as many African countries try to become less reliant on the export of raw commodities.

We envisage a continued trend on investments into healthcare and pharmaceuticals across Africa as African governments are concerned with the provision of access to healthcare and pharmaceuticals to lower income consumers, creating an opportunity for increased private sector participation to service the growing middle class. There is also potential for PE funds to benefit from increased state efforts to roll out universal healthcare if they can find businesses that provide complementary services and products.

Given the prevailing views of economic uncertainty surrounding developing countries in Africa, the decrease in fundraising generally and the increase in PE funds’ cash reserves (especially in more developed markets), we expect PE funds to be cautious when making new investments in Africa.

Contributors’ Profiles:
Jeff Buckland is a Partner at Hogan Lovells South Africa. Jeff offers his clients practical and tailored solutions when they need help with all aspects of corporate law such as public and private mergers acquisitions and disposals, outsourcing, crafting constitutional documents for different types of companies, partnerships, joint ventures and trusts incorporating majority and minority protections, exit strategies and commercial arrangements, corporate restructurings, investments in debt, equity and hybrid instruments, corporate governance, and JSE listing requirements.

John Nielsen is an Associate at Hogan Lovells South Africa. John’s practice focuses on all aspects of corporate law, including public and private mergers, acquisitions and disposals, private equity funds, joint ventures and trusts incorporating majority and minority protections, exit strategies and commercial arrangements, corporate restructurings, investments in debt, equity and hybrid instruments.

This article was featured in INTO AFRICA July edition, which focused on Private Equity in Africa and titled Private Equity: Africa’s Trump Card.

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