THE PRIVATE EQUITY PROMISE
Private equity, a recent financing option for businesses in sub-Saharan Africa, has been gaining remarkable traction over the past decade. This activity involves investment specialists providing equity funding and strategic advice to companies with a high growth potential then selling down their stake several years later at a capital gain. In sub-Saharan Africa, the private equity industry is made up of around 200 players of all sizes who, in 2014, raised $ 4.1 Bn in new investable funds* – essentially from international institutional investors. In 2014, private equity companies owned a pool of assets amounting to 0.12% of the GDP of sub-Saharan Africa** and deployed $ 7 Bn worth of new investments*** in the region.
While still confidential, private equity is a particularly relevant response to the fundamental issues that businesses south of the Sahara must confront, such as the chronic deficit of equity capital on companies’ balance sheets, the scarcity of adequate technical and managerial skills and weak management and governance standards, largely resulting from an informal approach to doing business. Bringing in a private equity investor is obviously a good way of raising cash to fund the company’s growth but it also pushes the company hard to modernize and formalize its business processes. This massive update of the company’s organizational software is clearly not a walk in the park for its management and employees, but it makes it possible for the company to improve its competitiveness and access business opportunities that previously were outside of its reach.
In spite of a series of initial hurdles and unfavorable perceptions of sub-Saharan Africa, private equity has largely proven to be a viable and profitable proposition. The track record of the pioneers who set up the first funds proves that it is possible to do business almost anywhere in Africa, in most economic sectors, with businesses of all sizes and exit the investments at attractive returns. With 40 exits completed by private equity funds, 2014 stands out as a record year.
So far, however, the private equity wave has essentially lifted the largest and best structured African companies even though SME’s and very small businesses remain the hard core of the developmental challenge facing the continent in terms of economic growth, job creation, reduction of poverty and innovation.
In addition, the industry is still dominated by foreign players investing foreign money. Sub-Saharan Africa must clearly wrestle and come to terms with the task of creating and strengthening a generation of local institutional investors, investment professionals and entrepreneurs who together will work to ensure that private equity contributes to the full extent of its capabilities to the future of the region.
* Source: EY Private Equity Roundup 2015.
** Source: EMPA.
*** Source: AVCA Data Tracker 2015.