At the beginning of August, Africa’s richest man according to FORBES, Aliko Dangote, signed an energy infrastructure partnership with the world’s two largest private equity firms, American-based Blackstone Group and Carlyle Group.
Dangote made a commitment to invest a combined $5 billion by 2019 with New York-based Blackstone in power projects in sub-Saharan Africa and formed a joint venture with Carlyle to invest an unspecified amount in Nigerian oil and gas ventures and other African projects.
This is one of many examples from the continent, showing a step in the right direction in the private equity space for companies hoping to implement projects that require copious amounts of capital.
Private equity refers to shareholder capital invested in private companies. Firms seeking private equity funding often want to finance business expansions, develop new technologies, and complete acquisitions of other businesses among other reasons. The size of the private equity market has grown steadily since the 1970s. Africa accounts for around 1% of private equity investment worldwide, says the Chief Executive of the Carlyle Group, David Rubenstein.
Patrycja Kula, a Business Development Manager at the Johannesburg Stock Exchange, says private equity is also good for the stock exchange. She gives Alexander Forbes, the pension fund giant that delisted in an R8.2 billion buyout in 2007, as an example. It was a R9.7 billion-company when it relisted, showing that private equity helps a lot.
Although the South African private equity industry is small in comparison to those of the United States and Britain, it is well established and locally significant. It may be argued, according to the Southern African Venture Capital and Private Equity Association (SAVCA) Industry Performance Survey in 2013, that the country has one of the most sophisticated private equity industries among emerging and developed markets, with different funds at all stages of business development, from start-up venture capital funds through to late-stage and buy-out funds.
According to the World Bank, African nations need an extra $50 billion a year to ease energy shortages and transportation bottlenecks. Since the mid-1990s, financing for African power projects has averaged around $1.2 billion a year. This is split between public and private money.
In South Africa, the report on the Economic Impact of Venture Capital and Private Equity in South Africa in 2013 emphasized the benefits of private equity and venture capital transactions to the development of the country’s economy. It stressed that they are not confined to investee companies. Besides providing access to capital, Aubrey Shabane, the Manager of the Development Bank of South Africa’s Private Equity & Direct Equities unit, says these investors bring dynamism, a depth of operational experience, huge financial acumen, strategic partners and foresight.
“As we face several economic challenges, including exceptionally high and persistent unemployment, it is rewarding to note the effect of this type of investment on job creation,” says Shabane.
“Companies with private equity and venture capital investors clearly do create employment and those in our survey indicated they have grown their staff by around 40 percent in the two-year period covered by this research.”
According to the KPMG and the SAVCA survey on the industry’s performance in the country over 2013, the private equity industry has R162.2 billion in funds under management, an increase of 16.9% from 2012. It adds that R58.6 billion of the funds under management are in undrawn commitments at the end of 2013, meaning that R46.1 billion is available for future investments in South Africa and R12.5 billion for the entire African continent.
This report also notes that private equity is an important source of Foreign Direct Investment, both indirectly via the raising of offshore money by local fund managers and by direct co-investment by foreign investors.
Speaking at the SAVCA Gordon Institute of Business Science for Private Equity in Illovo, Johannesburg, Stuart Bradley, a Senior Partner at Phatisa, a private equity fund manager investing in Africa, says that private equity is the most expensive way of getting funding or capital and should be a last resort for any business. Bradley adds that it is advisable for businesses to try other avenues first, like internal cash generation, family and friends, banks, mezzanine finance or even defer projects.