Private equity firms are becoming increasingly important in investing in thriving businesses and contributing to the development of African consumer markets. Numerous industry analysts are predicting that 2016 will see significant growth in this industry throughout sub-Saharan Africa as investors seek alternative asset classes to generate robust returns.
The private equity industry in South Africa has seen steady growth over the past decade and has attracted the cream of the crop of the banking sector, including investment bankers, merger and acquisition executives, management consultants and asset managers to name a few. Over the years, the number of these individuals who’ve elected to join private equity firms has increased. The audacious among them have opted to set up their own private equity funds to have autonomy over their investment strategies. The growing demand to recruit these executives, coupled with the increase in new private equity start-ups, indicates growth prospects for the industry at large. It also helps that the industry offers attractive remuneration packages and prestige that will elevate their career profile.
The Southern African Venture Capital and Private Equity Association (SAVCA) contends that although “…private equity is still under-represented in sub-Saharan Africa, the asset class presents an opportunity for investors to invest in a region that is experiencing strong economic growth and which is generating robust returns.” Some surveys have gone as far as predicting that around 80% of investors expect African private equity to outperform the African listed equity market in the next decade. This is a bold prediction, but one which cannot be dismissed.
Recent stats of the South African private equity industry are compelling. SAVCA reported in their latest RisCura-SAVCA South African Private Equity Performance Report that, “by mid-year 2015, the South African private equity industry delivered a ten-year internal rate of return (IRR) of 21.7%, up from 20.5% in March 2015. This performance compares with the 17.1% return from the FTSE/JSE All Share Total Return Index (ALSI) over the equivalent ten-year period.”
The reality of the matter is that the fast-growing African region presents countless opportunities for businesses and investors alike. When economies experience tangible growth they enable other industries and sectors to expand via the multiplier effect. For instance, Africa presently requires extensive investments in infrastructural development, energy, entrepreneurial support, skills development, research and development, and numerous others to drive economic growth.
Take a look at the need to improve transport infrastructure throughout Africa for instance. The construction of road networks, together with the upgrading of ports and airport facilities, will be done by engineering and construction firms. Some of these firms will be based in Africa and will require private equity partners that can provide the necessary financial and human capital support. Through this support, firms will have the backing and potential to grow exponentially.
The South African private equity market amounts to R170 billion ($10 billion) in assets under management, and although this may not typically appear large when contrasted with other asset classes, it is significant in the context of a niche asset class. SAVCA believes that the industry is maturing and this is demonstrated by the emergence of specialist private equity funds which are dedicated to focused industries or sectors depending on the scale of the fund. In addition, South African-managed funds have broadened their focus by exploring investments outside the country, indicating that the South African private equity market has developed over the years.
In the past, the private equity industry was largely concentrated in the developed markets in the United States and Europe. However, a number of emerging markets, such as South Africa, have seen significant growth over the past decade and, if future projections are anything to go by, the trend seems likely to continue.
Africa is teeming with opportunities for businesses to expand and private equity firms are the formidable partners that can bring this to fruition. Watch the space.