Private equity in Africa – why you need a long-term view

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Chetan Jeeva | Head of Specialised Finance (Africa) | Investec | mail me |


Despite the hurdles, opportunities abound in Africa for private equity – but innovation and a long-term approach are needed.

Out of Africa, something new

The African continent has opened up significantly in recent years as a destination for investors. After decades of turmoil and economic mismanagement, many African governments have worked hard at reforming their economies and financial systems, reforms that have led to a general rise in incomes and more attractive markets for foreign investors.

The growth of economies like China and India has contributed to a rise in demand for commodities, providing an impetus to growth on the continent. There is potential for the continent to grow further, both as consumer demand grows and as investment in infrastructure rises.

While Chinese investment has grabbed the headlines throughout much of Sub-Saharan Africa, many other countries, such as Turkey and India, have also increased their diplomatic and business presence. This could result in foreign direct investment continuing to rise, with capex channeled into public sector infrastructure and private sector developments. This may create a virtuous cycle of improved incomes and living standards, which should fuel opportunities in the domestic economies and export sectors alike.

Liquidity problems

The opening up of capital markets in Africa has created new opportunities for foreign investors. From an almost total absence of capital markets in much of Africa just three decades ago, a number of countries in Africa now have established stock exchanges, as well as bond and money markets.

However liquidity remains a challenge for many foreign investors. Apart from the Johannesburg Stock Exchange (JSE), most of the exchanges suffer from low turnover, making this a hurdle for global investors to take up stakes in locally listed companies.

To demonstrate the effect, in July (the latest figures available from the World Federation of Exchanges) the JSE had a monthly turnover of US$370bn, compared with US$44bn (8.4 times) for the Nigerian Stock Exchange, the next largest exchange on the continent, and US$14bn (26.4 times) for the Egyptian Stock Exchange, the third largest.

Furthermore, many locally focused businesses prefer to remain private, so many sectors in the economy remain underrepresented on their countries’ exchanges.

Foreign direct investment has grown over the last 20 years, though much of this has been by large multinationals or development finance institutions, either into infrastructure projects or in mining, energy and telecoms. Few locally listed companies have benefited directly from this.

Recent trends in private equity in Africa

Does private equity have a role in mobilising capital in Sub-Saharan Africa? Private equity can be a channel for investors to tap into the opportunities in Sub-Saharan Africa. While the numbers can sometimes be volatile, there is a clear rise in interest in the sector on the continent.

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Read the full article by Chetan Jeeva, Head of Specialised Finance (Africa), Investec, as well as a host of other topical management articles written by professionals, consultants and academics in the December/January 2019/20 edition of BusinessBrief.


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