How To Get Private Equity Exits in Africa Right

Private equity (PE) as an asset class has received reasonable prominence in Africa in recent times. New records are being set both at the levels of fund raising and sector diversity of investments. Africa is becoming increasingly investor-friendly.

The attraction of PE to Africa is driven largely by many factors such as: the huge market size – Africa is home to over 1 billion people; relatively young population – about 60% are below 40 years of age; favorable demographics – rising middle class, increasing urbanization, increasing disposable income etc; improved democratic rule and governance, increasing public sector reforms, reducing incidences of civil unrests and wars etc and the mobile technology revolution in Africa driving increased efficiencies, productivity and reducing cost of doing business. In a continent with weak infrastructure (outside of South Africa), mobile technology applications have been successfully implemented across several consumer facing sectors such as financial services, healthcare, education to drive penetration, financial inclusion, communication, logistics and process efficiency. These factors have contributed greatly to increased investors’ interest in Africa

Exit Options in Africa

Typical exit options include: Trade Sales; Secondary Buy-Outs; IPOs – public listing on capital markets; Management Buy-Outs or Buy Backs; and Sale to Stock market mainly for Private Investments in Public Entity (PIPE) transactions. In addition given downside risk issues usually associated with early-stage and owner-managed businesses, many PE houses have adopted self-liquidating quasi-equity instruments with equity kicker options

From 2007 to 2012, Africa has recorded well over 600 successful exits. According to the KPMG and SAVCA Venture Capital & Private Equity survey released in June 2013, South Africa recorded about 536 exits during the same period. Of the total number of exits in South Africa during this period, about 65% were Management Buy-Backs while 13% were Secondaries to another Private Equity firm or Financial Institutions. Disposals through Trade Sale were the most popular in value terms while Secondary sale was the next most popular method of disposal

As the economies of many African countries show significant improvement evidenced by robust GDP growth due to factors noted above coupled with the economic slow-down in the developed economies, it is not surprising that many foreign companies are looking into Africa. A good opportunity for entry is PE- backed companies with relatively good corporate governance principles, clean financial records and good track record of sustainable performance.

Listed below are select examples of exits recorded in 2012:

1. African Capital Alliance (ACA)’s $335million sale of MTN Nigeria to SA-based diversified holding company Shanduka.
2. Actis & others: sale of Savcio to Alstom
3. Actis’ IPO of Ugandan energy distribution company, Umeme
4. Aureos’ sale of Zambian agribusiness company, Golden Lay to Phatisa
5. Citadel Capital’s exit from National Petroleum company Egypt to SE Dragon Energy
6. ECP’s sale of Anvil Mining in DRC to MMG Malachite

 Challenges of PE Exits in Africa

As PE investments continue to grow in Africa, the challenge of Exits has always been raised as the missing part of the jig-saw puzzle. Proponents of this view have highlighted several challenges such as: relatively weak financial markets ( with the exception of South Africa) suffering largely from pricing, informational and transactional inefficiencies, relative illiquidity of most capital markets in Africa, low level representation of companies on the capital markets; complex and inconsistent legal and regulatory framework in many jurisdictions in Africa thereby creating uncertainties about foreign exchange rules, profit & dividend repatriation, investment incentives, capital gains tax, transaction taxes such as withholding and value added taxes etc. These factors have resulted in some cases to the increase in the holding periods for many PE investments in Africa.

Based on available statistics, the proportion of exits in other parts of Africa is growing steadily when compared to volume of exits in South Africa in spite of the challenges noted above. This indicates that successful exits in other African regions can be achieved with the right strategies even in spite of the limitations of the financial markets in these regions.

Source: KPMG, Africa website