RisCura launches fourth Bright Africa Private Equity report

JOHANNESBURG (Capital Markets in Africa) – Investment firm RisCura is pleased to announce the release of the 2017 private equity update of its Bright Africa report, which provides a comprehensive view of PE investment across Africa.

The report, initially launched in 2012, reveals RisCura’s research results covering fundraising, transaction activity, pricing and investor focus. With Africa’s PE activity growth, coverage in the report continues to expand and provides timeous insight into trends. The latest findings point to a favourable shift in PE deal sentiment in Africa.

Pricing
“Growth expectations have increased, while risk perceptions are lower and investors are focusing on higher-quality deals compared to 2015. This resulted in PE deal multiples growing to 8x Enterprise Value (EV)/EBITDA in sub-Saharan Africa,” says Head of Independent Valuations at RisCura, Heleen Goussard.

Listed equity markets in Africa, on the other hand, have presented a less encouraging trend.  Most of these markets have experienced falling EV/EBITDA multiples well into 2017. This means that valuations in these markets, including in Africa’s largest economies, have declined by as much as 38% since 2015. The interconnected nature of the modern economy has in the past always resulted in movements in African markets being correlated with those of the rest of the world. Africa’s listed multiples are diverging from the world’s other markets, which have been on a clear upward trend since 2014.

Cost of equity has increased by 6.4% in Nigeria and 6.5% in Egypt. As expected, significant currency depreciation and decreased values of commodity exports amplified the risk associated with these countries. Going into 2018, the economic situation in these countries remains somewhat volatile, but inherent qualities may restore some investor faith. The impact of exposure to economic factors has, however, differed across countries, including the fall in global oil prices which has had opposing effects on costs of equity in oil exporting countries and oil importing countries. In South Africa, the positive impact of cheaper oil imports was offset by detrimental political risk leaving the country’s cost of equity relatively unchanged over 2016. 

Transaction activity
The number of PE deals increased by 25% pointing to relentless investor interest, despite 2016 being characterised by difficulties in oil producing countries, wide-spread political tensions and currency depreciations. A record level of fundraising in 2015 left investment managers well-positioned to put cash towards attractive deals in 2016.

Encouraging to note was that the information technology and financial sectors are catching up to the consumer products sector’s share of transaction activity as PE investors take advantage of the changing demand. Although information technology gained the most traction during 2016, Africa has several other fast-growing sectors, and most have shown promise.  

Activity in Southern Africa (excl. South Africa) is up by over 70% since 2015, showing the attractiveness of these markets. Although the PE industry is growing, South Africa and Southern Africa continue to attract most transactions and some of the largest transactions recorded. Some parts of Africa, such as Gambia and Liberia in West Africa, do not receive much interest at all. Higher levels of uncertainty characterise these relatively untouched parts of Africa.

Leverage
There is a direct relationship between the size of PE transactions and the EV/EBITDA multiples paid for these investments. However, in Africa, leverage does not increase with the size of transactions. The consistently low debt levels in Africa indicate that the continent’s PE industry is still not debt driven, thus prices remain influenced by the availability of equity funding. The Bright Africa report compares this to developed markets such as the US, where debt remains more of a factor of prices, and PE multiples are consistently higher across most transaction sizes.

Private Equity has maintained its appeal by offering access to investment in Africa and exposure to returns. Despite challenges across the continent, PE pricing remains buoyant. With commodity prices slowly recovering and global demand strengthening, risk perception toward many African countries is subsiding. Africa’s recovery and rising growth prospects will continue to support Private Equity pricing.