The Johannesburg Stock Exchange (JSE) remains the largest and undisputed gateway for investors seeking to capitalise on the growing consumer market and mineral resources’ endowment on the continent.
Increasingly, private equity is fast emerging as an alternative route to placing money on the JSE, which has a market capitalisation of R14.3 trillion and is the vehicle through which investors can pick from more than 400 listed shares on the bourse’s main board and a further 123 medium-cap stocks floated on its alternative exchange.
According to the African Venture Capital Association, about 823 private equity deals totalling $21.6 billion were reported in Africa between 2010 and last year. Private equity firms specialise in buying companies – either to grow or turn them around – and later selling them at a huge profit.
If the acquired companies are listed on stock markets, they are delisted, kept for five to seven years before being sold to corporate or strategic buyers. Private equity firms also exit investments in their portfolios through initial public offerings (IPO) in which investors buy shares when the companies are listed on stock markets.
However, the illiquid nature of most African stock markets makes it less appealing for private equity investors to exit investments via IPO listings, preferring to sell to buyers in private sales.
Ngalaah Chuphi, partner for sub-Saharan investments at Ethos Private Equity, says the JSE, along with Nigerian Stock Exchange and Kenya’s Nairobi Stock Exchange, present the best routes for private equity investors to exit investments as they are liquid and well regulated. “These (markets) will continue to be important avenues for private equity looking to exit their investments. However, the majority of private equity investments are realised through strategic buyers. Some are put back to original sponsors,” he said.
An Ernst & Young report on private equity exits in Africa found that 56 percent of exits in 2014 were done through selling to corporate buyers, 23 percent to other private equity investors while only 3 percent of exits were executed through IPO listings.
In 2014, private equity firms Ethos and Actis exited pension funds administrator Alexander Forbes by listing it on the JSE after they bought the company for $1.2bn in 2007 and delisted it. Alexander Forbes’ re-listing on the JSE generated a market capitalisation of R10bn. However, Brait and other investors exited Pepkor Holdings through selling to corporate buyer Steinhoff in a transaction worth $5.7bn.
In the developed markets, exiting investments through IPO listings hit a “record pace” in 2014, thanks to robust mergers and acquisitions activity.
Where are private equity investors putting their money in Africa? It turns out that Africa’s booming population, which has topped 1 billion, is a magnet for investors looking to cash-in on its young consumer base and growing middle class.
Private equity investors are investing in high-growth, consumer-facing businesses, infrastructure, real estate, energy, health care, education, and disruptive technologies, mainly targeting South Africa, East Africa (Kenya, Uganda, Tanzania, and Ethiopia) and West Africa, particularly Nigeria and Ghana.
“The pace of diversification of economic activity in Africa is helping increase employment levels in the region and leading to creation of a new consumer class.
“This, in turn, attracts more foreign investment into the region, which will only accelerate the growth of the new middle class and help grow their spending power,” Ernst & Young predicts.
The rising tide of African consumer markets has been underpinned by strong economic growth. In sub-Saharan Africa, growth of 5 percent was registered in 2014, but pegged back to 3.5 percent last year due to a slowdown in the global economy and weak commodity prices.
A moderate recovery is expected over the next two years.
African private equity firms have at their disposal $16.2bn of capital, but there has been talk of a scarcity of companies to buy and of private equity investors struggling to deploy the cash.
But Chuphi maintains Africa is a treasure trove for opportunities.
“There is no scarcity of deals in sub-Saharan Africa for PE groups that know their markets and have created a strong deal origination platform,” he says.
Private equity firms Ethos, Helios and Abraaj have each cut deals worth more than $100m buying into African businesses. Ethos bought Eaton Towers, Africa’s leading independent telecommunications tower company; Helios invested in Africa Oil; and Abraaj invested in Mouka, a Nigerian mattress manufacturer.
Chuphi says many deals on the continent require anything between $50m and $100m to conclude, but a small portion of this money is drawn upfront and the rest is drawn over time to fund growth of the acquired companies.
The African Venture Capital Association report says 2015 was a bumper year for fundraising by private equity firms, but expects to see lower fund-raising totals this year.