In many ways, private equity (PE) firms are uniquely designed to deal with investment climates in emerging markets like Africa. They provide much-needed capital for moderately risky ventures and the management capabilities needed to make the companies grow. African PE firms are helping to enhance the investment climate for non-traditional sectors like green technology, telecommunications, and private healthcare systems. And while private equity is still only an emerging development paradigm (PE in Africa currently constitutes less than 6% of global PE deals), much can be done to support its expansion on the continent.
According to EMPEA, the Emerging Markets Private Equity Association, the future is bright for PE firms in emerging markets. Last year African-inclined PE firms raised $2.2 billion, a 10% increase from 2007. And compared to other emerging markets, PE investment Africa is growing at a faster rate.
These numbers reflect the fact that if PE firms invest in Africa, they will find an entirely different environment for their investments. PE has a better brand name in places like Africa, in part because they are supported by multilateral institutions like the International Finance Corporation, Overseas Private Investment Corporation and others that favor double and triple bottom line investments. Also, there aren’t significant “deal sourcing” challenges ― the process of finding good investments ― like there are in places like China, where competition between PE firms can make investing burdensome and low-yield.
Added to these advantages is the fact that growth rates of African economies are extremely attractive. The IMF expects Africa to grow at 4% in 2010, the fastest-growing continent-wide rate in the world. And in the medium term, it expects the continent to return to its average of 6.5% growth over the course of the next 4-6 years. Goldman Sachs’ prediction that by 2030, South Africa will be the fastest growing and highest per capita income country of the BRIC-level countries points to an emerging consensus within the financial community: that Africa now, is comparable to Asia in the start of the 1980s.
Often the only challenge firms face in raising funds for investment is in assuring an investor of a way out of their investment, or exiting. And while this remains a significant problem, more stock exchanges are sprouting up (Somali pirates even started one), so we can expect more exits through IPOs in the longer term. Strategic sales of PE-investments to large multinationals, too, are on the up-tick. As more multinationals see the value in increasing their presence in growing emerging markets, they have started buying promising PE –managed companies in the country (rather than starting their own in-country) as a way of mitigating risk, acquiring brand equity and intimate market knowledge. This strategy is especially smart in light of domestic policies, like Broad based Black Economic Empowerment (BBBEE) in South Africa, where laws advantage those firms with representation of formally disadvantaged South Africans.
