As global economies face uncertainty, a partner at South African-based private equity firm Spear Capital, says a contender is emerging as the next frontier for bold investors – Africa. He discusses investment opportunities in the region and the obstacles that need to be overcome.

Private equity can flourish in Africa as opportunities become increasingly visible, Bryan Turner, a partner at a South African firm, Spear Capital, argues.

In Africa, $7.6 billion was invested across 626 deals in 2022, compared with $7.4 billion over 429 deals in 2021, and a surge in exits from 36 to 82, he said in a recent note.

“That’s 82 companies where investors saw the potential for growth and helped build them to the point where they were ready for an exit. These stats not only show increased investment in Africa but that the investments made are paying off at an increasing rate. In theory, those numbers should keep growing, helping build better business and investment environments around the continent,” he continued.

Africa is the second largest continent in terms of land area, and is estimated to have around 60 per cent of the world's uncultivated arable land. In addition, the continent is home to about 10 per cent of the world's renewable fresh water resources, including the Nile, Congo, and Niger rivers. As of 2022, Africa's total population was estimated to be around 1.4 billion people, which is about 17 per cent of the world's total population. 

The continent has had to contend with more than its fair share of political, social and economic difficulties in recent decades. On the upside, however, it benefits from a relatively youthful population profile and the ability for a large and growing middle class to take shape. The total wealth of African high net worth individuals reached $1.9 trillion in 2022, rising 1.6 per cent, contrasting with percentage falls in North America, Asia-Pacific and Europe, although Latin America and the Middle East posted rises. Africa is home to about 200,000 high net worth individuals, according to the 2022 World Wealth Report from Cagemini. 

Turner thinks that Africa’s private equity has the potential to excel further, and it is time for the sector to overcome critical challenges including vintage bias and the limited investment vehicles.

Finding room for improvement 
“One of the biggest issues in the sector is vintage bias, where investments made in certain years benefit or struggle due to market forces outside of their control,” he said. “In an African context, this bias can be acute due to the more pronounced and volatile cycles. While the megatrends that make Africa a viable investment destination remain valid – a young, growing population with increasing levels of education and connectivity – those uncertainties can make timing an investment’s entry and exit difficult,” Turner continued.  

“In combination with other factors, such as the limited number of players in the African private equity market, this bias means that companies struggle to attract investors and valuations decrease. That, in turn, creates a vicious cycle where companies don’t achieve the valuations they should, disincentivising investors from taking chances on companies. Not only do they miss out on investments because of the bias, but the lower valuations further reduce an investor’s ability to exit investments. As a result, forced exits at suboptimal valuations become increasingly common,” he said.

“Africa’s smaller investor base and narrower investment vehicles also means fewer buyers and sellers. What buyers and sellers there are remain constrained, especially when it comes to buyout alternatives. Ultimately, this smaller secondary market means that the private equity environment is not able to operate at its full potential,” he added.   

Time for new thinking 
Knowing that, Turner believes that it’s important that investors in African companies start to think a little differently. “One solution that could work is if several players come together to launch a continuation fund or a number of them. Typically, continuation funds involve a private equity investor moving a portfolio company from an existing fund into a new special-purpose vehicle. Investors can then roll their stakes in a company into the continuation fund or receive cash for their stakes from other investors,” he said. 

“Such funds offer a number of advantages, including greater time and flexibility. Continuation funds extend the lifespan of investments, which allows greater time for companies to achieve their growth objectives. By giving more time, they allow the potential for higher valuations and better returns. It also means that the original investors can keep investing in more companies rather than desperately seeking out exits in potentially difficult markets,” he added. 

“There may be even more potential if there were continuation funds for different sectors, headed up by experts in those sectors. So, for example, a private equity investor could build up a retailer to the point where it’s ready to go into a dedicated retail continuation fund. The same could potentially be true for players in a number of sectors, including manufacturing, ecommerce, or logistics,” Turner continued. “A further extension of this concept could be in the tenor of these funds, from a handful of years to realise value and exit to permanent capital vehicles." 

Building a lasting legacy 
Turner doesn’t think private equity companies are doing a poor job in Africa. He’s seen too many companies in his own and other portfolios thrive as a result of investment to think that. But he said he has been around long enough to know that if players across the sector are really interested in building a legacy on the continent, then it can’t be business as usual.

“Instead, we need to start thinking about new ways of doing things with the aim of producing more and bigger exits, and more importantly more significant and sustainable African success stories, that advance Africa’s overall business environment,” he said.   

The EU has also recently stepped up efforts to catalyse public-private investment in African agriculture, with the launch of the €200 million ($214 million) Agri-Business Capital Fund in 2019, which receives funding from the European Development Fund. The blended finance impact fund is designed to increase agriculture smallholders' access to finance through loans, and has been welcomed by some investment managers. The fund forms part of the Africa-Europe Alliance for Sustainable Investment and Jobs. Tarek Zouari, managing partner and founder of Exco Tunisia, a member of accounting network Kreston Global, also believes that tapping into Africa’s emerging green economy is an attractive opportunity. See more here.