Dr. Waseem Khan, Head of Private Equity at Silk Invest has recently shared his views on the future of private equity in Africa. A summary:
Investors are in the process of rebuilding their private equity portfolios and they are likely to invest in countries where they see strong long-term growth.
According to the IMF, Africa is expected to experience positive growth of 4.5% per annum over the next five years. This, compared with the forecast 1.2% per annum growth in the G7, and 3.2% in the world, underscores Africa’s importance as a leading economic region.
Emerging markets private equity currently accounts for around 15% of investors overall private equity portfolios. Allocation to African private equity is no more than 1%-2% of that. We expect these figures to rise to 25% – 30%, and Africa’s share to double to 3%-4% over the next five years. Private Equity in Africa raised about $1 billion in 2005, rising to $2.5 billion in 2007; however, the pace of fund raising slowed significantly over the second half of 2008 and almost dried up during the first half of 2009. We believe that this will soon reverse course and investors are likely to eye opportunities in Africa as economic recovery takes hold.
While Africa continuous to lag other emerging markets in terms of political stability, corporate governance and financial strength, the region has shown meaningful progress in all three areas in recent years. Indeed it has come a long way from where it was 15-20 years ago. Economic and political reforms, while slow, are, nevertheless, moving in the right direction, which has led to a decrease in the risk factor for many countries, especially those in North Africa and Sub-Saharan Africa.
Economic growth in Sub-Saharan Africa is on an upward trajectory. According to the IMF’s latest forecast; the region is poised to grow at an average rate of 4.5% per annum.. Endowed with plentiful natural resources, notably oil, this region is likely to see a marked increase in FDI flows over the next five years.
North Africa is another area with significant investment potential. This region has been less affected by the recent credit crisis due in large part to the conservative policies of its Central Banks. As a consequence the debt burden in investee companies is relatively small and banks are willing to lend.
On the investor front, we are likely to see a paradigm shift going forward. Large US and European private investors, who had hitherto provided the bulk of seed capital for African private equity, are likely to be replaced by rich investors from the Gulf and Asia. Food security is forcing governments in the Gulf countries to buy agricultural land in Africa, while state-run Chinese companies are investing billions of dollars in Africa’s infrastructure, and oil and gas industries. Western development finance institutions (DFIs) will continue to play an important role in the development of Africa, but are likely to be more commercially driven than they have been in the past.
By Waseem Khan, PhD, CFA, Director Silkinvest Ltd, London
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