Johannesburg - African private equity is the most sought after in all emerging markets, when emerging markets are defined as all countries except the US, Canada, Japan, Australia, New Zealand and those in western Europe.
This is according to a report on “The Search for Returns: Investor Views on Private Equity in Africa” recently published by the African Private Equity and Venture Capital Association.
It is a collation of opinions based on a survey of 48 limited partners from four continents cumulatively representing over $150 billion (R1.58 trillion) in private equity assets. The report finds that investment sentiment towards private equity in Africa is highly positive, but that South Africa is far from being the only horse in the race.
Private equity is the asset class made up of equity shares and debt of operating companies not listed on a stock exchange. All the investors or companies surveyed expect to increase their exposure to private equity in emerging markets over the next two years; 85 percent say they will increase exposure to African private equity.
It is interesting that 69 percent of respondents say earnings driven by underlying economic growth will be the primary driver of returns. This is largely based on the size of the untapped consumer market.
Overall, the three most attractive sectors are considered to be consumer discretionary, financial and consumer surplus. The three least attractive sectors are industrials, mining and real estate.
Pension funds responded differently, saying they would prefer to invest in energy and power utilities. This shows their preference for longer-term, low-risk equity but in doing so it also expresses strong support for the future of African stability.
The main barriers to investing in private equity are seen to be a limited establishment of fund managers with little track record; weak exit policies, making it difficult and uncertain to get investments out; political risk; and regulatory and tax issues. Some respondents even mention high competition as a barrier, showing just how active the African market has become.
African partners are far less concerned with political risk than foreign partners, and are more positive about prospects in Africa overall. Generally, African investors have better local resources and more intimate knowledge of how to deal with the peculiarities of African investments. They are also not as biased by selectively bad news reaching foreign media.
“A lot of negative attitude to investing in Africa in general, and in South Africa in particular, comes from global investors who have not yet invested in the continent,” says David Gemmel of EDITLAB.net in his contribution to the book South Africa @20: For better or for worse.
This won’t last long. The majority of respondents say they would consider investing with first-time fund managers if they show an ability to execute deals from investment to exit.
South Africa remains one of the most highly advanced financial markets in the world. But South Africa is no longer the go-to player as the entry point into the African market. When investors say economic growth is the driver of equity earnings they are not referring to South Africa.
The increased interest in African equity is not an opportunity for South African businesses to receive direct investment, but rather an opportunity to be key suppliers to the growing market when these equity investments show returns.
Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course. Follow him on Twitter @PierreHeistein