Renee Bonorchis
SOUTH Africa is no longer the destination of choice for private equity investors seeking to tap returns on the continent.
Buyout firms are increasingly targeting markets such as Kenya and Nigeria, where expansion this year is forecast by the International Monetary Fund (IMF) to be more than double that of South Africa.
“Almost all the growth is outside South Africa’s borders,” Andrew Dewar, the managing partner at Rockwood Private Equity, said on Friday.
“The shift from South Africa to the rest of Africa also means the way exits happen will change. You could use listings in London if you get to scale in Africa.”
South Africa’s economy is being hobbled by power shortages, with the state-run utility rationing electricity for 11 days so far this month, helping to push the rand to a 13-year low. Returns for buyout firms in the country have been shrinking for a decade and lag behind the benchmark stock index.
“We used to get a net internal rate of return (IRR) of 30 percent; now it’s about 18 percent to 20 percent,” Andre Roux, who founded Ethos Private Equity, said. He was referring to the annual net IRR, a buyout firms’ benchmark for measuring the success of deals.
Ivory Coast
Southern Africa is now the third-most attractive region for buyout firms after West Africa and sub-Saharan Africa, according to an African Private Equity and Venture Capital Association report released last year.
Nigeria has attracted US private equity firm Carlyle Group, the second-largest manager of investment alternatives to stocks and bonds, which has invested $147 million (R1.7 billion) for an 18 percent stake in Diamond Bank. Carlyle said it would spend as much as $200m in a second Nigerian company this year.
Other targets for the firm include Ghana and Ivory Coast in West Africa.
Swiss Re was lured to Kenya in October when LeapFrog Investments, a private equity firm that focuses on Africa and Asia, sold a minority stake in Kenya’s Apollo Investments. LeapFrog paid 1.68 billion shillings (R210.1m) in November to gain control of Kenya’s Resolution Insurance and tap growth in health coverage in that country.
Ethos was looking to Nigeria, Kenya, Ghana, Zambia, Mozambique and Angola for expansion opportunities for its investments, chief executive Stuart MacKenzie said last week.
Going north
“South African corporates are going north in search of growth and part of our strategy is to take our investments there,” MacKenzie said. Ethos was targeting logistics, consumer, business and industrial services companies, he said.
AutoZone, an automotive parts retailer sold by RMB Corvest and Zico Capital to Ethos in January, has expanded into Namibia, Zimbabwe, Swaziland and Botswana.
Tsebo Outsourcing Group, controlled by Rockwood, has expanded from South Africa into countries including Namibia, Botswana and in 2013 won its first pan-African contact from Barclays to manage 2 000 sites across 12 countries.
EnviroServ Holdings, Rockwood’s waste management company, has expanded into 15 countries outside of South Africa.
IPO choices
As much as $50bn allocated to private equity in Africa has yet to be invested, according to the Southern African Venture Capital and Private Equity Association. Tsebo might tap into that cash as it prepares to sell its investment by year-end.
There have been as many as 40 approaches for Tsebo, many from other buyout companies, according to Dewar.
The FTSE/JSE Africa all share index advanced 18.8 percent a year on average in the decade to September compared with private equity’s annualised rate of return of 18.5 percent, net of fees, according to recent research from the private equity association.
As local firms expand in Africa and gain from more rapidly expanding markets, it becomes more attractive to consider alternatives to the JSE for initial public offerings (IPOs), according to some executives.
A share sale for EnviroServ “would be better on London’s AIM than on the JSE”, Dewar said. “We used to take a country discount to list in South Africa. Everybody’s growing pan-African and then that discount disappears.” – Bloomberg