As Africa moves into 2020, great excitement will remain over the continent’s emerging opportunities for investment and trade. For example, Mozambique will attract over $100bn in fresh capital over the next few years to develop its massive natural gas resources. Following recent African investment summits in Russia and Japan, both the UK and France will hold high profile events early next year to expand their commercial relations across Africa’s 54 countries.
Analysis & Strategy
What opportunities does Africa hold for private equity firms and their investors?
Investment performance has always been shadowed by ESG (environmental, social and governance) factors. In line with investment theory, protecting the downside is more important to portfolio returns than the outperformance on a few glory days. ESG may not guarantee happy returns, but it will narrow the opportunity for nasty things popping up in the portfolio and open new doors faster, writes Graham Sinclair, Principal at SinCo - Sustainable Investment Consulting LLC
Our continent is hurtling towards an uncertain future that is being shaped by the forces of the Fourth Industrial Revolution. It's too early to tell how exactly the confluence of rapid change and exponential technological advances will play out. But this much is clear: change will be constant and widespread. The uncertainty this creates has the potential to lead to insecurity.
It is important that Africa is viewed through the right lens or it risks being consistently dismissed by international investors. Africa is a youthful frontier story that has a long runway for growth uncorrelated to the rest of the world. The real story is the fortune at the bottom of the pyramid. This market is there right now and it doesn’t depend on politicians, commodity prices or even a growing middle class. It depends on finding the right company that is sensitive to these consumers’ needs by delivering a product that is good quality, offers convenience and at the right price point. In this note, we unpack our thinking behind such companies as well as the current mega-trends driving growth.
Prior to the global financial crisis of 2008 – 2010 the so-called “big” banks, both internationally and within the local context, were stamped by investors and depositors alike with the “too big to fail” label. There was a sense of comfort that, due to their systemic importance, the government would never allow a big bank to fail. And to a large extent, they may have been right. But if we have learned anything since the global financial crisis it’s that banks can and do fail.
The green bond market continues to grow, with analysts predicting 20% growth this year. While Africa only accounts for 2% of the existing green bond market, we are seeing African governments laying the foundations needed to grow their share of green finance. Given the market growth and infrastructure challenges Africa faces, this couldn’t come at a better time for institutional investors.
The good news for private equity fund managers in recent years has been the marked shift in global institutional investment towards private markets investments. According to Blackrock, one of the world’s largest asset managers, the largest pension fund markets have increased their exposure to alternatives from 4% to 25% over the past 20 years. This has included private credit, infrastructure, unlisted real estate, and a host of more niche strategies, and has led to a dramatic increase in fund sizes and capital available for investment in unlisted investments globally. It has also shifted the balance of power from LPs to established GPs, who have had more than enough interest in their funds to pick and choose their LPs. In certain instances this has even led to enhanced economics for the GPs, as LPs have agreed to skewed terms just to gain access to top rated funds. In a few instances, we have heard of the emergence of 3 and 30 fees arrangements being agreed.
How the evolution of the African model for PE sector continues to attract innovative solutions?
Under the guidance of the “Belt and Road Initiative”, international cooperation has become a major trend. In order to build a cross-industry cooperation platform and help the mining industry “go global”, at the second overseas mining investment high-level forum, experts and scholars had a comprehensive and multifaceted discussion and made some suggestions. Mining investment opportunities in Africa caught many investors’ attention.
According to Preqin, private capital dry powder has reached $2trn and is climbing. This means that a large amount of capital is committed by limited partners who are then called on, once an investment opportunity is identified, to provide capital for the purchasing of equity (sometimes mixed with debt). The trouble is that capital commitments continue to grow and are not being called on in what appears to be a sellers’ market.
In a region where only a minority of the population has access to a bank account and SMEs struggle to get financial help from traditional banks, Albert Alsina, CEO and Founder of Mediterrania Capital Partners, explains how the PE industry is becoming a catalyst for the African Fintech ecosystem’s development, enabling large-scale banking and supporting entrepreneurs and SMEs in their expansion plans.
On my first visit to Nigeria as I made my way around the city between meetings, I visited the Nigerian National Museum in Lagos. There were many interesting displays but two things stood out for me. Firstly, was that for some reason the museum had an infestation of mosquitoes that warmly welcomed us and the Black Mercedes in the centre.
Mezzanine debt funds can be an attractive investment for investors looking to achieve regular cash distributions and potential high total returns, with low volatility and downside protections.