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Analysis > Analysis and Strategy

Africa sees a favourable shift in private equity deal sentiment

Heleen Goussard, Head of Independent Valuations, RisCura
Dec. 5, 2017, 10:17 p.m.
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Word count: 604

RisCura has launched the 2017 private equity (PE) update of its Bright Africa report, providing a comprehensive view of PE investment across Africa. This research covers fundraising, transaction activity, pricing and investor focus. “The latest findings point to a favourable shift in PE deal sentiment in Africa,” says Head of Independent Valuations, RisCura: Heleen Goussard.

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RisCura has launched the 2017 private equity (PE) update of its Bright Africa report, providing a comprehensive view of PE investment across Africa. This research covers fundraising, transaction activity, pricing and investor focus. “The latest findings point to a favourable shift in PE deal sentiment in Africa,” says Head of Independent Valuations, RisCura: Heleen Goussard.

“Growth expectations in terms of pricing have increased, while risk perceptions are lower, and investors are focusing on higher-quality deals compared to 2015.” This has resulted in PE deal multiples growing to 8x Enterprise Value (EV)/EBITDA in sub-Saharan Africa.

Listed equity markets in Africa have presented a less encouraging trend. Most of these markets have experienced falling EV/EBITDA multiples well into 2017. This means that valuations in these markets, including in Africa’s largest economies, have declined by as much as 38% since 2015.

Cost of equity has increased by 6.4% in Nigeria and 6.5% in Egypt. As expected, significant currency depreciation and decreased values of commodity exports amplified the risk associated with these countries. “Going into 2018, the economic situation in these countries remains somewhat volatile, but inherent qualities may restore some investor faith,” Goussard says.

The impact of exposure to economic factors has, however, differed across countries, including the fall in global oil prices, which has had opposing effects on costs of equity in oil exporting countries and oil importing countries. In South Africa, the positive impact of cheaper oil imports was offset by detrimental political risk leaving the country’s cost of equity relatively unchanged over 2016.

The latest on transaction activity

Goussard says that the number of PE deals increased by 25%, pointing to relentless investor interest, despite 2016 being characterised by difficulties in oil producing countries, wide-spread political tensions and currency depreciations. “A record level of fundraising in 2015 left investment managers well-positioned to put cash towards attractive deals in 2016.”
Activity in Southern Africa (excl. South Africa) is up by over 70% since 2015, showing the attractiveness of these markets. Although the PE industry is growing, South Africa and Southern Africa continue to attract most transactions and some of the largest transactions recorded.

Leverage differs in Africa

There is a direct relationship between the size of PE transactions and the EV/EBITDA multiples paid for these investments. However, in Africa, leverage does not increase with the size of transactions. The consistently low debt levels in Africa indicate that the continent’s PE industry is still not debt driven, thus prices remain influenced by the availability of equity funding.
Despite challenges across the continent, PE pricing remains buoyant. With commodity prices slowly recovering and global demand strengthening, risk perception toward many African countries is subsiding. “Africa’s recovery and rising growth prospects will continue to support private equity pricing,” Goussard concludes.

The full report can be accessed at www.riscura.com/brightafrica.

About RisCura
With African roots and a global reach, RisCura is an independent investment advisor and financial analytics provider that offers investment decision support in developed and emerging markets.

RisCura provides a range of services to the largest investor base in Africa in listed and unlisted investments. We service institutional investors, asset managers, hedge funds and private equity clients with over USD 200bn in assets under advice.

About Bright Africa
Bright Africa was first launched in 2013. The report provides insight into key factors, including risks and opportunities that have driven investor interest across Africa. The findings can be accessed at www.riscura.com/brightafrica.

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