The conditions are ripe for private equity investment into Africa, according to Steve Costabile, Head of Private Funds Group at PineBridge Investments.

Costabile said that many of the public markets in Africa have done well and have grown, forming alliances across regions to improve liquidity.

“However, Africa cannot rely on formal markets alone as a source of capital. A portion of the feedstock will come from private equity. It is the next logical step to form capital in Africa,” he said.

Over last decade, with growth in developed markets proving difficult to come by, investors turned to emerging markets such as Brazil, India, Russia and China.

“In many cases however, returns in these markets have not met investor expectations. As a result, they are becoming more open minded to the next geography that offers growth,” he said.

According to PineBridge Investments, which currently has over $70bn in AUM, the world today is faced with two broad themes for investors – namely the search for yield and growth.

“Africa in particular will provide investors worldwide with the opportunity to tap into its growth potential,” said Costabile.

African private equity industry is gradually growing from its infancy, with fund-raising for the region increasing by 136% in 2013 to $3.3b from $1.4b a year earlier, according to the EY Private Equity Roundup Africa report, February 2014.

Costabile added, however, that private equity investments require high degrees of transparency, rule of law, infrastructure and contract protection.

“As more and more countries in Africa evolve and have these structures in place, so more private equity will flow in and create opportunities for those businesses that require the capital. These include SME’s, corporates and private equity funds themselves, thereby creating a virtuous circle,” he said.

Costabile believes that one of the core opportunities for private equity investments in Africa lies with consumer focused sectors, as populations move up the value chain.

“The industrial, financial services and agribusiness segments are also attractive, as increasingly, governments expect their needs to be met through partnerships with private capital.”

He noted that most savvy global institutional investors understand that there are longer time horizons in play when investing in Africa and other emerging markets.

“In these markets, investors want to see that the underlying companies they are investing in are performing, rather than just focusing on short term liquidity,” he said.

Costabile said that it is reasonable for investors to expect risk premiums as they are required to move away from their comfort zone, and expose themselves to the various market changes and geopolitical risks that Africa presents.

He added that what PineBridge Investments has learned over the years from investing in various emerging markets such as Mexico however, is not to overreact to negative developments that may occur in these regions: “While these events do inject uncertainty in the short term, often these normalise over time.”

Costabile said that the group has also learned the importance of coupling emerging market experience with on the ground presence.

“There are a lot of differences between emerging markets, but there are also a lot of similarities. For example, while our playbook in other emerging markets is important, being on the ground in the region we invest in means we can adjust the playbook where necessary,” he said.