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African PE market multiples increase, shows research

Africa Global Funds
May 4, 2016, midnight
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The last four years have seen an increase in private equity market multiples on the African continent, according to Bright Africa, an ongoing research endeavor from RisCura.

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The last four years have seen an increase in private equity market multiples on the African continent, according to Bright Africa, an ongoing research endeavor from RisCura.

The report shows that over 30% of reported PE transactions in 2014 and 2015 took place at greater than a 10x multiple, while this was less than 20% of cases in the earlier periods.

Over the 2009 to 2013 period, more than half of PE transactions took place at lower than a 6x multiple.
In 2014 and 2015 however, less than a third of PE transactions took place at that level.

An earnings multiple is a measure of the price of an investment, relative to the earnings of that investment.

There are several different earnings multiples that are used by investors, but a common one is the ratio of the total value of an enterprise (Enterprise Value or EV) to the operating profit of the entity, proxied by EBITDA.

This EV/EBITDA ratio is a useful measure of the relative cheapness or expensiveness of different assets or markets, and is broadly comparable across sectors and geographies.

In contrast, the EV/EBITDA multiples of listed equity on the continent have remained relatively flat over the 2013 – 2015 period, with a slight decline from 2014 levels.

Rory Ord, Executive at RisCura, said: “The reasons for these higher PE multiples included high growth expectations, particularly in the short term, and increased competition for deals.”

“We also think that perceived risk on the continent may have declined, as investors become more comfortable with the environment leading to a reduction in discounts for risk adjustments,” he said.

The report shows that the consumer discretionary sector continued to attract interest from investors, making up 22% of all transactions in 2015.

Of particular interest over the past few years has been online retail, education services such as tertiary education and colleges, as well as advertising and publishing houses.

The consumer sector has been identified time and time again as one of the most attractive areas for investment on the continent, due to the favorable demographics and the growing middle class.

As a result, both the consumer discretionary and consumer staples industries fetch the highest multiples across all sectors.

The financial sector remained a large portion of transaction activity in 2015, making up 16% of total transactions.

Points of interest range from regional banking to asset management and financial services across all regions.

Overall, transactions took a dip last year, as the industry seemed to concentrate more on raising funds.

The total number of transactions was around 160, a level last seen in 2010 and 2011.

On the other hand, M&A activity on the continent appears to have trended upward in 2015 with over 1200 transactions reported, an increase from 990 the previous year.

Despite the recent turmoil in which many African countries find themselves, global investors showed strong interest in investing in Africa’s real economy, as evidenced by the increase in private equity fundraising in 2015.

Total value of Africa PE funding, by year of final close was $4.3bn, based on the AVCA Private Equity Data Tracker.

“The slowdown in the growth of emerging market economies hasn’t inhibited the ability of African investment managers to attract significant amounts of capital, particularly for the larger Pan-African funds as well as Sub-Saharan Africa funds,” said Ord.

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