NewsInternationalSmaller deals grow as big private equity deals fade in Africa


Smaller deals grow as big private equity deals fade in Africa

By Reuters

A woman walks past a display of groceries. Photo: Reuters A family-owned grocery chain selling lychees and almond milk would have been an unlikely target when giant private equity funds were spending big in Africa.


But as times have got tougher for investors, small and midsize businesses like Food Lover's Market are making up the bulk of deals on the continent.

Two years ago, an $8.1 bn investment spree by some of the world's biggest private equity funds led to expectations that Africa would feature strongly in their portfolios.

US giant KKR made its first investment in the continent, putting $200m into Afriflora, a flower company in Ethiopia.

Carlyle put money into Nigeria's Diamond Bank while Permira backed a management buy-out of South African data centre firm Teraco Data.

But with falling commodity prices dragging down growth, some of these deals are souring, big money flows have dried up, and firms are finding it harder to sell or float their investments.

Standard Chartered has halved its private equity team in Africa in recent months as it looks to sell-off its assets following a number of disappointing deals.

"You need to be a bold investor today," said Andrei Vorobyov, a partner in Bain & Company's Johannesburg office. "I don't think anybody predicted such a decline in commodity prices."

Rise in smaller deals

Nigeria, Africa's largest economy, fell into recession for the first time in 25 years in the second quarter of 2016, while business confidence in South Africa was at its lowest in three decades in September.

Yet while big buyouts are out, the number of smaller private equity deals in Africa is rising as investors pick off opportunities too small for global funds, AVCA data shows.

Around 75% of deals in the first half of 2016 were below $250m.

In 2014, around 70% of funds went on buyouts of more than $250m.

A $54m investment by emerging market private equity firm Actis in Food Lover's Market (FLM), a niche South African chain with 128 stores in 11 countries and $750m in revenues, is typical of the deals which are closing despite slowing economic growth and depreciating currencies.

"This business is right in the sweet spot of our investment strategy in the sub-Saharan African market. The demand for modern retail is no different for a Kenyan consumer than someone sitting in the UK," said David Cooke, a director at Actis, which plans to triple the size of FLM in five years.

As well as economic uncertainty, industry experts say it is still difficult to find investments in Africa on the scale the big funds would like.

Traditional private equity funds also face the constraint of having to cash out of investments at specified times - often within three years and preferably at attractive enough return levels to tee them up for fresh fundraising.

That type of investment period does not usually work in Africa said Riaz Currimjee,a founding partner at Surya Capital, an East African-focused investment firm. "Things take longer. A five-year investment is not long in frontier markets," he said.


Currency risk

The undeveloped state of many of Africa's stock markets as well as volatile currencies add to the difficulties firms face in selling their investments at the right time.

According to an AVCA survey of investors, currency risk is the biggest obstacle to African private equity.

The South African rand hit record lows against the dollar early this year - making it harder for firms that invested in the country two years ago and are approaching the usual exit period to make their move.

Countries across the continent have restricted dollar use and imposed other capital controls since the emerging markets slide, further deterring foreign investment.

But Andrew Newington, chief operating officer at Actis, said his fund had no plans to retreat from Africa.

"These are big countries and they're growing. These markets are not going anywhere. We are committed to them through their cycles." 

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