The opening weeks of 2016 have been marked by growing concerns over a slowdown in China and a wider global economic malaise. However, Equus Group suggests that the long-term growth trajectory for Sub-Saharan Africa appears to be holding up strongly.
The London-based specialist communications agency, which has acted as advisor on more than 300 transactions with a combined €29bn of enterprise value, reports that private equity (PE) fundraising for Africa has stayed robust. “There is now a significant level of dry powder within a small number of competing general partners (GPs),” it comments.
Equus adds that from 2014 to date, US$7.6bn of funds have closed – more than 80% of which is held by just eight funds, with an average size more than US$700m. Yet during the same period, only 10 of 138 transactions completed have had ticket sizes of more than US$75m.
This suggests that a lot of money is chasing scarce assets in Africa and creating a risk of a PE-related ‘bubble’; a conclusion reached in ‘Broadening Horizons’, a joint study of PE exits in Africa by professional services group EY and the African Private Equity and Venture Capital Association (AVCA).
However, Equus suggests that the numbers would suggest this risk is overplayed. “Even Sub-Saharan Africa’s record fundraising year of 2014 saw a significantly smaller amount raised as a proportion of gross domestic product (GDP) than that seen in Europe,” the group comments.
“In addition, while larger operators may have struggled to put big funds to work, opportunities for those in smaller and mid-market segments are far more widespread in what remain in the main smaller countries with highly fragmented business landscapes.”
This view is supported by an announcement last October by the Overseas Development Institute (ODI) that international PE had become the fastest growing source of investment in Sub-Saharan Africa. However, Equus notes that better risk management tools are needed, together with a continuing maturation of the market, to ensure that the benefits of this capital are realised.
Most importantly, adds the group, the region’s growth looks to be sustainable, driven by a shift in the population to cities coupled with an increase in discretionary spending from a growing middle class that will fuel domestic demand for local products.
A young and growing population also serves as a source of competitive labour and boosts the consumer market as a whole. According to the United Nations Department of Economic and Social Affairs’ (UN DESA) forecasts, by 2040 Africa will have a larger working-age population than China or India and by 2050 the number of people living in urban areas is set to reach well over one billion.
Consumer-facing industries – such as fast-moving consumer goods (FMCG), financial services, healthcare and telecommunications – are set to account for the majority of growth, providing “a strong platform for success.”
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