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New Research shows private equity activity in Africa will inject billions of US dollars of sustainable investment over the next five years. Private equity deals in Africa are growing from a low base equivalent to 0.18 percent of Africa’s GDP in 2016. Every 0.01 percent increase will mean USD 200 million more investment and could easily reach USD 1.1 billion over the next five years.

A growth engine: Trends and outcomes of private equity in Africa, commissioned by global law firm Baker McKenzie with The Economist Corporate Network, also shows private equity investors in Africa are distinct from other parts of the world. They hold investments for longer than in developed markets, use less debt and improve corporate strategy and governance. They invest more in growth and job-creation, often scaling small businesses to a size viable for trade buyers.

The long-term opportunities across African economies for private equity are extremely robust and demonstrate long-term value creation and returns.

Returns can be far higher than in developed markets and at the same time private equity investors play a catalytic role in Africa. Investment in this sector tends to focus on growth capital, helping companies to improve governance and strategy, expand their footprint and contribute positively to the region’s broader commercial ecosystem.

While recent political events, and associated/consequent rating agency actions, in South Africa have no doubt driven further levels of uncertainty and lack of confidence to one of the continent’s key markets, the opportunity arising continent-wide remains both viable and compelling. Turning a corner and “bottoming out” such issues engenders greater levels of near-term stability, and will no doubt deliver tremendous value-based opportunity for the long-term benefit of key economies in due course.

Private equity (PE) activity in Africa has increased significantly in the last few years. From 2010 to 2016, PE firms (General Partners or GPs) invested around $25.6 billion across a variety of sectors from consumer goods to financial services, communications health care and infrastructure.

Environmental social and governance (ESG) investing has also improved in Africa. GPs, and the limited partners investing in their funds, prioritise meeting acceptable ESG standards. Energy efficiency, staff training and qualifications, greenhouse gas emissions, highest standards of governance and best business practices, and litigation risks are some factors considered in ESG investing.

“GPs that are successful in the region have a competence for helping investees, particularly family-owned and closely-held businesses, to up-scale and corporatise,” says Herman Warren, ECN’s Africa director.

More than 1000 PE deals were concluded between the beginning of 2010 and the end of 2016 in Africa. In particular:

The Southern Africa region accounted for around 30 percent of completed transactions. South Africa, the largest and most sophisticated PE market in Africa, accounted for 22 percent of concluded transactions by volume and 13 percent by value between 2010 and 2016.

West Africa contributed one-quarter of the capital invested in African PE transactions over the period while East Africa contributed 18 percent of PE transactions, but just 8 percent of total deal value.

Most GPs based in East and West Africa expect to raise most of their investor funding offshore (primarily in the US and Europe), due to shallow pools of African institutional capital. Currency volatility also remains a challenge to fundraising efforts, and to transaction execution in general. Investment returns have been negatively impacted by the strengthening of the dollar against most major currencies in Africa. However, even in tough commercial operating environments, GPs are generating above-average returns.

It was found that the low capital-market base is one of the contributing factors towards trade sales being a dominant form of exit for PE investments. In the period 2014-15, trade sales accounted for 53 percent of Africa-based exits, up from 44 percent over the period 2007-13.

In 2017, it is expected that nine out of the 20 fastest-growing economies will be in Africa.