Ample investment opportunity for private equity industry

Updated on 26 July 2016

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Today's top entrepreneurship and business stories (26 July)
The general view of the Southern African private equity industry remains overwhelmingly positive, despite what appears to be a challenging local, regional and international economic and financial setting. This is according to Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), who says that private equity managers thrive on seeking out overlooked investment opportunities and on applying their strategic skills, extensive networks and operational insights to enable businesses to reach their potential and deliver returns.

Van der Merwe says that while economic performance in the Southern African region appears unpredictable, the strength of top-performing private equity managers lies in their ability to make investee businesses more resilient and to enable them to navigate macroeconomic circumstances.

Commodity prices are an example of such macroeconomic considerations for investors in the region, explains Paul Boynton, CEO of Old Mutual Alternative Investments: “West African economies including Nigeria and Angola that have a strong reliance on oil for example, are particularly at risk in the current cycle. This contrasts with Kenya, Tanzania, Egypt and Ethiopia who are net importers of commodities and continue to grow strongly. Macro cycles inform us of head winds and can create pricing opportunities but our work is focused on the fundamentals of individual businesses,” he says.

Boynton adds that prevailing economic conditions have to some extent created opportunity. Pricing in Africa has moderated somewhat on the back of overall slowing growth but the long term investment thesis remains intact. His team regards the current environment as an opportunity for funds to acquire companies at attractive valuations.

According to Van der Merwe, this perspective on the investment prospects in the Southern African and other African regions would continue to attract private equity investment. Fundraising by private equity funds with a Southern African and broadly African mandate has been remarkably successful over the past year, with a number of houses announcing final fund closes. In fact, fundraising has been the stand-out feature of Southern African private equity activity in 2015.”

She cites the historical returns generated by the industry — over the ten years to December 2015, private equity returned 18.5%, compared with return of 14.1% from the FTSE/JSE All Share Total Return Index (ALSI) over the same period* — as reason for capital allocations to Southern African private equity to continue. “Careful deal selection followed by thoughtful, focused and active management of the investee company are notable drivers of industry returns.”

Van der Merwe concludes that “announcements of deals and exits across a number of industry sectors, and of varying sizes and structures, confirm that there is ample investment opportunity for this newly raised capital.”

Sub-Saharan Africa remains one of the fastest growing regions in the world
According to EY’s 2016 Africa attractiveness program 2016, Staying the course, despite a relative slow down, Sub-Saharan Africa remains one of the fastest growing regions in the world. This is reflected in the foreign direct investment (FDI) levels in 2015, where FDI project numbers increased by seven percent. Although, the capital value of projects was down year-on-year — from US$88.5b in 2014 to US$71.3b in 2015 — this was still higher than the 2010–2014 average of US$68b. Similarly, jobs created were down year-on-year, but, again ahead of the average for 2010–2014.

Ajen Sita, Africa Chief Executive Officer at EY, comments, “Over the past year, global markets have experienced unprecedented volatility. We’ve witnessed the collapse of commodity prices and a number of currencies across Africa, and with reference to the two largest markets, starting with South Africa, we saw GDP growth decline sharply to below one percent and the country averting a credit ratings downgrade; in Nigeria, the slowdown in that economy was impacted further by the decline in the oil price and currency devaluation pressure.”

Sita adds, “The reality is that economic growth across the region is likely to remain slower in coming years than it has been over the past 10 to 15 years, and the main reasons for a relative slowdown are not unique to Africa. In fact, Africa was one of the only two regions in the world in which there was growth in FDI project levels over the past year.”

​eKasiLabs open innovation workshops
A new project for entrepreneurs, innovators, researchers and business owners has been launched by OpenIX, eKasiLabs and WIBC. The initiative is offering workshops aimed at helping established SMMEs or startups based in Gauteng townships grow their businesses.

Innovative business owners will have the opportunity to work on real challenges and opportunities submitted by corporate and public sector partners while promising concepts will be offered product and business development support by The Innovation Hub to assist entrepreneurs develop them further.

OpenIX, a South African open innovation exchange that connects solution seekers in industry and government with tech entrepreneurs, eKasiLabs, is one of The Innovation Hub’s programs and offers co-creation and innovation spaces in the townships where local communities are able to access the services and facilities that are offered at The Innovation Hub, as well as the WIBC, an organisation offering ideation, incubation, enterprise development for businesses.

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