An important consideration in evaluating any class of investments is the ability to easily cash out of a position and lock in a healthy return. Among the elements required are liquid capital markets and a vibrant private secondary market for African equity and debt. The growing role of private equity in African finance has influenced the process of creating value and realizing attractive returns on African investments.
Now that private equity has been active in Africa for several years we are seeing more and better data on the performance of their portfolios. From this data we can draw conclusions about the experience of firms exiting their portfolio investments.
Some of the most respected work on African private equity exits has been done by Ernst and Young in partnership with the African Private Equity and Venture Capital Association. The 6th and most recent report—PE Exits in Africa 2017 covers the industry in 2016.
In summary, the report tells us that 2016 was a record year for the number of exits. The largest number were in South Africa but there were also several in Nigeria, Egypt, Kenya, and Ghana. We saw significant increases in the number of exits in West Africa and North Africa.
African stock market regulators are working hard to set the stage for greater liquidity in the markets, however, at present, most exits consist of sales to strategic buyers and an increasing number of financial buyers. The financial buyers are largely private equity firms buying out the previous financing round.
Stock Markets as an Exit Option
The good news is that African stock markets have been quite strong, largely due to stronger commodity markets which have spawned economic recovery in many countries. (See below) The consensus is that the recovery will continue in the near term. Liquidity is still a challenge. All else being equal the expectation of strong stock markets could make listing more of an exit option than it has been.
STOCK MARKET RETURNS IN LOCAL CURRENCY FOR 12 MONTHS ENDING JANUARY 2018
GHANA - 70.00%
KENYA - 44.00%
NIGERIA - 66.26%
SOUTH AFRICA - 16.28%
MSCI AFRICA - 22.56%
Implications for US Financial Investors
The activity in African private equity and venture capital have in many ways contributed to an improved investment climate for American capital.
A PE firm's value creation process often calls for partners or suppliers to join with their portfolio companies. This is an opportunity for US companies to enter African markets by engaging with those portfolio companies.
The US investor could buy out a PE firms equity position. This requires strong local knowledge that is often easier for a local firm.
The PE firm or another financial investor could be an exit for a current investor. The growing number of PE firms allocating funds to Africa makes the financial buyer an increasingly likely exit option.
With these possibilities in mind it behooves US investors to build relationships with key players on the ground in Africa including the financial community and government officials tasked with promoting and regulating portfolio and direct investment. US investors may find opportunities across all sectors, of the various economies and markets in Africa.
*Darnley Howard is a partner at PAN Diaspora Capital Management. PAN Diaspora Capital Management is an organizational partner with the Initiative for Global Development for the Africa Investment Rising campaign. A highlight of the campaign is the US Roadshow from April 18 through 28. IGD will visit four cities—Washington, New York, Des Moines and Houston in order to showcase opportunities in Africa and create a forum for American and African businesses to connect. For more information, visit https://aircampaign.org/