Pre-2012 is characterised by smaller EV/EBITDA multiples, with 34% of transactions in Africa taking place in the 2.5x-5x bracket. Conversely, 74% of post-2012 transactions have taken place at above 5x.
While the trend is in line with global activity whereby most of post-2012 transactions are in the higher brackets, the proportion of transactions occurring in the 7.5x bracket is still substantially lower in Africa, illustrating that pricing remains lower in Africa than other markets.
The level of multiples varies due to many factors. High multiples could be due to high growth expectations for companies in which funds are invested, particularly where this growth is expected in the short-term. Alternatively, a higher perceived risk will result in a lower multiple. There is a constant trade-off between growth expectations and risk perception in Africa.
Also contributing to higher multiples is increased competition from strategic acquirers for attractive investment opportunities. With a substantial amount of dry powder in the market and an increased number of deals taking place via auction in recent years, it is no wonder that prices are being driven up for high quality deals.
Rising prices and low leverage on deals may put downward pressure on future returns in the private equity space. Nonetheless, the upward trend in multiples continues to persist.
South Africa appears to have a more even spread across the various multiple sizes, whereas the remainder of Africa has a clear majority in the higher brackets.
According to the 2016 Deloitte SAVCA Africa Private Equity Confidence Survey, most respondents expect entry multiples on transactions in Southern and West Africa to decrease over the next 12 months. This is due to depressed economic growth forecasts weighing on investment decisions. Entry multiples in East Africa are expected to remain the same, despite increased interest from global and regional players. This would otherwise drive up multiples, however, funds are expected to follow a conservative approach due to pressure on global markets and high costs of debt.