Despite the recent turmoil in which many African countries find themselves, global investors showed strong interest in investing in Africa’s real economy, as evidenced by the increase in private equity fund raising in 2015. Total value of Africa PE funding, by year of final close*, was US$ 4.3billion.
This is according to Bright Africa, the ongoing research endeavour from Africa investment specialists, RisCura.
“The slowdown in the growth of emerging market economies hasn’t inhibited the ability of African investment managers to attract significant amounts of capital, particularly for the larger Pan-African funds as well as Sub-Saharan Africa funds,” said Rory Ord, Executive at RisCura.
Some of the largest African private equity funds seen to date were closed in 2015, including Helios Investors Fund III ($1.1bn), Abraaj Africa Fund III ($990m) and African Development Partners Fund II ($725m).
“Investors making commitments to Africa may be flocking to these experienced managers as a way of mitigating their risk, knowing that the next few years are bound to be a more difficult time for the continent,” Ord said.
The last four years have seen an increase in private equity market multiples** on the continent. Over the 2009 to 2013 period, more than half of PE transactions took place at lower than a 6x multiple. In 2014 and 2015 however, less than a third of PE transactions took place at that level.
Over 30% of reported PE transactions in 2014 and 2015 took place at greater than a 10x multiple, while this was less than 20% of cases in the earlier periods.
In contrast, the EV/EBITDA multiples of listed equity on the continent have remained relatively flat over the 2013 – 2015 period, with a slight decline from 2014 levels.
“The reasons for these higher PE multiples included high growth expectations, particularly in the short term, and increased competition for deals,” said Ord.
“We also think that perceived risk on the continent may have declined, as investors become more comfortable with the environment leading to a reduction in discounts for risk adjustments.”
The report shows that the consumer discretionary sector continued to attract interest from investors, making up 22% of all transactions in 2015. Of particular interest over the past few years has been online retail, education services such as tertiary education and colleges, as well as advertising and publishing houses.
The consumer sector has been identified time and time again as one of the most attractive areas for investment on the continent, due to the favourable demographics and the so-called ‘growing middle class’. As a result, both the consumer discretionary and consumer staples industries fetch the highest multiples across all sectors.
The financials sector remained a large portion of transaction activity in 2015, making up 16% of total transactions. Points of interest range from regional banking to asset management and financial services across all regions.
Overall, transactions took a dip last year, as the industry seemed to concentrate more on raising funds. The total number of transactions was around 160, a level last seen in 2010 and 2011. On the other hand, M&A activity on the continent appears to have trended upward in 2015 with over 1200 transactions reported, an increase from 990 the previous year.
Notes to Editors:
*This is based on the AVCA Private Equity Data Tracker, which allocates capital raised in the year of the fund’s final close. There are other sources that show a slightly different picture as they allocate capital raised to the year in which the funds reached first, second and final close respectively (EMPEA and Preqin). The major difference in the EMPEA data is that the Helios Investors Fund III was recorded at first close, which occurred in 2014.
An earnings multiple is a measure of the price of an investment, relative to the earnings of that investment. There are several different earnings multiples that are used by investors, but a common one is the ratio of the total value of an enterprise (Enterprise Value or EV) to the operating profit of the entity, proxied by EBITDA. This EV/EBITDA ratio is a useful measure of the relative cheapness or expensiveness of different assets or markets, and is broadly comparable across sectors and geographies.
The Enterprise Value of a company is the sum of the market value of the debt and equity in the company. While this ratio is more commonly used in private equity rather than listed equity analysis, it can be used across both kinds of equity for purposes of comparison.
The EV/EBITDA multiple represents a balance of growth expectations of an asset and the risk to the earnings. For example, an investor will pay less for an asset with a higher perceived risk but the same earnings as another asset, resulting in a lower EV/EBITDA multiple for the riskier asset. However, if that same riskier asset is expected to produce higher growth than another asset, this expectation of growth may outweigh the additional risk resulting in a higher multiple.
Multiples tend to revert to average levels over time for particular markets as expectations of growth and risk fluctuate.