Size playing a significant role in the price of Africa private equity deals.
Over 30% of reported Africa private equity (PE) transactions in 2014 and 2015 took place at greater than a 10x EBITDA multiple*, a strong increase over earlier periods. Between 2009 and 2013, for example, more than half of PE transactions took place at lower than a 6x multiple. These figures have just been released in Bright Africa, an ongoing research endeavour from Africa investment specialists RisCura.
“While most private equity deals in Africa are small, the vast majority of value goes to large deals,” says Rory Ord, Executive at RisCura.
He says the increase in private equity market multiples is being driven by heightened competition for deals, especially larger deals where there are high growth expectations for the short term.
The increase in competition comes on the back of higher fundraising, forcing investors to bid higher to secure deals, resulting in more highly priced entry multiples.
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 private equity funding, by year of final close**, was US$ 4.3billion.
“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,” says 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,” he says.
Higher priced transactions tend to take place in the category of companies with Enterprise Value greater than USD 250m.
“It is interesting to note that at an Enterprise Value of less than USD 250m, there is very little differentiation between the multiples of medium sized transactions and small transactions,” Ord says. The median multiple within both size buckets is around 6x. However, on the upper end of the spectrum, the very large transactions are attracting EV/EBITDA multiples of over 8x.
Of the transactions with reported Enterprise Value, just over half of companies entered by PE funds in the 2011 to 2015 period reflected a Net Debt position on their balance sheets. The average Debt/EBITDA position of these companies was 1.61x over the period and within a small range of between 1.49x and 1.70x.
The relatively stable level of debt indicates that the private equity industry in Africa is still not debt driven, and the majority of fluctuation in multiples relates to the availability and willingness of investors to put equity on the table.
Both the consumer discretionary and consumer staples industries fetch the highest multiples across all sectors, which is not unlike the case for listed companies in those sectors. 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’. It is clear that there are many transactions taking place in this sector, within consumer discretionary in particular. High growth expectations, fierce competition, or decreased risk perception could be the contributors to these relatively higher multiples.
Another prevalent sector is the industrials sector, which incorporates construction, engineering, transport, logistics, equipment and machinery, among others. These industries are essential to any economy and will benefit greatly from a growing economy, which explains their popularity among African countries.
Notes to Editors:
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.
**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.