The financial sector has been a favourite of investors into Africa for some time. The long-term nature of the investment, the direct link to the expansion of the wider economy and individuals’ increase in discretionary incomes have all been factors that have supported investment into this sector. Financials have also traditionally been very well represented in the listed environment as financial entities are often the first to access public capital markets within developing economies.
However, several risk factors have tempered the interest in these entities. Firstly, the high level of governance and regulatory requirements in financial businesses, along with the high level of skilled personnel needed to carry out these duties, have been difficult to find. Secondly, the reliance on information technology and business processes has been a barrier to the competitiveness of some financials companies in Africa. And lastly, a robust legal environment resulting in a high level of contractual trust, is critical for a strong financial industry, and has not always been in place across the continent.
Large South African financials multi-nationals are looking to strengthen their regional footprint in Africa in order to capture some of the strong growth prevalent in many African markets. Nedbank Capital head Shabbir Norath has described their expansion as ”carrying a sense of urgency as companies that do not move into [the rest of] Africa now, will find themselves left behind in five years’ time”. Record fund raising by African focussed private equity funds (USD 3.3 bn in 2013) and high levels of deal activity (deal value in the first four months of the year 2014 is USD 1.1 bn, up 262% on the same period in 2013) has served to further heighten the interest in these assets.
With the average ticket size for private equity deals in Africa being about USD 30 million, according to EY’s transactional advisory services, and the market being significantly fragmented into smaller financial firms, the number of firms large enough to be acquired is limited. At a lower level of deal size the competition has also intensified as mid-sized companies have taken advantage of the capital available to them. Financing has come both from private equity firms, which have purchased stakes in them, and from the issue of corporate bonds. With the current high interest in investment in Africa, the interest in higher quality corporate bonds has also increased. This can be seen in the recent bonds issued by a number of Kenyan insurers such as Britam, CIC Insurance and UAP. Private equity funds such as Leapfrog, which has recently closed its newest fund at USD 400 million, develop smaller assets that are also present in this market. The increase in the number of parties willing to fund financial services has resulted in prices and competition for acquisitions increasing significantly.
Some of the more high profile and high value deals during the last six months include: the Atlas Mara (the USD 325 million Africa-focussed investment vehicle lead by Bob Diamond) purchase of 47.1% of BancABC, a Botswana-based lender, and 30% of Union Bank of Nigeria. On the 16th of September, London-listed Prudential also announced the acquisition of Shield Assurance.
Private equity funds have also been extremely active in the market with Fortiz Private Equity Fund Ltd acquiring a 90% stake in Merchant Bank Ghana Ltd from SSNIT. Republic Bank Limited acquired an additional 23.23% stake in HFC Bank Ghana Limited from Aureos Africa Fund I managed by Aureos Capital Limited. Consilium Investment Management LLC acquired a 4% stake in FBC Holdings Limited.
The South African financials services groups have also been active. MMI Holdings acquired a majority stake in Cannon Assurance for R300 million. Old Mutual has purchased Oceanic Life in Nigeria, Provident Life Assurance in Ghana, Faula Microfinance Bank in Kenya and has committed a further R700 million for expansion in the rest of Africa. Old Mutual now has 1.9 million customers in Africa. Sanlam has acquired a minority share in Botswana Insurance Holdings Limited and a 40% stake in Ghanaian listed Enterprise Group. During this year Sanlam closed three deals in Africa valued at R589 million and now derive 11% of their income from Africa outside of South Africa.
The South African banks have not been left behind. Nedbank has acquired 36.4% of Banco Unico in Mozambique. FNB and FirstRand have announced plans to invest nearly R2 billion over the next 12 months in South Africa and the rest of Africa, targeting specifically Nigeria and Ghana.
Interest in African financial services has also increased from the Middle East. The Qatar National bank announced on the 15th of September that after its latest acquisition in pan-African lender EcoBank Transnational, it is now the dominant shareholder in one of the largest financial firms in Africa. Saham Group also acquired 49.9% of Ga Angola Seguros SA, which provides insurance and reinsurance services in Angola.
Companies from around the rest of the continent are also in the market, such as Continental Reinsurance (a pan African service reinsurer) targeting smaller acquisitions. Jubilee, a Kenyan insurer, has announced that it is seeking acquisitions in a number of African markets. Centum Investment Limited has also announced its acquisition of the majority share in K-Rep Bank Limited and Britam has acquired a 24.75% stake in the Housing Finance Company of Kenya.
Such widely held interest in a limited pool of assets has resulted in a significant appreciation in the asset prices in the most desired markets. This increase in price has been reflected in the listed market as can be seen when comparing the increase in an index constructed from financial firms listed on each exchange, to an index constructed from non-financial firms. Even at these new higher levels it appears that these assets remain extremely attractive to buyers. With general market risk increasing in all these markets and the pricing of non-financial firms reflecting this, the remarkable resilience and increases in value of financial firms is all the more remarkable.
– Heleen Goussard
Associate, RisCura Fundamentals
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