Increased interest by international investors, and a shortage of listed companies, is bolstering private equity in Africa.
Rory Ord, head of RisCura Fundamentals, which provides independent valuation, risk and performance analysis services, says the paucity of listed instruments in Africa (with the exception of South Africa) makes private equity a must-have for investors interested in the continent.
Far East and US investors are particularly keen on identifying opportunities, he says.
“US endowment funds, in particular, which don’t have the same regulatory constraints as pension funds, are avidly looking for investments in emerging markets, and are more forward thinking when it comes to unlisted instruments.”
That being said, the largest US pension fund, the California Public Employees’ Retirement System, established in 1988 (AUM of USD 214bn, 6th largest worldwide) has actively increased its private equity allocation from 5.1% of AUM, or USD 9.8bn, in 2005 to 14.1% of AUM or USD 33.4bn as at February 29, 2012 and is invested across all emerging markets including Africa.
Ord estimates the value of the African private equity market at around US$25-30 billion, including SA, but says it’s difficult to be sure, as statistics are hard to pin down. Performance data is also in short supply. He estimates there are about 130 active fund managers up-continent, of which 50 are “substantial”.
With US$9.5 billion in total investments under control, Citadel Capital is one such company. Listed on the Egyptian stock exchange, Citadel recently announced its 2011 annual results, crediting RisCura Fundamentals with providing an independent valuation of its portfolio.
“Having a third party opinion gives international investors greater comfort and is increasingly important for African PE funds,” says Ord. RisCura Fundamentals currently values upwards of 150 companies a year, of which 60% are South African and 40% are in the rest of Africa.
Just as they did in South Africa, development finance institutions (DFIs) like the International Finance Corporation (IFC) and many others have played a major role in developing the African private equity market. “Where funds have received DFI funding their controls are generally better.”
However, there is a new generation of PE funds that raise their money from purely commercial investors from Africa and around the world. “International investors require even stricter governance and controls from these funds, and want to see that locals have invested in them.”
African pension funds, however, have been slow to invest. “Most African pension fund regulations are conservative, and prohibit private equity investments. This has begun to change in Nigeria where pension funds can invest 5% of their portfolios in PE, but only within Nigeria.”
South Africa is the other exception where, thanks to the revised version of Regulation 28 of the Pension Funds Act, pension funds can invest up to 10% of their portfolios in private equity. Because they can also invest up to 30% of their portfolios outside SA in the rest of Africa, they can invest in private equity funds across the continent.
Ord says that other African pension fund regulators, driven partially by the small universe of listed investments, are starting to consider the benefits of private equity investments. RisCura is working with regulators in this regard, by providing information and training.
“Ten years ago investing in African private equity outside South Africa was limited – the possibilities for institutional investors weren’t there. But now there’s an industry.”