Interview: Michael Turner
How has the level of private equity activity changed in Africa in recent years, and which sectors offer the most potential?
MICHAEL TURNER: African markets are expanding rapidly – six of the 12 fastest-growing economies globally are in Africa. As a result, the African private equity landscape is foremost in the minds of many international investors as they increasingly turn their attention towards the continent to diversify their global portfolios and capitalise on the African growth story. Growth in Africa is spurred by the size and favourable demographics of the market, which is home to over 1bn people, 60% of whom are below the age of 40. Other advantages are strong macroeconomic fundamentals, improvements in political governance and in rising middle-class consumer spending.
We also see potential in the real estate sector and consumer-driven sectors such as snack food, manufacturing and industry, as African countries become wealthier and consume more. As growth slows in many OECD countries, Africa now forms a vital component of many foreign companies’ growth strategies. Africa is also the last untapped market for electronic payments. Around 80% of sub-Saharan Africa’s adult population are unbanked, and there has been a fundamental shift in consumer and business behaviour away from cash transactions and towards e-payments. Just as the mobile phone became ubiquitous across Africa in just a few years, we are close to a similar tipping point with electronic transactions.
To what extent are exits more challenging in African markets than in more developed markets?
TURNER: Exits are not necessarily harder in Africa, but they may have a longer gestation period than in developed markets. Private equity houses may enter a company at a very early stage in the company’s development, and it might take a long time for the company to develop fully and for strong governance principles to be embedded. With proper planning, good corporate governance principles, skilled management and experienced advisers, successful private equity exits are possible. Typical options include trade sales, secondary buyouts, initial public offerings and management buyouts or buybacks. With large global private equity firms now operating in Africa alongside the funds with a longer presence, the development of liquid exchanges in key regions in Africa and the accessibility of the exchanges to investors in more developed markets, there should be no shortage of exit opportunities for businesses at the right value and time in their lifecycle.
How can private equity firms help channel capital into real estate and infrastructure projects?
TURNER: In recent years, many real estate and infrastructure projects have attracted investment from private equity houses, allowing investors to develop large, defensible, institutional-quality assets that can be backed up by strong covenants. There is a lack of high-quality real estate in sub-Saharan Africa and a deficit of modern shopping malls to meet growing demand from an expanding consumer base – which private equity can help supply. The supply chain is also constrained by a lack of skills and capital at the institutional end of the development spectrum.
Private equity can also help the lower end of the residential real estate market by creating a platform that can scale at an affordable rate. With longer investment time horizons, private equity can boost profitability by improving operations and corporate governance. The impact that private equity has on large-scale real estate and infrastructure projects is good for the whole economy, including job creation, a broader tax base and sustained growth. As just one person in five has access to electricity in sub-Saharan Africa, there is also significant potential for private equity firms to undertake a role in the energy sector.
Read More from OBG
