Research done on investor attitudes shows that African markets are expected to be a significantly greater recipient of global capital than they have been in the past, and that African fund managers, both listed and private, will have to comply with the expected global standards in order to benefit from this shift.
Listed markets in Africa are evolving, and trading conditions are improving; expected demutualizations and regulatory changes are likely to result in an improved investment environment. Listed market valuations reflect the high growth expectations of investors in consumer related sectors, while other sectors have significantly lower valuations.
Africa’s private equity market continues to develop, with investments happening to a varying extent across all regions and across many sectors.
Mergers and acquisitions on the continent are an important component to consider, particularly as a potential exit route for private equity investments. M&A transaction numbers have continued to recover after the global financial crisis, and currently close to 1,000 such transactions are reported each year, with a significant number expected to be unreported.
Key themes on equity investing in Africa
Increased capital flows to Africa are financing strong growth
Since the financial crisis global flows of capital have been re-directed to emerging markets on concerns over developed market growth. Africa has benefited from these flows as improved capital availability has helped to fund high levels of growth through FDI and portfolio flows into listed and private equity. There are now 8 African economies with GDP of over US$100 billion, and around 1000 mergers and acquisitions reported each year at a value of US$30 billion in 2013.
Nigeria has been a global star since the turn of the century
Nigeria’s GDP was re-based on 2014 for the first time in two decades resulting in a markedly improved picture of the economy. In particular, the country’s services sectors were included for the first time providing a truer picture of Africa’s largest economy, and one of the fastest-growing countries on the continent. This revealed that Nigeria has been one of the world’s faster growing economies since the turn of the century behind only China and India in its increase in share of global GDP.
Africa’s capital markets are developing and have shown excellent returns
Africa has 23 stock exchanges representing all of the continent’s major economies. South Africa’s Johannesburg Stock Exchange (JSE) remains a model exchange and been named the world’s best regulated exchange for the fourth year running. The developing nature of the continent’s other exchanges means that most markets have relatively low general liquidity and relatively high transactions costs. However, when trading the main shares on each exchange, there is better liquidity and often lower transactions costs. Returns have been strong across major exchanges due to strong earnings and improved capital flows.
African markets are accessible at reasonable multiples
Listed market P/E multiples average a little below the emerging markets average and are significantly below the developed market average. The consumer staples sector is the highest priced sector on the continent on a P/E basis across most markets while other sectors are at lower levels. Private equity transaction multiples are still below global levels, and are well below multiples observed in the BRICs. Private equity deal multiples are fairly consistent across major sectors in the 5-7x EBITDA range.
Private equity investments are happening in all major markets
Private equity is becoming established in large markets such as South Africa, Nigeria, Kenya and through North Africa. Countries with large GDP, but difficult business conditions are finding it harder to attract private equity investment than other more investor-friendly countries. South Africa is still the leader in private equity on the continent, but West Africa in particular and East Africa to a lesser degree are attracting capital and investment and more transactions are happening in that region.
Africa’s growth sectors are accessible through a number of channels
While African markets develop, investors are using several channels to access African growth equity. Local listed markets give good access to financials, telecoms, and consumer staples in certain countries. Private equity allows stronger exposure to consumer discretionary as well as industrials and materials, and niche sectors such as healthcare and education. Certain other sectors such as some resources can further be accessed through foreign-listed Africa focused companies.