Table of Contents
- Executive summary
- Exit activity and performance
- Key findings
- Entry multiples creeping upward
- Intermediated deals outperform proprietary transactions
- Local offices key to strong performance
- Organic revenue growth driving profit growth in PE portfolio
- More exit routes opening up
- Exit enablers in Africa
- About the study
Read the full report below.
This is the second of our annual studies of how private equity (PE) investors create value in Africa. In our inaugural report, we countered popular opinion about PE in Africa to prove that the industry was making excellent progress in exiting its portfolio companies. We also provided evidence of genuine value creation by PE firms in the region through hands-on involvement in the companies they back.
The contents of this second study back up our findings from 2013. We have collected more data over a longer time period, making our findings more statistically valid. While exits were down in 2013, between 2007 and 2013 we recorded a total of 207 realizations by African private equity fund managers for transactions with an entry enterprise value of at least US$1m. We have reinforced the view that the African PE industry is maturing fast and moving out of its infancy.
This is apparent in a number of ways. One of these is the broadening of exit routes over recent times, as sales to other PE houses now account for a far greater share of portfolio realizations than previously. While trade sales remain the key exit route — and among the most profitable for PE — the increasing options available to PE for exit will ensure PE in Africa can continue to realize value for its investors.
Allied to this is the good spread of exits across the continent. While the more developed South African market accounts for a large share of African exits, other regions, most notably West Africa, are seeing a high proportion of exits, demonstrating the industry’s expansion into less developed PE markets over recent years.
PE in Africa continues to provide outperformance for its investors over companies exited between 2007 and 2013. Our exit sample showed outperformance versus a number of benchmarks. Even more positively for the industry, our analysis shows that PE’s outperformance has increased for companies exited since 2011, attesting to the greater experience PE has gained and used to its advantage since the early years of investing in Africa.
As the industry has grown, we have found evidence of increasing entry enterprise values (entry EV), particularly at the larger end of the deal spectrum where deals are fewer and competition is therefore greater. And in a further sign of a maturing industry, auctions are steadily becoming more prevalent.
As with other regions of the world where we have conducted these studies, we have found evidence consistent with PE’s ability to create value in the companies it backs as the main driver of its outperformance. In Africa, PE’s value-creating capability shows clear evidence of evolution. Our finding that exits generated in more recent years through investments managed by local offices outperform those managed regionally or from further afield, and that their holding periods are shorter, demonstrate that hands-on involvement with portfolio companies really makes a difference.
In addition, the development of African PE’s value creation levers is continuing. While the largest component of organic revenue growth remains sector growth — validating PE’s time spent carefully selecting investment prospects — there are signs that performance improvement measures, such as changing a company’s offering or developing new products, are becoming more important drivers of growth than was the case in the industry’s early years on the continent.
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Overall, the study paints a picture of an industry that is developing fast but in a measured way. Exit numbers were down in 2013, but the pipeline is filling up as investments made over more recent years become ready for sale. As these exits start to come through and as exit routes continue to develop, we’d expect further evidence to emerge of African PE’s value-creating credentials. Home to fast-growing economies and more stable political environments, Africa has highly apparent attractions for PE investors; for its part, our study shows that PE is working in close partnership with portfolio company management to support their growth and take them to the next stage of their development. African PE is moving to a new phase of maturity.