Corporate Financing Analysis - Another Year Of Stuttering Growth For African PE - 28 AUG 2017


The African private equity growth story remains on track, but 2017 is not shaping up to be the year that activity really lifts off in the asset class' final frontier. A combination of struggling commodity prices in a natural resources-rich continent, as well as Africa's two most established PE destinations (South Africa and Nigeria) both enduring strengthening macroeconomic headwinds, means that this year is likely to see both investment and fundraising in the region drag its feet in the same way it did in 2016.

Dragging Its Feet
Y-T-D Announced African PE Activity By Deal Value, USDmn
Source: Zephyr, a Bureau van Dijk product

Shy On Deals

According to Zephyr (a Bureau van Dijk product), there have been 55 PE deals announced in Africa in the y-t-d period (data correct to August 5) worth a combined USD488mn. This represents a decline from the USD866mn spent on PE transactions (across 72 deals) by the same stage last year and subsequently looks set to fall short of the USD2,093mn in PE takeover deals announced in Africa across the 2016 full-year period (via 118 transactions). Within this, BMI notes that there have only been two announced PE M&A deals in Africa this year valued at USD100.0mn or more. UK fund Black Star Holdings' proposed minority stake buyout of Enterprise Insurance Company (Enterprise) valued at USD130.0mn and Abraaj Capital's 100% institutional buyout of Nairobi Java House are both valued at more than USD100mn. The deal for the Ghana Stock Exchange-listed Enterprise will see Black Star acquire stakes in three subsidiary companies, namely Enterprise Life, Enterprise Insurance and Enterprise Trustees from Sanlam Emerging Markets Proprietary Limited of South Africa (Sanlam) in what ranks as the largest PE deal to be announced in Africa so far this year. Meanwhile, the deal for Nairobi Java House, at the end of a year-long auction cycle which has seen as many as a dozen potential suitors make bids for the assets, is another example of a secondary buyout deal with EM-focused fund group Abraaj Capital snapping up the asset from PE rival Emerging Capital Partners (ECP). Furthermore, the deal for the coffee chain - with stores across Kenya, Uganda, and Rwanda - reflects a broader shift in PE interest in Africa, and one which we would argue is partly responsible for the recent slowdown in deal momentum. The shift we are referring to is the growing interest in East African opportunities at the expense of interest in West Africa, where PE investment has typically been popular.

Crude Oil Price Downgrade

Back at the start of the year, and after twelve months of a slowdown in growth in PE activity, we were largely bullish on the outlook for the asset class in the continent for this year ( see ' African Private Equity To Bounce Back In 2017 ' , December 14 2016). However, we also highlighted that such a view was very much at the mercy of commodity prices; in fact, it is this potential headwind which has contributed to the stuttering level of growth in PE in Africa so far this year. In this vein, we point to the fact that our Commodities team has recently revised down our Brent crude oil forecast for the period ranging from 2017 to 2021, which is bad news for the regional economy and subsequently for investment interest from overseas PE funds. As a result, BMI is now projecting an annual average price of USD54.0/bbl for his year, compared to USD57.0/bbl previously - as the impact of OPEC cuts have been slower to take effect than we had anticipated, with demand also having disappointed in the y-t-d period. Furthermore, we predict that large supply additions will keep prices broadly flat in 2018, at USD55.0/bbl. In addition, we caution that oilfield services bottlenecks and low prices over the second quarter will constrain drilling and completion activity in the US shale plays over H217, paring back on growth in production. More specifically, we highlight that Nigeria and Libya are both nearing their productive capacity and will be unable to add significantly more barrels over the short term, or in the absence of large capital outlays.

Focus Shifting From West To East

Research from the African Private Equity and Venture Capital Association (AVCA) shows that South Africa and Nigeria have been the top destinations for PE activity in Africa over the past decade. Between 2011 and 2016, South Africa played host to 22% of all African PE transactions by deal value, while oil-rich West Africa, led by the region's largest economy, Nigeria, has been home to 27% of such deals. Given the strategic importance of the two economies to the regional economic backdrop, it is hardly surprising that when their own growth prospects sour, so does that of the prospects of the regional PE industry. And that is exactly the scenario we see being played out in 2017.

Indeed, we point to the view of BMI's South Africa analysts that growth in the country will accelerate only slowly over the coming quarters, with an increasingly challenging regulatory environment, still-low metals prices, strengthening signs of a more populist policy shift by the government, and elevated unemployment weighing on the mining, manufacturing and consumer driven sectors. While the agricultural sector will be a bright spot, with more favourable weather prompting a sharp uptick in crop yields, this will not be sufficient to offset weakness in all the other major segments of the economy. As a result, we have recently revised down our already tepid growth projections: after real GDP growth of just 0.3% in 2016, we now forecast growth of 0.7% in 2017 and 1.6% in 2018 - noticeably below our prior 1.0% and 1.8% forecasts. This reflects our view that, rather than accelerate, the economy is set to stagnate in the latter half of the year, only slowly regaining momentum in 2018.

In Nigeria, meanwhile, our view is that falling oil production and a challenging operating environment will pose significant challenges to the country's economic outlook for the next ten years, preventing Africa's largest economy from returning to the levels of growth recorded prior to the collapse in oil prices in 2014. A large and fast-growing population (expected to reach 239.5mn by 2026) will ensure opportunities are on offer for investors willing to take on substantial risk, which will see economic activity slowly accelerate from the recession recorded in 2016. However, the unfriendly business environment and instability of the commodity-dependent economy will keep fixed investment below the levels required to move the country away from its oil dependence. Given all this, we forecast that real GDP growth will average 3.8% per annum over our long-term outlook from 2017 to 2026, from 6.5% over the last decade. In sum, while we expect Nigeria, and even more so South Africa to remain key to the long-term growth of PE asset class in Africa, we also expect to see a growing number of nations in Africa - especially those in the East - take up some of the slack left by the two more established PE nations as they grapple with their own economic problems and establish themselves as bona fide local PE markets in their own right over the next few years. For example, we point to Kenya - East Africa's largest economy - as a potential rising star in this regard, with the country on a positive medium-term growth trajectory and boasting a large and diversified economy that remains attractive to foreign investors in a range of sectors, including manufacturing, tourism, telecommunications, and financial services as well as large-scale power and transport infrastructure developments.