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In a slow-growth world, investors have to go further to find returns. There are few places farther to go then Africa. The continent is doing well, having grown by 4.9% in 2010, according to the African Development Bank. Yet, finding ways to tap into that growth with a sensible level of risk is a challenge. Innovative private equity solutions are increasingly attractive to international limited partners (LPs) looking for diversification and growth returns.
According to David Wilton, CIO of IFC’s global private equity investment business, private equity returns in the continent have averaged 19% a year since 2000, compared to an 11% internal rate of return for the MSCI. Moreover, these returns have beaten the African public markets. Andre Roux, CEO of South African private equity firm Ethos, says returns for South African private equity have beaten public markets by 400 to 800 basis points a year for the last 10 years. Has private equity come to Africa?
“We didn’t find many LPs who were new to the asset class, but we did find many who were new to Africa,” says Paul Cunningham, CFO of investment firm Helios Investment Partners, which recently closed a $900 million African-focused private equity fund. “As LPs realize that growth in the developed markets is not there, they are looking at alternatives—and since the beginning of 2011 there has been a sea change in investor interest and they are actively looking to diversify into a new continent.” LPs say that concerns over governance risks are overblown when it comes to investing in Africa. “African private equity has been largely founded by the development bank community and so very strong controls have been put in at the beginning,” says IFC’s Wilton. “It does not suffer from the lack of property rights or transparency issues that China faced coming out of communism in the 1990s.” There is a lack of reliable information about the asset class, but this is being addressed by the creation of a new African private equity benchmark index being built by Cambridge Associates and the newly formed African Venture Capital Association.
When foreign investors are looking to a new asset class, they do like to see that local investors are already there. However, for African private equity, this is not necessarily the case. “African pension funds are conservative investors and private equity is still viewed as risky,” says David Uduanu, Managing Director of Pensions Alliance, Pension Operators Association of Nigeria. Uduanu also says that beating local currency bonds is difficult for national LPs as these bonds return between 12% and 18% a year. Moreover, local rules requiring pension plans to provide up to 25% annual liquidity in many markets make it very difficult to allocate to private equity funds.
Other local LPs have also been burnt by previous investments. “We had a very poor experience in one private equity fund—our investments quickly became impairments—so we pulled out,” says Ephraim Letebele, CEO of the Botswana Public Officers Pension Fund. Widespread acceptance of the asset class comes only with proven success. According to Michael Addo, former General Manager of Investments, Social Security, and National Insurance Trust of Ghana, “There is no pension fund in sub-Saharan Africa that has invested in private equity and has seen any successful exits.”
Bridging the gap between past performance and future potential is the job of the new pioneers in African private equity— and with returns from other asset classes wilting, that bridge needs to be built.
—Nick Lord
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