Not long ago any mention of investing in an Africa-focused private equity fund would have been preceded by words such as ‘opaque’ or ‘risky’. But now Africa is rapidly entering the emerging market investment mainstream, as global limited partners seek greater diversification, and look to vehicles that can deliver higher returns than their traditional assets.
Historically, African private equity funds have been heavily weighted to developmental capital, as managers struggled to convince global limited partners (LPs) to allocate capital to the region. Indeed very few, if any, of the funds that have closed over the last decade have escaped carrying names such as the Commonwealth Development Corporation and the International Finance Corporation in their basket of commitments.
However this is changing, as Africa’s image transitions from bearing the image of being just a needy philanthropic cause to the latest frontier for financial returns. About 44% of the global LPs surveyed by Coller Capital this year’s annual survey said they find Africa as an attractive investment region, compared to only 21% in 2010. In this year’s survey, Africa has surpassed key frontier markets such as Turkey, the Middle East and North Africa region, Russia, and Central and Eastern Europe.
Africa’s rapid ascent of LPs ladder of preferred investment regions is also evidenced in the rate at which fundraising for the region has grown. Year-on-year fundraising for the African sub-Saharan region grew at the rate of 56% in 2009, while Russia , the Middle East and North Africa, India, Emerging Asia and the collective Central and Eastern European region and Commonwealth of Independent States suffered decline in their fundraising figures.
Investors nevertheless continue to be wary of the low number of established fund managers in the African market, with 47% citing this as a primary deterrent to committing capital to the region. Interestingly this concern ranked above political risk, which was singled out by 39% of the group. Almost a quarter of the LPs expressed worries over the scale of opportunity to invest, believing that for Africa this is still too small.
The poor choice of exits was surprisingly not a huge concern for the LPs, with only 14% of the respondents saying it was a discouraging factor. Valuations were the least concern for investors, with only 2% listing this as a deterrent. This is compared to India, where 58% of the investors believed the market is becoming overheated in terms of asset valuations.
“In reality, where competition is increasing in emerging markets private equity markets, it tends to be concentrated within a handful of sectors or a particular tier of the market where deals are large enough to attract global funds,” said Erwin Roex, partner at Coller Capital. “Investors recognize there are still plenty of opportunities for skilled managers to supply value-added capital and to create returns for LPs.”
Economic growth is the primary driver of investors increasing commitments to emerging markets region – the desire for exposure to high-growth markets, according to the survey. More than half of LPs expect their emerging markets private equity commitments to generate returns of at least 16%, with about a quarter expecting this to be as high as 21% over the next three to five years. Only 9% of the respondents surveyed expect similar returns from their developed markets portfolios.
Despite the lure of returns, investors are still careful to ensure environmental, social and governance compliance, with the majority of LPs saying this influenced their fund investment decisions. The investors would also like to see higher participation from local investors, although some saw a potential misalignment of interests as likely to cause the most friction between the two sets of investors.
Coller Capital partnered with the Emerging Markets Private Equity Association in the annual survey, which covered 156 global LPs. Fund of funds made up 32% of the group, 15% were direct foreign investors, while pension funds made up14%. Bank and asset managers made up 13% while 11% represented government owned organisations.