This year’s figures have been bolstered by the Ethos Private Equity $800million vehicle, closed at the beginning of the year. Ethos Private Equity Fund VI exceeded its originally cap of $750million.

Fundraising was also lifted by Vital Capital’s vehicle, which reached final close $350million. The Tuninvest – Africinvest Group also finally reached its close at $156million (€120milion) for its third vehicle, according to Preqin data.

However not all mangers have been able to attract significant capital. Silk Invest has reached a final close at $32million, with an expectation to reach a final cap at $40million. The consumer-focused fund had originally hoped to bring in approximately $150million (€100million).

Another newcomer that has closed at a lower level is Netherlands-based XSML, which has closed at $19million. The manger  was only $6million short of its original $25million target. The Central Africa SME Fund (CASF) has an 80% allocation to DRC and 20% to the Central African Republic (CAR).

Even so, the first quarter 2013 fundraising figures put the industry on track to touch the $3billion raised in 2011, the highest level reached since the credit crisis. The figure is the second-highest figure raised for Africa, on Preqin’s records. The figure is only surpassed by the $4.9billion raised in 2007, the largest amount raised for the continent in one year.

This year’s figures are set to be lifted by expected interim and final closes from key funds in the market. Among some of the brand names on the fundraising trail are Carlyle Group, with its $500million Carlyle Sub-Saharan Africa Fund and 8 Miles, which is raising its maiden $450million vehicle. Satya is also on the trail with a sophomore fund, which has been cut from $500million to $300million.

Five Investors, Three questions

QUESTION 1

GPs seem to have struggled with closing deals in 2012. Do you expect this to improve in 2013?

ANSWERS

Hurley Doddy, co-Chief Executive Officer, Emerging Capital Partners

While deal-making statistics can be important trend indicators over time, they can be misleading when taken over one year in a cyclical industry like private equity. Despite a recent increase in the number of GPs looking to invest in Africa, we still see a relative lack of competition for deals, especially compared with investors in the traditional BRIC markets. However, we rely heavily on our proprietary deal sources and on the ground staff in our seven Africa offices. Our dealflow is improved by knowing and living in our target markets. Our team members are therefore well placed to recognise good investments and understand the requirements that make a safe investment.

Simon Merchant, Chief Executive Officer, Jacana Partners

We see a very strong dealflow in the SME segment and expect that trend to continue, as the opportunity for growth is there. However, what is really needed is for the reach of value-add private equity capital in the SME part of the market to expand to a greater number of small businesses in more countries. Jacana is currently raising a new $75m mezzanine SME fund, led by development finance institutions but open to other investors. This will enable us to significantly increase the scale and geographic reach of our operations to help entrepreneurs to build successful businesses, create jobs and support long-term economic growth in Africa.

Mark Richards, Partner, Actis

At Actis, as we look to 2013, we see an active pipeline across the continent of some material scale. What is clear is that the days of having a large cheque book and waiting for interesting partners is long gone. To improve dealflow, GPs must be able to illustrate that they can bring a distinctive angle and edge to their origination strategies and be able to add material value to companies. The Actis response has been to deepen investment in industry origination groups staffed by industry specialists. In 2013, Actis will add a healthcare specialist to the team, adding to our financial services, consumer, and industrials groups.

Jean-Marc Savi de Tové, Partner, Cauris

Considering the build up of most African economies, structurally SME funds do more deals than one can see in the large-cap space. We will not see that changing in 2013, in my view. That being said, my crystal ball says that there will be more deals announced in 2013, and more exits as well. Thinking of Cauris, we have a number of deals that have been cooking for a while, due to the level of education on private equity we need to provide to vendors. Some of them should close in 2013.

Alexander Wolf, Associate, HarbourVest Partners

With the exception of South Africa, the corporate landscape across most of sub-Saharan Africa is highly fragmented and there are a relatively small number of large acquisition targets for private equity funds in these markets. We will see a greater number of larger African transactions in 2013 as there is a strong group of well-capitalised private equity managers devoting significant resources to unlocking bigger transactions. There is also an increased understanding among entrepreneurs and business owners of the potential merits of private equity investment. I also expect to see larger deals in the infrastructure and resources sectors in 2013.

You can read the rest of the article in the latest issue of the Private Equity Africa printed journal. Subscribe to receive a copy of the journal.

ALSO IN THIS ISSUE:

Features

• Cover story: Driven to Distinction – Time for fund differentiation
• Top five deals of 2012

News Roundup

• Quarterly news report
• People moves

Analysis

• A review of 2012: A year of new things
• Q&A with TLG Capital’s Zain Latif
• Exits in 2012 hit record high
• Fundraising in 2012 falls flat

Deals & Funds

• H2 2012 deals & funds highlights

Technicals

• Laying down the law – Common Law versus Napoleonic law
• The short view – A short-term macro economic view of Sub-Saharan Africa
• Going back to returns – A look at returns in South African funds

Global View

• Exits: Africa’s not alone

The latest figures show that although the emerging economies grabbed a larger share of global fundraising, about 20% in 2012 from 12% in 2007, only a few funds have benefited from the shift.

In 2012, LPs committing to emerging markets focused their efforts on the largest funds. The 10 largest funds reaching a final close in 2012 accounted for 55% of the total capital raised by vehicles, as compared to 42% in 2011.

“As limited partners struggle with the goal of increasing their allocations to emerging markets private equity, while at the same time reducing overall costs, many have chosen to write larger checks to a smaller number of fund managers that have longer track records,” said Jennifer Choi, the trade body’s newly appointed acting chief executive officer.

The findings are in line with a recent survey from Coller Capital in which a significant number LPs said that they had plans to reduce their general partner relationships globally. A good number of the surveyed LPs also revealed that they were deepening their fund due diligence processes, which in turn lengthens the time it takes them to commit to funds.

LPs also appeared to be losing their appetite for country-focused vehicles,  according to  EMPEA data.  China and India were the largest losers, as commitments dropped by about 35% and 24%, respectively. LPs instead focused their efforts on pan-emerging markets and Asia-focused regional funds, which were the biggest emerging market gainers in 2012.

Commitments to Sub-Saharan Africa remained fairly steady at $1.4billion, having reported about $1.4billion in both 2011 and 2010, according to the EMPEA figures. Africa-focused allocations however only made up about 3% of the total $40.3 billion raised by emerging markets in 2012, the figures showed.

Most recently this has been attributed to difficulties in exiting portfolios via listings. Recent reports of fraud in China’s corporate world seem to have taken their toll on investors, with a good number shying away from putting money into companies.

The concerns over fraud have not only resulted in fewer initial public offerings (IPO) in China, but also across leading bourses in places like the US. This is a huge problem, as historically IPOs have been the source of exit for a good majority of private equity investors.

Although trade sales would be considered the next best option, these have traditionally not featured highly in the Chinese industry. The report attributes the low number of trade exits to the fact that private equity investors frequently only hold minority stakes, which are difficult to sell to a trade buyer. China, it appears, exhibits the same problems faced in Africa where the bulk of the entrepreneurs are not happy to give up a majority part of their company.

The report suggests developing a strong secondaries market – where private equity investors sell stakes to each other – as a possible way out of the conundrum. The report projects that this model will become increasingly preferred. China First Capital expects the fraud concerns to dampen IPOs for a while.

It is interesting to see that Africa is not alone in the exit dilemma. For the longest time, global investors have listed Africa’s poor exit environment as one of their top reasons for not putting money into the continent. Central to the concern has been poor liquidity on Africa’s bourses, which makes exiting via an IPO a significant challenge.

However, private equity investors in Africa are finding ways around this. Recent exits data shows that trade sales are increasingly being used as a route out of portfolio companies in Africa. The Africa Development Bank (AfDB) suggests trade sales as a more feasible mechanism for funds to relinquish their holdings in portfolio companies, revealing that a good number of vehicles it has backed have followed this route.

With the exit environment in Africa seemingly thawing, while challenges are rising in some of the world’s biggest emerging markets such as China, investors may have to rethink their strategies. The revelations of China First Capital’s report helps to show that exits are not only an African problem, but a broader emerging markets dilemma. Granted, Africa is a smaller market than China and therefore offers less depth, but it does not take away from the fact that investors will have to work hard to find their way out of portfolios, particularly in light of China’s IPO struggles.

The bottom line is, investors can no longer use exits as an excuse not to be in Africa. Just as they will find a way out in China, they will also find a way out in Africa.

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2012 deals close at $1.3bn

Dealers reported approximately $1.3bn worth of deals in 2012, the industry’s lowest level since 2009, according to Preqin data. The figures only cover transactions with disclosed deal values.

Volumes also came in lower at 32 transactions, compared to the 39 announced the year before.  The 2012 figures include the Union Bank $500m recapitalisation transaction which was announced in 2011 and closed in 2012.

Deal values were boosted by the business services sector, which brought in about 54% of the deals, and 29% of the deal volume. North Africa hosted some of the largest deals in the sector, most notably the International Finance Corporations Asset Management Company’s $204m investment in Morocco-based bank Banque Centrale Populaire (BCP). Abraaj Capital also seized an opportunity to seal a $125m investment in Morocco-based insurance holding company Saham Finances.

Food and agriculture came in second in terms of activity, delivering 26% of the industry’s volumes.  The sector however only contributed 15% to the total value of deals. Notable deals in the sector include Carlyle’s $210m Export Trading Group (ETG) deal, in partnership with Standard Chartered Private Equity (SCPE) and Pembani Remgro Infrastructure Managers.

The sector also featured Morgan Stanley Alternative Investment Partners, which partnered with Capitalworks Equity Partners on an investment into South Africa’s Rhodes Food Group. The deal value was not disclosed. Agriculture also hosted a secondary buyout – Aureos’s sale of Zambia-based agribusiness Golden Lay to Phatisa for $24m.

Healthcare and industrials were the third most active sectors, each bringing in 13% of the volume. Meanwhile telecoms & media brought in 7% of volumes. The sector’s higher deal values made the sector the second highest contributor in terms of deal values, coming in at 16%.

Regionally, North Africa had the highest deal values at about 42% of overall deal values, while South Africa delivered15.8%.  Sub-Saharan Africa, ex-South Africa, delivered 42.6% of the aggregate deal values, and was the most active in terms of deal volumes, sealing 54.5%.

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GPs’ fundraising efforts fell to a four year low in 2012, collecting just $1.3bn across 11 funds, according to data from Preqin.  The figure excludes the just announced $800m Ethos fund closure, which falls into 2013.

The 2012 total fundraising total is less than half the $3bn’s worth of commitments brought home in 2011, Africa’s second highest fundraising year since records began. The year’s fundraising is only a quarter of the record $5.4bn raised by GPs for the continent at the height of industry optimism in 2007.

Fundraising dropped to $1.2bn in 2008, as global financial turbulence dampened investor appetite. The optimists were, however, vindicated in 2009 with a phenomenal upturn which saw figures double to $2.4bn, with this rising to $2.8bn the following year.

The 2012 figures were in part lifted by Catalyst Principal Partners’ East Africa focused maiden vehicle, which was steered to final close at $125m – beating its $100m initial target. 8 Miles during the year also announced a $200million first close of its $450million maiden vehicle.

Fund launches

All was not doom and gloom in Africa’s fundraising scene. Managers spiced up the space with a number of fund announcements, setting the stage for an interesting year in 2013.

Brazil’s BTG Pactual bank turned heads with its revelation of a $1bn Africa-focused private equity fund, understood to be mainly focused on former Portuguese colonies. Schulze Global Investments also flavoured the space with a $100m Ethiopia-focused offering, one of Africa’s few single country pitches.

Fairview Capital Partners, on the other hand, brought a new flavour to the continent with a maiden fund-of-funds, one of the few Africa-focused funds offering this strategy. The vehicle has been launched in partnership with Dutch development investor FMO.

Meanwhile, Helios and Jacana started hot discussions with their mezzanine vehicles. Helios sized its fund at $250m, with an interesting evergreen structure that offers an equity-like partnership to LPs, as opposed to the debt-like commitments common in the regular limited partnerships.

Jacana’s vehicle is, on the other hand, seeking $75m for its limited partnership fund. Elsewhere, Satya brought to market a sophomore $500m fund, while Medu Capital launched its $300m Fund III, which, if Medu reaches its target, will be almost three times the size of its predecessor.

The new funds join a long line of GPs who collectively hope to raise more than $11bn for the continent. According to Preqin, there are at least 50 managers seeking commitments for Africa.

The new capital will be used to expand Chai Bora regionally, following the company’s initial entry into Kenya in 2011. The company has also been investing in new equipment to increase capacity. The transaction is Catalyst’s second deal from its recently closed $125 million maiden East-Africa focused fund.

“Chai Bora is a recognized Superbrand in Tanzania where it has established a leading market share as the leading tea company in the country,” said Catalyst managing director, Rajal Upadhyaya.  “We remain upbeat about the prospects for Eastern Africa. This investment represents a ramping up of Catalyst’s investment activities across the region.”

The deal brings to an end Trans Century’s five-year holding in the company. The Kenya-based investment holdings company acquired Chai Bora from TATEPA Group in 2008. Trans Century is divesting the tea company to focus on its core businesses of power and transport infrastructure, and engineering.

Based in Mafinga, Chai Bora creates locally popular tea brands, which are primarily sold into the Tanzanian market. The company was created as a subsidiary of TATEPA in 1994, and spun off as a separate company in 2006. Chai Bora reported revenues of approximately $11million (Ksh1bn) in 2011, while earnings before interest and tax (Ebit) stood at about $1million, a 9% year-on-year slide.

Catalyst’s first investment was in Chemi and Cotex Industries Limited (CCIL), a Tanzania-based consumer goods manufacturer that is backed by HSBC and Satya Capital.

The total value of exits in the year, on the other hand, stood at $1.65bn, a 13% rise over the $1.43bn reported at the end of 2011. The latest figures are 23% lower than the $2.3bn of sales closed in 2008, which remains Africa’s record exit year in aggregate values.

In 2012, the bulk of Africa’s private equity sellers chose to offload companies to trade buyers, accounting for almost 65% of the volume. Included in this is African Capital Alliance’s $335m sale of MTN Nigeria to South Africa-based diversified holding company Shanduka. The transaction was the largest exit in sub- Saharan Africa, outside South Africa.

Also to be noted is Actis et al.’s sale of South Africa-based industrial services company Savcio to Alstom, an Actis portfolio company. Sellers included Ethos, Old Mutual and Sphere holdings. Although the transaction value remains undisclosed, it is expected to be significantly higher than the $195m the investors paid for the company in 2006.

Actis additionally delivered a $66.7m initial public offering of its Uganda-based energy distribution company, Umeme, on the Uganda Securities Exchange. The investor sold 38% of its holding in Africa’s only flotation of the year. Umeme was also listed on Kenya’s Nairobi Stock Exchange and is understood to be the first company to cross-list from Uganda to Kenya. The IPO was oversubscribed by 37%.

Elsewhere, secondary activity saw Aureos’s sale of Zambia-based agribusiness Golden Lay to Phatisa for $24m. Cauris was also in the secondaries space, selling its stake in Petro Ivoire, a downstream oil and gas operator based in Cote d’Ivoire, to an undisclosed fund manager for approximately $4m.

Africa is set to see even more exits in 2013, as the bulk of the continent’s leading GPs return to the fundraising trail.

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The AIFMD aims to create a supervisory environment for alternative investment fund managers in Europe. The regulations will cover both European Union (EU) and third-country managers. The latter refers to managers based outside the EU that market their vehicles to investors based in the EU.  This covers both private equity and hedge fund managers.

The Delegated Regulation is a precondition for the application of the overall directive in EU countries and was adopted to supplement certain elements of the overall rules. The supplement clarifies conditions and procedure for the determination and authorisation of AIFMs, including the capital requirements.

The rules also cover operating conditions for fund managers, such as remuneration, conflicts of interest, risk & liquidity management, investment in securitisation positions and valuation. Conditions for delegation have also been covered, as have rules on depositaries, including the depositary’s tasks and liability.

The directive has additionally stipulated reporting requirements and leverage calculation.  The latest act takes the form of a regulation and does not need any national transposition but will be directly applicable in all EU member states. EU member states however have July 2013 to transpose the overall Directive and its implementing measures.

Wider AIFMD rules will require non-EU managers marketing funds within its jurisdiction to obtain a ‘passport’ by mid 2015. The ‘passport’ has been introduced to enable non-EU funds to be marketed to professional investors across the EU subject to certain conditions. Managers can also be marketed in a specific member states, for as long as member state has met stipulated conditions.