Private equity funds attract investments destined for sub-Saharan Africa

Pieter de Wet, Head of Research at Novare Equity Partners.

Despite concerns that the momentum of economic growth in Africa may not be sustained, not least due to the slowdown in the resource boom, funds continue to flow into projects across the continent.

Pieter de Wet, Head of Research at Novare Equity Partners, noted that foreign direct investment (FDI) into sub-Saharan Africa has grown strongly since 2000.

“Although this took place from a low base, indicative of growing appetite on the part of international investors is that Africa’s share of global FDI escalated from 2.7% in 2007 to 5.6% in 2012,” said de Wet.

However, the listed markets in most countries across the continent are still relatively undeveloped and illiquid compared to their developed peers.

Said de Wet: “With the exception of South Africa, and to a lesser extent Kenya and Nigeria, markets are too small to absorb the large quantities of money that investors are willing to deploy into the region.

“As a result, direct investments via private equity funds are the order of the day.”

Interestingly, he added, it is not only developed countries that are investing in Africa. According to a 2012 study by Ernst & Young, South Africa, with 235 FDI projects, was the African country with the highest number of projects on the continent, second only to India's 237.

“This is mainly due to South African multinationals from various economic sectors looking for higher growth in markets outside of their well-served home market. Some have recently raised capital for additional funding, a major portion of which has been earmarked for further expansion into Africa,” said de Wet.

The relaxation of South Africa’s investment guidelines under Regulation 28 of the Pension Funds Act, allowing an additional 5% allocation towards investments in the rest of Africa, has also opened the way for pension funds to realise the continent’s potential.

Again, direct investments appear to be the favoured route. The longer term nature of private equity investments is a good fit for South African pension funds in search of real yields.