In 2007, Sub-Saharan Africa received approximately 3% of the private equity funding raised for emerging markets. This figure had doubled by 2010 and, if interest is anything to go by, this growth looks set to rise substantially.
“The growing interest in Africa shown by private equity firms is being driven by a combination of high growth rates and ongoing political and economic reforms,” says Graham Stokoe, African Private Equity leader, Ernst & Young. “Despite the global slowdown, foreign direct investment has remained robust and we expect private equity investment to grow substantially as well.”
Africa’s growth projections are certainly impressive. Sub-Saharan Africa is set to grow at an average 5% over the next decade, as compared with 1.5% in Europe and 2.5% in the United States. Foreign direct investment projects in Africa are set to reach $150 billion per annum by 2015 but, despite the increases noted above, private equity investment is relatively under-represented in the region. Private equity investment represents 0.11% of the Sub-Saharan gross domestic product as compared with 0.67% in the United Kingdom.
“This lag between foreign direct and private equity investment could be attributed to the fact that the former typically focuses on large infrastructure projects while private equity firms, in the main, are generally more interested in companies that serve the consumer markets or sectors impacted by the expanding consumer market such as financial services,telecommunications and manufacturing,” Stokoe explains. “However, powerful demographic trends are making African markets more and more attractive to private equity investors.”
Chief among these trends are the rapid pace of urbanisation in Africa and the rapid emergence of a middle class. By 2030, half of Africa’s people are expected to be living in cities, as compared with today’s one-third. Crucially, the number of young people is growing, as is a highly aspirational middle class. In the Sub-Saharan region, around 34% of the population is categorised as middle class, a percentage that will grow to 42% by 2060. And by 2020 Africa’s middle class is expected to spend more than $2.2 trillion annually, some 34% of the global total.
Private equity investment is important because it plays an important role in helping mid- sized to large companies grow into regional leaders. They do this by bringing in much-needed capital—African financial institutions can be reluctant to lend money to such companies. As important, private equity firms also provide board-level skills in key disciplines like strategy and corporate governance.
“Private equity investment into Africa looks set to rise, much as it began to do so a few years ago in the more established emerging markets like Brazil, India and China,” says Stokoe. “However, Africa also needs to establish more venture funding for start-ups and smaller companies. In so doing, we will ultimately increase the number of investment prospects available for private equity firms.”
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