Private equity funds are booming in Africa, says Vantage Risk Capital

Private equity is booming across the continent, with more than $565 million of private equity capital raised for investment in Africa just in 2004.

More than $1,3 billion of private equity capital was invested on the continent in 2004, according to the African Venture Capital Association ("AVCA").

These statistics have been released as part of the AVCA annual conference, which this year is being held in Dakar, Senegal. The prognosis is that these numbers will be dwarfed by the 2005/2006 statistics.

According to Luc Albinski, Managing Partner at Vantage Risk Capital, a new and exciting trend is the support of domestic institutional capital for private equity. The AVCA statistics show that 54% of total funds raised came from domestic sources in 2004 versus 37% in 2003.

Albinski, commenting from Dakar, points to the success that his own fund, the Vantage Mezzanine Fund, South Africas first independent mezzanine fund, has achieved in this regard.

Vantage has secured more than two-thirds of its capital for its first closing from local South African institutions, including the Metropolitan Asset Management, the Eskom Pension Fund, the Transnet Retirement Fund and the Public Investment Corporation (PIC).

Elsewhere on the continent, governments have intervened to assist with the development of the private equity asset class. According to africainvestor, a trade publication, in Nigeria, the governments Small and Medium Enterprises Equity Investment Scheme asks banks to invest ten per cent of their profit in SME equity.

This scheme was valued at $306 million in May this year.

Ghana's government is pushing a similar scheme with its $24 million Ghana Venture Capital Trust Fund, which, just operational, will be invested through private equity funds.

In South Africa, the government has established the National Empowerment Fund, which is targeting the black SME sector with investments from R100 000 to R50 million.

"One of the most challenging aspects of private equity investing in Africa remains the issue of exits. Stock exchanges are illiquid and IPOs - a common exit route in more developed markets - remain scarce," says Albinski.

"Private equity firms are adopting two common strategies to deal with this challenge. One is to seek to invest in companies that can develop a scale of operations which makes them attractive to trade buyers."

Albinski says a good example is Celtel, the sub-Sahara mobile phone operator, which was recently sold to a major Kuwaiti telecoms operator. Private equity firms such as EMP Africa and Kingdom Zephyr helped Celtel develop its operations across a number of African countries giving it the scale that made it attractive for a major trade buyer to buy it.

"The other strategy is to negotiate exit mechanisms into the deal up-front rather than relying on the uncertainties of a potential exit five to seven years into the future.

As Albinski points out, in this sense African private equity firms are adopting "mezzanine-type" methodologies which rely on cashflow-driven returns rather than on the more traditional capital liquidity events which have underpinned private equity in developed markets.

As africainvestor points out, the less developed markets in Africa allow private equity investors to structure attractive exit options which would necessarily be available to investors in more competitive developed world markets.