Foreign investors are looking to Africa to expand their footprint

Africa is continuing to receive more interest as an investment destination from investors looking to emerging markets to access their growth potential or from investors looking to emerging markets to access their growth potential, according to a report is

These are some of the findings of PwCs’ sixth edition of its biennial Valuation Methodology Survey.

The publication titled ‘An African perspective: Valuation methodology survey 2012’ reflects the views of 49 financial analysts and corporate financiers. This year the study broadens the reach of the previous South African surveys by including perspectives from analysts in East and West Africa.

Jan Groenewald, Valuation & Economics Leader: PwC Corporate Finance says: “A significant number of corporate executives have declared their company’s intentions of growing their presence in Africa, and the number of global companies looking to establish a foothold on the continent has increased.

“A key characteristic of the post-2008 recession period has been the increase in prominence of Africa as an investment destination. With an already higher than average growth rate, Africa is fast becoming an attractive place to do business especially as corporate in developed markets seek to augment slowing growth rates in their home markets. Price and value however remains the key challenge for companies doing deals in Africa as the gap between sellers and buyers seem larger on the continent than in other jurisdictions.”

This year’s survey looks at companies’ perceptions of investment around Africa as an investment destination, as well as how corporate executives across the continent address the complexities associated with valuing businesses in Africa. Specific questions addressed in this edition of the report relate to the reasons for the increased investor interest in Africa; the industries that are attracting the most interest in Africa from potential investors; the level of cross-border and intra-African interest in the continent; deal activity in African markets; companies’ perceptions of African markets; and the challenges faced by companies in performing valuations in African markets.

“The survey does not represent a detailed economic study of investment in Africa but does provide the reader with an insight into the perceptions and experiences of Corporate Financiers in Africa, and how they approach valuing businesses in Africa.”

Economic growth in Africa has recently been significantly higher than that in many developed regions, which is often cited as the main reason for investment in Africa. On average, developing economies have an expected five year compound annual growth rate (CAGR) that is more than twice that of developed economies, according to the International Monetary Fund (2012).”Africa has a lot to offer, particularly in terms of scarce resources. However there are also a host of factors hindering the continent’s success, such as a lack of infrastructure, various barriers to trade, low productivity and skills shortages. Each African country should be considered according to its individual risks and opportunities.”

Reasons for investors becoming increasingly interested in making investments in African companies

There is a strong perception in the market that African companies have greater growth expectations than those in other markets. No less than 92% of respondents see this as either “very relevant” or “extremely relevant” in explaining the increased interest in African companies.

In addition, there is a strong drive to diversify away from low-return markets, with 92% of analysts and corporate financiers also seeing this as either “very relevant” or “extremely relevant”. “This demonstrates investors in developed markets’ desire to augment slowing growth in their home markets,” says Groenewald. On a secondary level, improved political stability and risk-return trade-offs have contributed to a more positive perception of African markets.

Purpose for which valuations are performed in Africa

The results of the study indicate that the majority of valuations are still performed for investors in home markets. However, a significant number of valuations are also being performed in connection with investors from Europe and the US evaluating investment opportunities in Africa, which underscores the heightened level of interest from developed market investors seeking exposure to higher anticipated growth in Africa.

The industries in which target companies operate

The level of activity by industry tends to differ between regions. The study shows that the most predominant target industry in West Africa appears to be the retail, consumer goods and industrial products industries, whereas mining continues to be a key industry within the Southern African market. The financial services sector is a key focus area for all markets, but is particularly strong in East and West Africa.

Difficulties encountered in performing evaluations in Africa

Analysts and corporate financiers cited the lack of data, both about comparable companies that could provide valuation benchmarks in a valuation analysis, as well as industry data (for example around market demand, the competitive environment and growth expectations) that could support cash flow forecasts as challenges to performing valuations.

Groenewald says that the main issues around emerging market valuations are the lack of industry data and the inability to find comparable companies. This is largely as a result of a lack of active markets. In some emerging markets active secondary markets and exchanges are not present, or those that are present are so limited that the value is unable to gain much use from the information these markets provide, he says. Furthermore, in some emerging economies active markets are present but the breadth of the markets is limited. As a result, the valuer may not be able to find suitable comparable companies on markets to use in their analysis.

Groenewald concludes: “The outlook for deal activity in the emerging markets is clearly improving. However, companies need to do more to effectively understand emerging markets and manage the risk to boost their chances of entering into successful cross-border transactions in fast-growing developing economies.”