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2019 Outlook from CEO of Old Mutual Alternative Investments

11 December 2018 Old Mutual Alternative Investments (OMAI)

Fundraising
• In the current global context of increasing amounts of capital chasing fewer attractive deals, and driving down returns in traditional markets, Limited Partners (LPs) are increasingly looking to new markets to achieve their return objectives – and Africa can offer this.
• In 2019 we will continue to see an uptick in investor enquiries looking to benefit from the key macro trends which are expected to underpin positive GDP growth across the continent. Foremost amongst these are rapid urbanization and the expanding middle class (Africa is urbanizing at a rate of 24 million people a year, more than twice the rate of urbanization occurring in either India or China).
• The African Private Equity and Venture Capital Association’s (AVCA) fifth annual Limited Partner Survey for 2018, which examines global investor views and expectations about private equity in Africa, revealed that the majority of LPs (76 per cent) plan to increase or maintain their allocation to African PE over the next three years. The data provides a clear indication that LPs are confident and optimistic about the continued attractiveness of African PE.
• With global economic instability, the private equity industry made some adaptations in recent years which will continue to gain momentum in 2019. Co-investment is one such trend among some LPs who are looking to tailor their investments. Old Mutual Alternative Investments (OMAI) continues to look for the best deals on behalf of its investors and will offer its LPs co-investment opportunities where appropriate.
• In 2019, African pension funds will have a growing role to play as an additional pool of capital. In 2018, OMAI was able to attract increasing amounts of investor interest from Africa-based LPs and we expect this to continue into 2019 as their assets grow (around 20% per annum in some African countries).
• The outlook for 2019 and beyond is positive, with strong indications of sustained confidence in the African PE industry.

Deal flow
• An unprecedented level of fundraising for African private equity in 2014 and 2015, as well as the entry of global players into the market for the first time (resulting in a deepening of the African PE market), was followed by a period of slower growth and currency volatility in some of the region’s leading economies.
• In 2018, investor sentiment, deal flow and pipeline visibility improved driven by factors such as higher than expected GDP growth in some regions, recovery of the oil price in Nigeria, political leadership changes in South Africa and improved foreign exchange liquidity. Certainly, it’s a rosier picture than a few years ago when the global economy slowed, affecting Africa’s major economies. The improvements are encouraging and reflect Africa’s status as the world’s fastest urbanizing continent.
• Given the deepening of the market, it will be even more important in 2019 for African PE firms to have an on-the-ground network. Unlike in developed PE markets such as the US or Western Europe, you cannot rely on brokers delivering or introducing fully active investment opportunities. Instead, we believe it is critical to be locally based. This is essential for both deal sourcing, transaction execution (including due diligence), and ultimately being able to work with your investees to deliver value.
• OMAI relies heavily on our on-the-ground staff for deal sourcing and execution, and investment management. We have a team of 95 investment professionals across 5 offices in 4 African countries: Cape Town, Johannesburg, Lagos, Nairobi and Abidjan. Our strong on-the-ground presence (rooted in a 175-year history on the Continent as part of the Old Mutual Group) combined with investment professionals with global experience and local knowledge allows us to develop strong proprietary deal flow and to better evaluate new opportunities.
• Looking forward, we expect to see more deal flow in the African infrastructure space. It’s an exciting area for us. We’re also particularly optimistic about the general environment in South Africa which has been quite tight over the last few years because of the political and economic situation. It’s early days but we believe that the situation is more prospective from a deal point of view. In fact, the whole continent has recovered from the commodity slump to a certain extent and we’re expecting more of Africa’s cylinders to be firing over the next year. There’s a lot of opportunity for us and the PE industry in Africa.

Exits
• The exit environment for African PE is much more robust and active than many realise. There is indeed an active market both for selling and buying of assets and interests, and that, similar to more developed markets, there are a growing number of exit routes across different sectors and countries (not just in the more mature South African market). For example, in 2019 and beyond, there will be a growing opportunity to exit through public listings on local markets. African exchanges continue to struggle with liquidity but some of the larger bourses do offer exit options for PE investors, including Johannesburg, Nigeria and Nairobi. Even smaller exchanges like Tunis may offer a viable exit route for certain portfolio companies.

 

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