Pan-African boom

As private equity in the MENA region shows spectacular signs of health, could the rest of the continent also experience a private equity boom? Toby Lewis reports.

Private equity in Africa may be coming of age.

This week two record-breaking deals took place in the Middle East and North Africa region. Today US buyout firm Colony Capital bought Tamoil, a Libyan-owned oil company, for around $4 billion (€3 billion) – nearly three times the $1.41 billion record set by Abraaj Capital in Egypt earlier this week, when it bought Egyptian Fertilizers Group.

The Colony deal was also the largest ever in Africa as a whole, beating Bain Capital’s $3.5 billion acquisition of South African retailer Edgars Consolidated Stores

The success of the African countries in the MENA region has been driven largely by the private equity funds in the Middle East, which include Dubai International Capital and Kuwait’s Global Investment House.

Other foreign funds are also taking an interest, including US buyout firm The Carlyle Group, which recently raised a $700 million fund for investments in the MENA region. According to the UK newspaper Financial Times, Carlyle intends to invest in higher-population African countries such as Egypt and Algeria, as opposed to the wealthier Gulf states, which should fuel Africa’s growth further.

The question remains whether the private equity boom for Africa in the MENA region will also translate to the rest of continent. South Africa has seen activity for some time, and the country already has well-established buyout firms such as Brait and Ethos Private Equity. According to a report last month by accountancy KPMG, South Africa’s private equity industry had R56.2 billion ($7.8 billion, €5.8 billion) funds under management by the end of 2006, an increase of 32 percent on the R42.57 billion from the previous year. 

But investment in the rest of the continent is also picking up. Two weeks ago Emerging Capital Partners closed a $523 million fund, which has been billed as the largest fund to invest right across Africa (although there are larger South Africa-specific funds).

Rod Evison, from UK government-backed emerging markets fund of funds CDC Group, says: “Private equity in South Africa and MENA is a well-established industry but in the rest of the continent it is a pioneering asset class. Most of the big firms still operate with fly-in managers in Pan-Africa.” Yet there is now more interest from the LP community in the good news coming out of the rest of Africa, he believes.

Because of the early stage of Pan-African private equity, exact figures of what has been invested outside MENA and South Africa are hard to find. According to trade body EMPEA, Aureos has a $400 million fund, CVCI has a $200 million fund and Travant Capital is raising a $200-300 million to invest in Nigeria. There are also numerous smaller local funds. 

Tom Gibian, chief executive of Emerging Capital Partners, says: “Across Africa there are growing disposable incomes, and the private sector is experiencing explosive growth with the ability to compete against state-owned companies.”

Much of Africa remains in extreme poverty. But the fact that the continent is now perceived as a plausible private equity target may be a sign that it is becoming acceptable to make profits in African countries. Evison says: “The capitalist approach may succeed where aid has not succeeded in the past. We need to generate wealth as well as alleviating poverty.” However, Africa must also help itself – if it is to really benefit from private equity, its standards of governance and transparency must be brought up to those of the first world , he says.

Gibian is extremely confident that this is possible. He argues that risk-taking is attractive in Africa, because in the less developed but stable African countries, it is possible to build up companies in untypical sectors – such as telecoms – that can create virtual monopolies. This would be very difficult in other parts of the world, he points out.  

Alongside Africa’s fantastic natural resources, including diamonds, uranium and oil, such alternative investments provide private equity with the base from which to blossom. The nascent industry in the continent at large may well follow the path of countries such as Egypt and South Africa, where buyout firms have thrived.