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2016 Africa Private Equity Confidence Survey

More capital being deployed – what about returns?

This article provides valuable insight into how fellow private equity (PE) practitioners view the landscape at present as well as their future expectations.

Introduction

This forward looking survey provides valuable insight into how fellow private equity (PE) practitioners view the landscape at present as well as their future expectations.

African Private Equity (PE) markets have grown exponentially in recent years and, going by the results of the 2016 Africa Private Equity Confidence Survey, this trend will continue, albeit at a slower pace. An overwhelming majority of respondents across all three regions surveyed – Southern, East and West Africa– expect PE activity to increase in the next12 months. Outside of South Africa, the region's generally shallow capital markets and nascent stock exchanges mean PE remains a "natural" asset class for investors interested in Africa's frontier and emerging markets. This is providing support for the industry and, as one of the world's largest PE firms recently declared, "We're not even in Chapter One of Private Equity in Africa. It's more like the Prelude. We hope all the major firms will be there in five to 10 years."

However, opportunities are not evenly spread. There is optimism about East Africa’s favourable economic climate but pessimism about West African prospects on the back of fiscal deficits, low oil prices and rising security tensions. Southern Africa's economic climate is expected to remain relatively unchanged with lethargic growth in South Africa, its engine room, offset somewhat by growth in Namibia and Mozambique.
Unsurprisingly, respondents believe the fundraising environment will improve on the back of more success stories out of sub-Saharan Africa (SSA), supported by an increase in awareness of PE as an asset class with several large pension funds opening up to its possibilities for the first time.

It is no surprise then that increased competition for quality deals is expected to drive up asset prices over the medium term. New opportunities in rapidly expanding markets like Côte d'Ivoire, Ethiopia and Tanzania will bolster traditionally favoured PE destinations like Kenya, Nigeria and South Africa.

But the environment is not without challenges. PE firms continue to struggle with a lack of quality deal flow, human capital challenges and, often, a lack of sophistication in potential acquisitions and portfolio companies.

On balance, the picture is positive but the perennial question remains: will the increased levels of confidence and capital being deployed be rewarded with the required returns?
 

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