Nigeria, South Africa, Others Top Private Equity Exits in Africa | Independent Newspapers Limited
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Nigeria, South Africa, Others Top Private Equity Exits in Africa

Posted: Apr 29, 2016 at 4:30 am   /   by   /   comments (0)


Kirk Leigh


Nigeria, South Africa, Kenya and Egypt have been identified as private equity (PE) hotspots on the continent measured by the number of private equity (PE) exits, according to a new report by EY (Ernst and Young).

A PE’s ultimate goal is to sell or exit its investments in portfolio companies for a return, known as internal rate of return (IRR) in excess of the price paid, according to an online source.

Returns in Nigeria look pretty decent, according to practitioners who spoke with Independent.

“It’s tricky – large PE in Nigeria is a little hampered by forex considerations and the macro story”, says Bex Nwawudu, director, CBO Capital Partners, a private equity firm.

But target return expectations are still around 30pc but will be highly varied given the different impacts of exchange controls and the slowdown on key sectors.

According to the report, the number of exits by PE firms has continued to trend upwards, hitting record levels in 2015.

Over the last two years, South Africa accounted for 39 percent of exits, followed by Egypt with 11 percent exit. Nigeria and Kenya both account for 10 percent exit each.

Financial services led the number of exits at 24 percent in 2014-15, better than the 20 percent showing between 2007 and 2013. Industrial goods and services followed with 16 percent exits in the years under consideration. Industrials and health care have equal number of exits at 14 percent.

The retail sector, which is fast gaining grounds in Nigeria with the coming of retailers like Shoprite and recently Park n Pay accounted for 11 percent of exits. This is much better than 3 percent achieved between 2007 and 2013.

Oil and gas had zero exit compared to the 4 percent between 2007 and 2013. Telecoms and media had 2 percent exit where it had 10 percent in the period between 2007 and 2013. Power and utilities had a 4 percent exit compared to one percent in the 2007-2013 periods.

According to the report, “While exits across all regions noted positive performance relative to public markets, variations continue to exist across Africa. Exits in East Africa posted the strongest returns over the study period, returning two times an equivalent hypothetical investment in the MSCI Emerging Markets Index assuming the same period as the PE firms’ investments occurred”.

Indeed East Africa posted returns of 2.0 times multiple, Southern Africa (excluding South Africa) followed closely with returns of 1.9 times. West Africa and South Africa posted returns of 1.5 times multiple.

The report notes that the scope and competencies of PE firms have expanded considerably in the period under review.

“PE firms in Africa continue to expand their toolkit, creating value from new sources and with new competencies. At the same time, the private equity ecosystem in which firms are operating continues to mature, offering new opportunities for exits.”

More recent PE activities tend to be more creative than earlier times as they explore more creative avenues like mergers and acquisitions to create value.

“PE firms have diversified their approaches to creating value. While exits in 2013 and prior were characterized by a heavy emphasis on organic revenue growth to drive returns. Exits over the last two years have seen PE firms pull additional value creation levers, including cost reduction and M&A.”

“While geographic expansion has always been an important component to value creation in Africa, the last several years have seen PE firms focus increasingly on helping their portfolio companies to expand geographically.

“PE firms in Africa are increasingly bringing in new management to supplement the skill sets of family owners and entrepreneurs. In exits achieved over the last two years, over 40 percent had management teams with new managers brought on by the PE firm.

“While trade sales still account for the majority of PE exits in Africa, PE firms and other financial buyers have evolved into important buyers of PE assets.

“When it comes to sales to PE firms and other financial buyers, PE firms are selling to a mix of local, regional and multinational firms. Regional buyers accounted for approximately 36 percent of deals where the buyer was a financial sponsor in 2014–15, while multinationals accounted for 43 percent.”