Africa has risen in investment importance and private equity is increasingly looking to the African continent. Osama Ezzo, managing director of Nile Development and Investment highlights the great economic potential of African markets.
Africa has become a growing focus of private equity investment, with fundraising figures for 2019 exceeding the previous several years. Although the real value of deals has lagged behind somewhat, these have begun to pick up recently. African markets have significant economic potential founded on favourable demographic trends and rising incomes, as well as the widening gap between the availability of goods and services and the level of demand. Sub-Saharan Africa is one of the fastest-growing regions globally in terms of GDP, home to seven of the 10 most rapidly expanding economies. As is the case in Egypt, where the population exceeds 100m and is growing at over 2% annually, the population of Africa is exploding and is forecast to grow by over 1bn people in the next 30 years. This will drive household consumption to $2.5trn by 2030. With increased spending on logistics and power infrastructure, small and medium-sized enterprises (SMEs) will be better able to reach a larger client base and achieve efficiencies.
African governments are also taking steps to improve regulations and the ease of doing business, all of which has increased appetite among investors. The financial services, agri-business, fast-moving consumer goods and health care sectors stand out as key areas for investment, given these demographic and consumer trends. Nevertheless, knowledge of local markets and supportive domestic partners continue to be important factors for successful investment in what is often an underdeveloped regulatory environment with numerous bureaucratic hurdles.
How is digitalisation changing the landscape of private equity investment, especially in light of new public health measures?
Digitalisation has become a priority in Egypt in the past few years as a tool to improve access to consumers and clients. From the public sector perspective, digital channels can make government services easier to use for citizens and businesses, while for private sector companies, digitalisation can expand their client base and improve data collection on their operations to help secure financing or investment. The adoption of digital tools in the financial sector has created opportunities for greater inclusion and better service offerings to SMEs. Likewise, while digitalisation has progressed further in some markets, such as Kenya, than in others, it is contributing to a more dynamic investment and business environment across the continent.
During the pandemic digitalisation has taken on greater urgency as restrictions have been imposed on travel and in-person meetings with clients and partners. In terms of private equity, digitalisation has allowed for continued collaboration with partners where relationships are well established, and has facilitated negotiations and discussions on new investments. The greatest remaining hurdle is the inability to assess businesses and assets in person, which continues to be an important step in the private equity process.
In what ways will private equity investment in Africa change as economic recovery gets under way?
Perhaps due to climate and demographics, though the full list of reasons is not entirely clear, Africa has fared better in the pandemic than many other regions. In addition, businesses outside of heavily affected sectors like tourism are likely to bounce back fairly quickly. For private equity, the pandemic has created an opportunity to stress test potential investments, and evaluate the strengths and weaknesses of business models in a way that is not often possible. In the recovery from the pandemic, private equity investors are likely to scrutinise the adaptability of businesses in the face of novel challenges. Successful private equity investment hinges on the quality and depth of a company’s management, and that has been highlighted by the current situation.