African private equity is having its moment in the sun, with pension funds on the continent ready to invest in their own backyard as investment banks continue to retreat from lending and domestic strategies mature.
Sources cited East Africa as “hot.” Countries such as Tanzania, Kenya, Ethiopia and Rwanda were mentioned as offering emerging opportunities in private equity, while Nigeria — whose attractiveness as an investment destination took a brief hiatus this year when its currency was crippled by the collapse in oil prices — also is back in vogue.
After a record wave of inflows in 2014, when sub-Saharan focused funds raised $4.5 billion globally, up from $1.8 billion in 2013, and maintaining a high level throughout 2015 at $3.8 billion, private equity inflows have slowed in the first quarter of 2016, according to Emerging Markets Private Equity Association. But while global flows are slowing, there still is an upward trend among domestic pension funds, making managers optimistic.
Jeff Schlapinski, director of research at EMPEA in Washington, believes that the downturn in the commodity cycle and currency volatility have made fund managers hesitant to act on opportunities in sub-Saharan Africa this year, choosing to delay the deployment of the capital they have already raised.
“However, in Q3 2016, an $80 million deal (made by a consortium led by African Capital Alliance and 8 Miles) with Nigerian biscuit manufacturer Beloxxi was completed, which could signify a turning point and bring private equity in Africa up again,” said Mr. Schlapinski. He said EMPEA has in particular seen private equity projects in the power sector on the rise.
U.S. and European pension funds have been allocating to Africa private equity for the last few years, but this also has grown.
Figures from alternatives research firm Preqin show that U.S. investors boosted allocations by one percentage point since 2013, while inflows from European investors grew by 2.4% percentage points in the same period.
According to Preqin, European investors' top choices are East Africa-focused funds (52%), while North American investors are more specific, preferring Nigeria-focused funds (62%).
One of those U.S. investors is the $181 billion New York State Common Retirement Fund, Albany, which in 2015 committed a total of $185 million to two private equity managers, African Capital Alliance and Helios Investment Partners, a fund spokesman confirmed in an e-mail.
Investors based on the African continent have now started seeking private equity opportunities too.
African pension funds, especially South African funds, like their U.S. and European brethren before them, had been slow to invest in private equity, but are now considering alternatives — often at the expense of equities.
“One factor which draws South African pension funds to alternatives is a source of diversification, which enables them to avoid a complete dependence on the shallow domestic equity market,” Mr. Schlapinski said. This goes for both domestic and international investors, who previously sought yield in African equities.
Hemal Naran, former head of investment and actuarial at the Government Employees Pension Fund, Johannesburg, believes it has been more attractive to fund small and medium enterprises through a direct lending or some sort of convertible structure than the more traditional route of taking an equity stake in an African company. The GEPF is the largest investor in Africa with 1.6 trillion rand ($112 billion).
Mr. Naran, who now is a Johannesburg-based partner with Mkoba Private Equity Fund, said “there is big social push by South African and other retirement organizations from across Africa to invest in the continent, in many areas in a collaborative manner by pooling assets and directing investments more closely in their own backyards.”
“There is an opportunity to launch a platform focused on truly alternative and private asset opportunities across the African continent,” said Mr. Naran.
The Mkoba Private Equity Fund, founded in 2013, is based in Dar es Salaam, Tanzania, and was created to cater to domestic demand for private equity opportunities.
“The focus will be on sectors that are complementary to existing institutional portfolios, however (the fund) is always seeking areas of inefficiency that have less installed pools of capital and where it can uncover value and aggregate portfolios of assets,” Mr. Naran added.
Johan Botes, chief investment officer of the 82 billion rand Sentinel Retirement Fund, Johannesburg, confirmed in an e-mail that Sentinel is invested in South African and African real estate and private equity.
“Due to regulatory limits we cannot, at this stage, make any further commitments to private equity but Sentinel has, in percentage, one of the largest exposures among South African pension funds,” he said.