Views from the Field: Control Investments in Sub-Saharan Africa
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Sub-Saharan Africa’s private equity industry is showing signs of maturity—including a record US$8.4 billion in capital raised for funds focused on the region in 2014 and 2015, increasing commitments from commercial investors based both locally and internationally and geographic diversification on the part of GPs. One missing puzzle piece in the development of the industry in the region, however, is control investments. In other EM regions, a rise in buyout activity has accompanied the broader maturation of the PE market. In Latin America and Emerging Asia, the number of buyouts from 2008 to 2016 increased by 43% and 42%, respectively. In Sub-Saharan Africa, only one more buyout was completed in 2016 than in 2008 (see Exhibit 1). Indeed, growth investments accounted for 67% of the number of investments completed from 2008 to 2016, contrasting sharply with buyouts, which accounted for just 14%.
Those fund managers that have ventured into buyouts have tended to focus on South Africa, which attracted almost half of all such investments in the region over the past three years (see Exhibit 2). A few of these deals in South Africa even employed debt financing, demonstrating both the relative maturity of the country’s capital markets and the gap between it and the rest of the region, where banks tend not to support such transactions.
The advantages of majority stakes over minority positions seem clear enough. A majority shareholder can take the driver seat over the full lifecycle of an investment—modifying the corporate structure and management, implementing operational improvements without obstruction and engineering the desired exit at a time that makes sense for a PE fund’s limited partners. Yet these supposed advantages beg the question: why has Sub-Saharan Africa not seen more control investments? In this Views from the Field, EMPEA shines a light on this matter by exploring the nuances of “control” at the investment level, the current landscape for buyouts and the causes of their slow take-up among fund managers in the region. EMPEA interviewed fund managers who operate across the shareholding spectrum, ranging from a minority investor to a control-only GP. They shared their views, drawing from deep knowledge of the Sub-Saharan African market.