African Private Equity Funds Adapt To Emerging Market Capital Flight

African Private Equity Funds Adapt To Emerging Market Capital Flight

From GlobalCapital. Story by Jon Hay and Olivier Holmey.

Africa has become an exciting new frontier for private equity firms in recent years, with big players such as KKR and Carlyle seeking deals there, joining more established specialist firms. But this year investors have become wary, as several African economies have been hit by severe currency weakness and tumbling prices for the commodities on which they rely for export revenue.

Banks, both local and international, have also become cautious about lending for African deals. That means not only are investments difficult, but also exits — though one high profile sale is being attempted now. HTN Towers, a Nigerian telecoms tower business built up with backing from private equity firms Helios Investment Partners and Shanduka, is attempting a $165 million London IPO.

A banker at one of the deal’s lead managers, Bank of America Merrill Lynch and Citigroup, said the specialized investors that would consider an emerging market midcap IPO were driven by fundamentals, not momentum, and were engaging with the deal. However, this week the bookbuild was extended until Friday November 6 and the deal is not covered yet.

This is not the easiest time to attract investment to Africa. “Banks and credit committees are saying ‘why do we want to put money here?’” said Mayank Gupta, partner at Mayer Brown in London. “Private equity firms are the same. They think it’s going to get worse than it is now ­— let’s invest when they are a lot more desperate than they are now.”

Deals Gupta was working on earlier this year have been put on the back burner in recent months, as the year-old slump in commodity prices bites ever deeper.

“At the moment Africa is in quite a tight spot generally,” said Angus Downie, chief economist at Nigeria’s Ecobank, at a recent Financial Times conference on private equity in emerging markets in London. “It’s not looking good in terms of interest rates and exchange rates.”

In the past year, the Kenyan shilling has fallen 15 percent against the dollar, the Nigerian naira 20 percent, and the South African rand 26 percent.

Gupta said private equity firms purely focused on Africa — such as Helios and Atlas Mara — took a longer view, as their end investors were willing to take time to make returns in Africa. “Some other hedge funds and smaller private equity houses are a lot more aggressive,” he said. “They want to see returns in 18 months. If I was in that bucket I would also be reluctant to put money in now. But if you have a long term view, it’s not a bad time to put money in.”

Read more at GlobalCapital.