More Africa-owned private equity funds and financial service institutions can help the continent reduce the amount of capital flight to foreign countries seeking investments, the Executive Secretary of the Economic Commission for Africa, Carlos Lopes, told a conference in Addis Ababa.
Capital flight represents a direct loss of domestic capital and highlights the effects of the country’s policy distortions on investment, Lopes was quoted by Addis Standard saying at the conference that sought to discuss ‘Capital Flight and Tax Havens in Africa’.
“Africa is not waiting for better times – we have to build the better times now,” Lopes said, adding the need to scale up Africa-owned private equity funds and other financial services that can encourage capital to remain in Africa
“The factors that fuel it (capital flight), such as real exchange rate overvaluation have to be central in the discussion,” he said.
Private equity is still a relatively new financial vehicle on Africa’s landscape and challenges include offering enough added value to encourage family firms to open up to external financing, finding local managers with the skills to see a project from investment to exit and winning over African pension funds and other local funding sources to create a more indigenous industry.
Private equity funds focused on sub-Saharan Africa raised less money year-on-year in 2013, with 11 funds taking in $922 million, down 46 per cent from 2012, according to data from the Emerging Markets Private Equity Association.
However, a high rate of growth in most countries in the world poorest continent has caught the attention of the attention of investors in the recent years encouraged by rising consumer spending from an emerging African middle class.
Increased discovery of natural resources, especially in the east Africa region, has also wetted investors’ appetites for high expected returns. Countries like Kenya, Uganda and Mozambique have discovered huge deposit of oil and gas that they are moving to commercialize in the medium term.
Most investors don’t have many option in the stock markets outside South Africa, because of the limited number of listed companies and low liquidity at bourses, and can only get into fast growing sectors like ICT and energy through private equities.
“Compared to a decade ago, today, there is a thriving private equity industry in Africa, valued at approximately $30 billion,” Lopes said, adding that there are up to 38 private equity funds which are invested in infrastructure in Africa including toll roads, dams, and airports.
Lopes said private equity funds have outperformed listed stocks in Africa for the past four years and in the boom years of 2006 to 2008, private equity in Africa amounted to approximately US$6.4billion.
“Nevertheless, while FDI through Private Equity has been rising in Africa, the continent still only attracts a small share of global equity funds,” he said, but added that these funds are relatively low and concentrated in a few countries, mainly South Africa at 53 percent, Egypt, Mauritius and Morocco at 8 percent, Nigeria at 5 percent.
He also highlighted the emergence of African bonds in the international debt market. “in Ethiopia, Kenya, Nigeria, South Africa, and Zambia, Infrastructure Bonds issues were recently oversubscribed by up to 15 times.” He said that these bonds could perform better with superior returns, low borrowing costs, appropriate fiscal incentives, and credit guarantee facilities to protect against default.
“As many of these are likely to be trans-boundary projects, African countries should coordinate efforts to deepen these bond markets and incentivize capital to stay in African countries,” he said and proposed an African Credit Guarantee Facility (ACGF) which would back African companies by guaranteeing the bonds they issue, and thereby build investor confidence to invest in the activities of these companies.
