Is The Influx Of Private Equity Investment Good For Africa?
Private equity investment on the African continent grew significantly in the past decade, and more and more new entrants are targeting the market. The trend garnered more attention this year with the notable arrival of Kolberg Kravis & Roberts, which made its first investment on the continent, and Carlyle Group’s closing of its first African fund.
So is the influx of private equity investment good for Africa?
“I believe it is really good for growth in South Africa and Africa as a whole,” says Graham Stokoe, Africa Private Equity Leader at Ernst & Young.
Private equity firms tend to invest in smaller privately-owned companies, which can otherwise struggle to get capital in developing financial markets. Stokoe argues that this is a prerequisite to economic development throughout the region.
“Also, it’s not just about financial capital: Private equity takes a very active role and helps entrepreneurs and family businesses take their business to the next level.”
In other words, private equity firms are taking small and mid-size firms and developing them by bringing in strategic, financial, and governance expertise. “They bring in a lot of human capital resources,” he says, and the result is stronger organizations and industry.
It seems to work: An Ernst & Young study found that companies with access to private equity networks had 2.4 times greater returns of those which didn’t, and companies that implemented governance changes had nearly twice the returns of their unchanged counterparts.
Keeping ownership local
The obvious question would be whether private equity owners, rather than the entrepreneurs and employees of the businesses themselves, enjoy disproportionate benefits from this growth.
Stokoe points out that most private equity firms take a minority position in the companies they invest in, and that the majority of exits involve sales to other African companies, rather than foreign firms.
Another 20 percent of exits now involve sales back to the entrepreneur. This means that African businesses and entrepreneurs are able to reap the benefits of these investments.
Another growing trend is private equity firms selling their position to other private equity firms. In the last year, Ernst & Young found that private equity sales to other private equity firms increased from a long-term average of 14 percent of sales to 22 percent – an indication of the demand for longer-term financing.
In those cases, Stokoe gives the private equity firm’s perspective as, “Well, we have to exit because we need to give returns back to our shareholders, but actually there’s a role for another PE. Say we’ve done a lot in improving financial controls but the next PE can play a role in expanding the business outside and turning it into a pan-African firm.”
This reflects the reality that many investment opportunities in Africa tend to require a longer-term horizon.
The larger funds might be more willing to take these projects on, as exemplified by Blackstone’s hydropower investment in Uganda, but many have to deliver returns to shareholders on a more traditional schedule.
This is where other types of investors play a role. In Blackstone’s case, the firm partnered with the Aga Khan Development Network and the World Bank in order to finance the project.
According to Stokoe, these types of organizations “have a big role to play [in African private equity investment] because there’s a lot of investment in infrastructure and other areas.”
Such investors can focus on longer time horizons and enjoy more muted returns, similar to impact and socially conscious investors. These firms represent a growing force in African investment.
“While there are big players who are set on high returns, there are a lot of private equity investors investing for social impact.”
Do these investments do any good?
Private equity investment can improve corporate governance and, either through partnerships with development-oriented funding sources or through impact fund, deliver the longer-term capital that many projects require.
But are these investments generating the kind of broad-based societal benefit that one would hope for?
Infrastructure investments, and particularly those that hinge on single-sourcing arrangements, are a potentially vulnerable area, according to Achieng Ojwang, program manager for the United Nations Global Compact Network in South Africa.
“That alone is going to pose a huge risk to development — it’s one area we need to watch,” Ojwang said.
These arrangements are usually government-to-government, but there is a risk that private equity could benefit from them too, especially in unstable regions such as conflict zones.
It’s a risk that remains worth monitoring, although the majority of investment dollars go to small- and mid-size enterprises, rather than infrastructure, and to more stable regions.
Notably absent from the private equity purview are the mining and extraction industries, which Stokoe considers to be a good sign.
“We don’t have enough manufacturing and value-adding, which is a problem for Africa as a whole.” Thus, private equity’s focus on local industry, where both the growth of businesses and their outputs are enjoyed locally, could be a good vehicle for long-term growth.
The risks remain
Given the range of issues on the table when it comes to investment and development, Ojwang believes that it’s difficult to determine if a particular investment could be considered a success.
“I don’t think you can [ever] claim success across the board,” she says, referring to the myriad factors involved. “Awareness and sensitivity around environmental, social, and governance issues are quite important.”
Thus far, it looks like private equity is avoiding some of these foreign investment pitfalls, but that doesn’t mean they’re irrelevant. Overall, there have certainly been benefits to African business development and growth — with the influx of new investors in the region, we can only hope that this will continue.