Roughly 1 percent of private equity capital was invested in Sub-Saharan Africa in 2012, with South Africa attracting the greatest volume of that capital. There is, however, a growing trend toward the newly emerging countries, including Mozambique and Tanzania.
While these economies are not as diversified as South Africa, or Mauritius and Egypt, their growth rates far outpace it, however it does not mean South Africa is running out of opportunities. In fact, there are plenty.
This week’s article looks at the best opportunities for private equity investors who have an interest in South Africa, the country considered to be the gateway into Africa:
Luxury (Including Specialty) Consumer Goods
African investors generally emphasize the emergence of consumer goods in Africa, specifically fast moving consumer goods, because of its rising middle class. For that reason, great hype followed the entry of U.S. retail giant Walmart into South Africa. But, being home to 60 percent of Africa’s millionaires and one of the few African countries with a GDP per capita above $5,000, it is higher incomes that afford South Africans the opportunity to satiate more nuanced tastes.
According to consulting firm Bain & Company, South Africa’s luxury goods market could grow 20 to 30 percent over the next five years. Suit makers, like Ermeneglido Zegan for example, have performed well in South Africa because local and foreign businessmen consider the country as a shopping hub that allows access to many luxury global designers brands without having to fly to Europe or the United States. It is all too common to see two or three different nationalities buying two luxury suits in Johannesburg for themselves and one for a family member in another country, says Riccardo, a self-described ‘displaced Italian’ in South Africa. “You would not have seen this years ago,” he continues, “but our business has benefited significantly [from being] in Johannesburg and Cape Town [due to] South Africa’s continued emergence as an international financial hub.” Other luxury designer groups, including Louis Vuitton and Gucci, perform well in the country too.
Unique tastes in South Africa make high-end clothing only a part of the emerging sector in the country. Many consumers have developed a taste for other luxuries, particularly alcohol and jewels, signalling immense opportunity for investors interested in the specialty retail sector. Growing diversified and expensive tastes creates returns if you provide the goods or services that satisfy the desire.
Industrial and Heavy Industry
Outdated and underdeveloped infrastructure in many African countries make industrial and construction projects attractive to private equity investors. South Africa is known for its modern infrastructure. Many of its rail, road, air and other transport services are considered to be top notch. It is evident as soon as you step out of the plane into the world-class O.R. Tambo International Airport in Johannesburg, or Cape Town International Airport. However, the country must continue to invest heavily in construction and industry to ensure that its main cities match other foreign financial centers. “Building and industrial sophistication is an ongoing development in South Africa,” says Kagiso, owner of a large construction company in South Africa. “The government and the private sector back projects…” he continues, “only to want a more advance offering a couple years later, especially if Singapore and Hong Kong are doing it.”
Industrial equipment providers have benefited greatly from the ongoing development in the country. The top building product providers, for example, have seen growth beyond 15 percent. Slow GDP growth numbers will not undermine continued growth in the industrial sector. At least one company that manufactures and distributes industrial equipment estimates that it could grow year on year beyond 25 percent. Any future rebound in the economy will only further boost returns in the sector.
Demand for electricity continues to grow in South Africa, while supply remains limited. Public utility supplier Eskom provides about 95 percent of the electricity used in the country. Far into its New Build Programme, Eskom will not be able to meet the demands of electricity in the country, especially for the demanding industrial and mining sectors.
Coal accounts for more than 60 percent of electricity generated in the country, a great increase from the 45 percent generated 15 years ago. But government and international pressures for climate change weighs heavily on the sector. South Africa’s strategy is to make cleaner use of the country’s low cost and abundant coal reserves. Officials having pledged to reduce greenhouse gas emissions by 34 percent by 2020, while also growing their use of low-emission energy sources.
Renewable energy sources, specifically solar and wind, have seen sector growth upwards of 60 percent, and reportedly as high as 80 percent in the solar photovoltaic sector in 2012. Government auctions have proven to be more successful than the standardized feed-in tariffs, and they are also being credited for a decreased price per kilowatt hour. The country’s climate and loan guarantees from development financial institutions, including the African Development Bank, also further the sector’s attractiveness.