(Editor’s Note: This is the first of a two-part series. Subsequent posts: Part II)
For a growing number of private equity investors and asset managers, Africa is no longer a secret. The high-level discussions at the World Economic Forum’s 2011 Africa Summit, the signaling from the Carlyle Group’s newly established fund that targets deals in sub-Saharan Africa, and the interest that made Africa the most popular regional session at the recent EMPEA/IFC Global Private Equity Conference, all highlight the view that Africa will play an important role in the global economy.
According to the Emerging Market Private Equity Association (EMPEA), fundraising of private equity totaled nearly US$1.5 billion for sub-Saharan Africa in 2010. Leading insurance experts now indicate that political risk in the region is declining. With more investment capital focused on the continent and better management of risk, the outlook for private equity investing in Africa is more promising than ever.
recently discussed the forecast for private equity investing in Africa with Hurley Doddy, co-chief executive officer and founding partner of Emerging Capital Partners (ECP). With seven funds and over $1.8 billion under management, ECP is a leading private equity manager focused exclusively on Africa. Headquartered in Washington D.C., ECP has six offices across Africa and over a decade of successful investing experience in companies operating in over 40 countries on the continent. ECP has over 50 investments (with 20 exits), targeting companies that operate in business environments characterized by limited competition, or in sectors where Africa has either a comparative advantage or an unmet need.
Africa.com: What is your general forecast for private equity investing in Africa over the next few years?
Doddy: We see good growth throughout Africa over the next three years. That’s been the same as we’ve seen over the last 10 years. Every single year over the last decade, Africa has grown at least twice the speed of the developed markets. We see that continuing. The World Bank and others who forecast these things also see that strong growth continuing. Growth could be in the neighborhood of 5 percent this year, and probably even a bit higher next year. We think we’ll see growth across the continent. The IMF’s most recent projections show that seven out of the 10 fastest growing economies for the next five years are in Africa, so that is a good backdrop or a tailwind for private equity investing on the continent. In the west, Nigeria’s importance is growing on the world stage and we think with 140 million people in a growing economy, Nigeria is going to attract strong interest. In the north, we view Morocco as an interesting destination as well. In the east, certainly to the extent that ties between Uganda, Tanzania and Kenya can be strengthened, you will have an attractive market with 70 million people.
Africa.com: On which sectors is ECP bullish?
Doddy: There are good opportunities in many sectors across Africa and that would include telecom, which has experienced a boom in Africa last decade but will be entering a next wave as the Internet and data become increasingly important. We think it extends to the financial services where the penetration rates and use of financial products has exceptional room to grow. We are also bullish on power and water as these sectors need significant investment to fuel this type of growth. We think more and more, the consumer businesses are going to be interesting, such as big box retailers. Africa has a large and growing middle class who has increasing disposable income and giving those people new products and services is going to fuel profits for quite a number of businesses. And finally, I would point to natural resources. We obviously have very high prices in quite a number of the minerals and the other natural resources that Africa has in abundance and that would include agriculture where world markets are quite tight for food. Africa has the land and the rainfall that can be part of the solution with proper investment.
Africa.com: What changes in private equity deals have you seen over the last few years?
Doddy: Well, that’s a good question. Certainly if you look over the decade, there are more countries that are good destinations for private equity. The number of opportunities has increased in part just because the economy has grown. You now have an economy that is 50 percent bigger than it was a decade ago, which has increased deal sizes. Also, the demonstration effect of successful investments has made more entrepreneurs in Africa aware of and interested in private equity investment.
In terms of specific industries, in telecom, when we started 10 years ago, there was maybe 2 percent of penetration of cell phones across the whole continent. Well over 300 million cell phones have been added since that time. That’s been a lot of growth and those rates are going to have to slow. But there are now similar opportunities in new industries such as pay television and broadband Internet. You might have seen ECP’s announcement this March of an investment in the Wananchi Group, located in Kenya. The company provides triple play services: broadband, pay television, and telephone. Liberty Global, one of the world leaders in cable television, invested in the company, making their first investment in sub-Saharan Africa. I think that’s a sign of an industry which is going to be interesting.
Wilmot Allen is an advisor on impact investing in emerging markets and resides in Washington, D.C.