Globally, 2021 was a knock-out year for private equity (PE) transactions (and M&A generally), with 2022 arriving off a very hot 2021. However, global private equity deal activity slowed in 2022 compared to the previous year. According to Bloomberg Law, investments in the global private equity M&A market in 2022 saw reductions of 38.6% from 2021, with deal value down US$820,5bn to $1,3trn in 2022.

African PE space

In the African PE space, the upward trajectory continued in 2022, albeit more muted than 2021. Going forward, it is expected that PE transactions in Africa will continue to grow. According to the AVCA Private Capital Activity Report, the first half (H1) of 2022, was one of the strongest half years for Africa’s private capital industry, with 338 completed deals valued at $4,7bn. This followed an upbeat 2021 for African PE, a year of ample dry powder.

The confidence instilled in investors by PE fund managers in Africa means the continent is expected to remain a very strong investment opportunity for private investors. This is despite the numerous crises of the last couple of years, especially in terms of the effects of the looming global recession and energy crisis, which is significant in South Africa but also a global issue, with energy prices soaring. In addition, the recent rate hikes mean that money is not cheap and this adds complexity and makes for more risk-averse investors.

These challenges have stalled investors to some extent, but there is still dry powder, and capital is being channelled to the market. It does appear that the ticket size is smaller, but that funds are still able to raise capital. While there are not as many high value deals, the market remains buoyant. The smaller ticket trend is something we have seen for the last few years. Overall, it is a fairly positive and opportunistic market, with managers looking at assets where the price is attractive, and those that will offer an uplift to their portfolios.

Opportunities and Challenges

PE investments in Africa still face numerous challenges, however. Post-pandemic and after the impact of global economic turbulence, investors have been thinking very carefully about which sectors will do well and where the pandemic has allowed for discounts on quality assets. Across the world, including in Africa, General Partners (GPs) have had to address new risks and stabilise their investments. In addition, sellers have been holding on to their assets, waiting for an increase in value. Currency volatility in Africa has also been a challenge in recent years, and the devaluation of certain of the local currencies has impacted the value of deals.

We are also likely to see more take privates in 2023. There have been a number of delistings from the Johannesburg Stock Exchange in the past 18 months and this trend will likely continue. According to the AmaranthCX database of South African company listings and delistings, South Africa has been averaging about 25 delistings per year. This, however, also presents a good opportunity for private equity.

Most opportunities lie in the hot sectors, which are currently technology (especially fintech), agriculture, healthcare, financial services and renewable energy.

Exits

In terms of exits in the African market, the general consensus is that they might take a little longer going forward and the fund life of a typical vehicle might need to be extended as managers hold on to assets a little longer to turn the time and growth into a premium. We have not seen many IPOs recently and this is impacted by the cyclical nature of the market.

The AVCA report details how private capital investors achieved 22 full exits between January and June 2022. This was a 29% increase compared to H1 2021. The number of exits in the continent’s PE sector is expected to continue increasing despite global economic turbulence. Globally, the exit market saw a 37% decline from H1 2021, and fund managers appeared to be holding on to their portfolios rather than risking lower prices as valuations in the markets fell.

Start-ups and venture capital

According to Deloitte’s Private Equity Review 2022, 41% of PE firms in South Africa have prioritised risk management in portfolio companies, and 14% of private equity firms in the country said that they would focus on bolt-on and tuck-in acquisitions to augment their portfolio companies. Deloitte also noted that in 2021, 12.4% of the total value invested in PE firms was in start-up and early-stage companies, and 45.5% went to buyout and replacement capital for businesses that were expanding. There has also been a strong investor appetite for early-stage investments, leading to growth in the number of dealmakers on the continent. Africa’s venture capitalists have also been attracting global investors.

Africa’s fintech ecosystem has been a star performer in the venture capital space. According to Ashlin Perumall, a Partner in our Corporate/M&A Practice, the fintech industry made up more than 25% of all venture capital rounds in the last few years, with South Africa joining other regional leaders, such as Egypt, Nigeria and Kenya. Out of the nine notable tech unicorns in Africa, seven are fintech companies.

We have also seen increased interest in and appetite for start-ups by development finance institutions (DFIs), with some pretty edgy new ventures attracting their attention.

Focus on sustainability

Another trend to take note of is the heightened focus of PE investors on green, low-carbon and sustainable initiatives in Africa. Projects focusing on clean energy, community healthcare, green transport, sustainable water, wildlife protection and low-carbon developments, for example, are attracting much attention. GPs, and the limited partners investing in their funds, have been prioritising investments that meet acceptable Environmental, Social and Governance (ESG) standards. ESG investing has become quite a buzz term driving sustainability and there is some ESG dry powder waiting to be deployed. Energy efficiency, staff training and qualifications, green-house gas emissions, highest standards of governance and best business practices, and litigation risks are some of the factors that they have been considering. Alongside the increased equity investor focus on ESG, some lenders are also prescribing particular ESG principles that a company must meet in order to receive funding.

It appears that the PE sector is shining in Africa as we head deeper into 2023, and investments in the sector are playing a catalytic role in terms of sustainable growth and investment on the continent.

Picking up on another recent trend, I asked artificial intelligence chatbot, ChatGPT, what it thought the future was for private equity and was pleased to see that it confirmed my view, suggesting that private equity would become an increasingly attractive asset class and that, overall, the outlook for private equity in 2023 was positive and would remain so for the foreseeable future.

Lydia Shadrach-Razzino is a Partner and Co-head of the Corporate/M&A Practice |Baker McKenzie Johannesburg

This article first appeared in Catalyst, DealMakers’ quarterly private equity magazine.

DealMakers is SA’s M&A publication.
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