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DEALTALK-Global buyout firms reach into Africa
November 16, 2010 / 4:35 PM / 7 years ago

DEALTALK-Global buyout firms reach into Africa

(For more Reuters Dealtalk stories, click on [DEALTALK/])

* High growth, youthful population attract buyout firms

* Global firms put dealmakers on the continent

* Concerns over lack of infrastructure, skilled management

By Tommy Wilkes and Simon Meads

LONDON, Nov 16 (Reuters) - Private equity firms are eyeing Africa for new deals, drawn by high growth rates and low valuations which outweigh the myriad risks.

Facing stiff competition for deals in mature markets and rising asset prices in the fast-growing markets of China, India and Brazil, firms are thinking about Africa, where there are fewer rivals and good businesses cost less.

“I am very bullish on the prospects for Africa; nothing compares in terms of economic growth as a percentage over the next decade,” said David Rubenstein, co-founder of Carlyle Group [CYL.UL] at a conference this summer.

After falling to $514.4 million in 2009, down from $1.2 billion in 2008, the value of private equity acquisitions of African companies stands at $670 million in 2010, spanning 18 deals, according to Thomson Reuters data.

This is still a tiny segment of the $189 billion overall deal volume in global buy-outs so far this year but support for investing in the region is growing.

Wananchi, the only triple player operator -- combining internet, television and telephone services -- in East Africa, is looking to raise $100 million from private equity to launch new cable services, people familiar with the matter said.

Economist Nouriel Roubini told Reuters last week that fund managers should spurn crowded emerging markets elsewhere in favour of African markets such as Ghana, Nigeria and Tanzania. [nLDE6AA1R2]

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For a graphic on private equity acquisitions of African companies, click on

here

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SPRINGBOARD TO THE CONTINENT

Private equity firms are attracted to the youthful population -- 43 percent under the age of 15 -- and growth forecasts are among the best in the world.

Ghana is forecast to grow 17.5 percent next year, Angola by 7.7 percent and Africa’s most populous nation Nigeria by 5.7 percent, according to World Bank forecasts made in June.

And with low levels of competition, particularly in West and East Africa, valuations on the continent are also enticing.

“(One) attraction is we are able to buy control of market leaders at between five and eight times (earnings) multiples,” said Peter Schmid at buyouts firm Actis.

That compares with double digit deal multiples in the likes of China, India or Brazil, Schmid said.

International players are focused on South Africa, the most developed market, and Egypt as the two entry portals.

Bain, which edged out private equity rivals to buy South Africa’s leading clothing retailer Edcon in 2007 for some $3.5 billion, has two dealmakers in the country.

Carlyle is yet to seal an investment from its dedicated Middle East and North Africa fund, but is hoping to close one or two deals on the continent by the middle of next year, said Hassan El-Khatib, a managing director focused on North Africa.

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For a graphic on emerging market 2011 GDP growth forecasts, click here

here

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RISKS

Despite the obvious attractions, would-be investors highlight the many drawbacks and risks of doing deals outside South Africa and Egypt -- poor infrastructure, a shallow pool of management talent and a lack of target companies.

“There are too many people chasing too few credible deals. Investors have to be very selective in Africa because a lot of opportunities are tainted by lack of governance or weak management,” said a banking source.

“In a European buyout scenario you could go and replace the management, [in Africa] you don’t have that luxury,” said Actis’s Schimd.

But others point to well-educated teams in North Africa and skilled managerial pools in Nigeria, Kenya and Ghana.

Still, fundraising focused on Sub-Saharan Africa hit $1.5 billion by July, more than all 2009, and on course to at least match the $2.6 billion raised in 2008, according to the Emerging Markets Private Equity Association.

“It carries it own challenges but I think investors are ready to accept that risk and can see today the opportunity Africa offers,” said Carlyle’s El-Khatib. (Additional reporting by Victoria Howley)

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