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Global PE players looking to Africa as investment doubles in H1 2014

The value of global private equity deals targeting Africa has more than doubled (137 per cent) in the first half of 2014 compared to the same period last year, according to research by global law firm Freshfields Bruckhaus Deringer.

Global PE funds competed 15 deals collectively worth USD1.5bn in the period between 1 January and 30 June 2014, up from 10 deals totalling USD621m in the first half of 2013.
 
As a proportion of total African PE spend (83 per cent in 2014 H1) and deal volume (44 per cent in the same period), global PE firms are now more active on the continent than ever before.
 
The strong start for global PE players this year follows a turning point for African PE investment more generally in 2013. PE firms based both domestically and globally invested USD4.26bn last year, more than at any point since the global financial crisis. The previous high was in 2007 when PE firms poured more than USD7.6bn into assets on the continent.
 
Freshfields corporate partner Pervez Akhtar, head of Freshfields’ MENA practice, says: “As we move on from the financial crisis, private equity firms are back doing what they do for a living, which is investing. The PE market quietened down significantly during the downturn but is now picking up, because many firms have funds that have not been deployed. They are looking for new markets that give them a growth story, and some of the returns we see in Africa are staggering compared to those in developed market economies.”
 
Fellow corporate partner David Higgins, co-head of the firm’s global financial investors group, says: “The increasing interest from the biggest funds is partly as a result of increased risk tolerance, and partly because they’re seeing others do deals in Africa. Sellers are now aware that global funds are willing to transact on the continent and are getting more comfortable selling to them.
 
“With lots of funds looking at opportunities in Africa, this has led to an increase in relative prices and there are of course other issues to overcome such as foreign exchange controls. But for the funds willing to invest the time and effort to understand the local markets, there are real opportunities available.”
  
Analysing the data by fund type reveals a greater geographic spread of investments from global players in recent years. As global investors increase their exposure to Africa, they are looking beyond South Africa, historically the destination of choice for private equity investors. Between 2004 and 2009, 75 per cent of their investment was in South Africa. Between 2009 and H1 2013, this figure was 10 per cent.
 
More than four-fifths (84 per cent) of the money global funds have invested in west Africa since 2004 has come in the past two years. They are also beginning to show significantly more interest in east African assets, with 41 per cent of their deals in the region since 2004 coming in the past two years. Despite the conflicts that have scarred north Africa’s recent history, one-sixth of Africa’s PE transactions over the past decade have been made in the region.
 
Higgins says: “North Africa, west Africa, southern Africa and east Africa are four very different markets, so investors need to have four different strategies. There is greater political risk for particular sectors such as energy or natural resources, where having a local partner is critical.
 
“There will be a few bumps in the road, like there always are in emerging markets. But while political risk in Africa remains, the situation gets easier as more deals are done; the lending banks begin to understand the market, and regulators and tax authorities become more familiar with private equity investors.”

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