Three shifts shaping the PE landscape

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Heleen Goussard

Interpreting the changes that take place in private equity (PE) prices over time isn’t straightforward as many of the drivers are unobservable.

But there are some noticeable shifts in the marketplace that prove how PE is performing, says Heleen Goussard, head of Alternative Investment Services at global investment firm RisCura. Their latest Bright Africa Private Equity research focuses on the PE ecosystem in 2021 including a look at fundraising, dry powder, and sector trends.

More deals, smaller transactions

According to the latest Bright Africa research, PE prices have dipped below those of listed companies, but deal activity is growing significantly. In 2021, notwithstanding tough market conditions and sentiment, deal activity reached new highs, albeit at lower transaction values.

“Despite erratic fundraising and volatile risk and growth conditions, exemplified by current global geo-political events such as the Russia-Ukraine war, long-term market trends in African private equity have remained constant,” says Goussard. “Our research shows that the significant amount of committed capital has had a stabilising effect on pricing, which survived short-term changes in funding levels and risk profile.”

Total private equity transaction activity steadily increased by 20% from June 2018 to June 2019, then tapered to a 9% increase from June 2019 to June 2020. Transaction activity then rebounded strongly, resulting in a 19% increase from June 2020 to June 2021. “The average transaction value in our database between 2016 and 2019 was USD40.44 m, whereas between 2020 and 2021 it shrunk to USD11.1 m,” says Goussard.

Dry powder could power up pricing

Dry powder is the amount of committed but unallocated capital a firm has on hand. Using fundraising data and the average deployment period, RisCura estimates the dry powder of the African PE industry to have averaged around USD8.51 bn until 2018, reaching recent highs of USD9.56 bn in 2019, last achieved in 2016. “Dry powder levels declined to about USD6.5 bn by June last year,” says Goussard. The recent decline is due to investment funds continuing to draw on committed capital – to invest in new businesses and support existing investments through the pandemic – without the corresponding flow of commitments from Limited Partners, third party investors of PE funds, through fundraising. “This reduction in dry powder should contribute significantly to stabilising private equity pricing going forward.”

The committed capital model, however, can only delay the efficiency of markets. Prolonged decreases in fundraising and risk outlook are filtering through to pricing but there is hope for a recovery as the post-pandemic economic slowdown improves. “In the interim, firms are grappling with how to deploy funds and manage the impact on returns,” Goussard adds.

Sector investment shifts to tech-capabilities

The Covid-19 pandemic has of course impacted PE. Key sectors for investment include healthcare, pharmaceuticals, IT and education, and tech-enabled businesses are gaining traction.

Consumer products have historically been a PE focus due to the perception of the growing African middle class, but investment into consumer staples has decreased by 38%. Investment activity in the consumer discretionary sector remained stable over the year but investor interest has moved towards internet and direct marketing retail, education, communication services, and publishing. “This shows a possible shift from targeting a broader target market with lower income to a smaller market with a higher income.”

Internet and direct marketing retail companies, classified as a subsector of the consumer discretionary sector, have experienced 63% growth. The global pandemic has accelerated E-commerce in many parts of the world, which could present substantial opportunities. Africa’s large and growing young population is expected to continue to drive demand for online retail and services.

Realising Africa’s potential for enormous growth and innovation, given its young population and vast natural resources, requires considerable investment into economic reform, education, healthcare, and digital skills development. Africa’s rapid urbanisation and technology uptake so far, are factors that support long-term growth on the continent, and RisCura expects this to be reflected in PE deal activity to come.

“Africa remains an attractive investment destination, but requires enhanced economic reforms, good governance and a stable political landscape to continue attracting PE fundraising and entrepreneurs. Addressing these factors will play a pivotal role in the development of the continent, including attracting vital private investment to accelerate progress,” Goussard concludes.

BRIGHT AFRICA 2021 – PRIVATE EQUITY

Download the full research here.