Speaking at the Financial Times and the Emerging Markets Private Equity Association’s Private Equity in Africa Summit in London on Wednesday, many guest speakers were optimistic about investing in countries outside of the continent’s more developed markets such as South Africa.
Countries mentioned included Sierra Leone, the Democratic Republic of the Congo and Ethiopia, three of the world’s fastest-growing economies, according to the World Bank. All three countries are also among the world’s poorest, according to the United Nations, while Sierra Leone and DRC have both been gripped by an outbreak of the Ebola virus that is being described as the worst on record.
Scott Mackin, managing partner and head of the power team at Denham Capital, a US-based private equity firm focused on the energy sector, spoke positively about the energy industry in Sierra Leone, despite an outbreak of Ebola in May.
In July last year Denham formed Endeavour Energy, an Africa-focused power development and generation company that is in the process of building a $700 million hydroelectric power project in Sierra Leone.
Mackin said: “[Sierra Leone has] a new energy minister who’s very business-like, very crisp and sets schedules and makes people stick to them. The president wants to get a lot done and they’re enabling themselves to be very commercial […] and they’ve got goals to accomplish.”
Souleymane Ba, a principal at Helios Investment Partners, an Africa-focused private equity firm set up by two former dealmakers from buyout giant TPG Capital, referred to DRC, another country that has suffered a recent outbreak of the virus, as a country that should be looked at seriously by private equity investors.
In 2009 Helios was one of a group of investors, including hedge fund billionaireGeorge Soros, which committed $350 million to Helios Towers Africa, a sub-Saharan African telecommunications towers company that has since acquired tower assets in DRC, Ghana and Tanzania.
Ba said: “We operate in 35 countries, including DRC, and I think if you have a platform [that operates in more than] a single country you can manage some of the risk and have interesting upsides.”
Private equity firms including global buyout giants such as Carlyle Group and Kohlberg Kravis Roberts have flocked to Africa in recent years in search of higher returns outside of stagnant Western economies, driven by a growing population, a burgeoning middle class and improved governance and economic policies, according to industry figures.
Popular countries for investment outside of South Africa, the continent’s most developed market, include Nigeria and Kenya, although increasing competition is making it difficult for some private equity firms, particularly the larger fund managers, to find companies to buy.
Diana Noble, chief executive of emerging markets-focused investor CDC Group, said that there are 3,186 companies on the continent that have revenue of above $50 million, 1,326 of which are in South Africa and 99 of which are in Nigeria. In sub-Saharan Africa, outside of North Africa and South Africa, there are 1,014 such companies across 46 countries, or 22 per country.
“That’s an incredibly shallow pool,” Noble said.
The increase in competition and desire for higher returns has led many firms to pursue deals in less developed countries, many of which are experiencing rapid economic growth. Sierra Leone’s gross domestic product grew by 15.2% last year, according to estimates by the World Bank.
However, in a report on the potential economic effect of Ebola released last week, the development organisation warned that the virus could cause up to $33 billion in losses for West Africa’s economy.
The virus had killed more than 3,400 people by early October, according to estimates by the World Health Organization.
CDC’s Noble said: “This is a humanitarian tragedy, and from an economic viewpoint it absolutely does affect perception of Africa.
“We’re seeing a number of transactions where international people are not wanting to go and do due diligence or not wanting to work on the power plants. So absolutely there is an effect and we all know it’s going to get worse before it gets better.”