Bright Africa 2014, a guide to equity investing on the African continent, has been published today, 25 June 2014.
According to the report, Africa today is very different from Africa at the turn of the century.
Today, the continent’s 1.1 billion people can boast some of the world’s highest growth rates, urbanising populations and sound government balance sheets.
The world today is also fundamentally different in terms of its distribution of capital, with foreign direct investment (FDI) flows to developed markets now at only 44% of their pre-financial-crisis highs. Conversely, FDI flows to developing economies reached a new high of USD 759 billion in 2013 (53% of total flows).
Of this, Africa attracted USD 56 billion, an increase over the 2012 figure of USD 53 billion. The increase was largely driven by Southern Africa, with Mozambique the standout recipient at USD 7 billion of FDI compared to GDP of only USD 14.7 billion (UNCTAD).
“There is a higher level of attention on Africa from around the world. Investors need to understand whether Africa has a place in their portfolios, and if so, how they will access what the continent has to offer,” said Rory Ord, Head of Private Equity at RisCura, the investment advisors specialising in Africa.
The first Bright Africa report was launched in 2013 as an initial response to these questions. The 2014 edition has improved coverage of both listed and unlisted equity markets, including an analysis of the truly investible universe of the exchanges (free-float adjusted), and sector pricing across major countries. The report also includes the first comprehensive, publically available reference point for monitoring listed equity trading costs going forward.
Further, an analysis of Africa’s mergers and acquisitions (M&A) activity has been added. M&A activity is an important exit route for private equity, as trade sales account for the majority of exit transactions, and is indicative of business confidence. The report shows that nearly 1000 M&A deals are taking place each year, at a value of over USD 30 billion in 2013, even as many transactions go unreported.
“African private equity deals continue to be more attractively priced than those globally, particularly mid-sized deals. Private equity managers have set up shop across all parts of the continent, giving investors options to approach Africa from a country, region or pan-African perspective,” says Rory Ord, RisCura Head of Private Equity.
“The very low level of debt in African private equity deals means that these deals take on little extra risk through financial leverage and rely on real earnings growth for returns,” says Ord.
“Strong recent returns on African equity have put the asset class centre stage with investors in Europe and US. The investment thesis is well understood and compelling. Listed equity is the natural starting point; it is time to go beyond an off-benchmark allocation to, say, a Nigerian bank in an emerging market mandate and make a dedicated allocation. But the twenty-plus African exchanges are, perhaps South Africa excepted, unfamiliar territory and investors are looking for turnkey ways of accessing African listed combining diversification and local market knowledge,” Andrew Slater, RisCura UK Managing Director.
“Factors affecting the attractiveness of listed markets include the quality of exchanges, cost of trading, listed market valuations and sector access. Africa’s exchanges continue to show improvements, with reduced trading costs and attractive market valuations. Although there is a disconnect between each country’s economic activity and the associated sectorial representation on the stock market, strong returns and continuing growth expectations have encouraged investment,” Albrecht Gantz, RisCura Mauritius Director.
“The total cost of a ‘round trip’ (buying and then selling a share) can vary from as much as 3.16% in Zimbabwe to as low as 0.84% (South Africa) of value traded. However, as liquidity increases and these markets deepen, the costs in these markets should align closer to the norm,” Gantz.
Highlights of the Bright Africa report 2014
GREATER SECTOR DIVERSIFICATION CAN BE OBTAINED BY INVESTING IN BOTH PRIVATE EQUITY AND LISTED EQUITY
Due to the developing nature of equity exchanges in Africa, a limited number of enterprises are listed, resulting in sector concentration. For example, when looking at Africa’s listed market by value, 58% is made up by the financial services sector. This is very different in private equity where only 14% of the transaction value in our database is in this sector.
AFRICA-FOCUSED SHARES LISTED OUTSIDE OF AFRICA GIVE ADDITIONAL EXPOSURE TO THE CONTINENT
Long-only asset managers who focus on African markets often allocate a portion of their portfolios to foreign listings of Africa focused companies. These listings double the opportunity set in the materials sector and provide five times the potential to invest in the energy sector. These ex-Africa listings also increase the exposure to countries with underdeveloped or no capital market, such as Mali and Angola.
AFRICAN PRIVATE EQUITY MANAGERS ARE WELL BALANCED BETWEEN REGIONAL AND HOLISTIC FOCUS
The number of managers and funds with an Africa focus has increased strongly over the last few years, with over 200 managers currently active on the continent in various stages of the private equity life cycle. Investors have good access to on the ground knowledge through regionally focused managers, while Pan African and sub-Saharan funds provide for larger scale investment.
NUMBER OF MERGERS AND ACQUSITIONS (M&A) HAS REACHED PRE-CRISIS LEVELS WITH NEW SOURCES OF INVESTMENT
The M&A activity has shown a strong rebound after the Global Financial Crisis. Considering the historic dependence on European capital markets, which have remained weak, this represents a strong growth in confidence in the African market from new investors. Specifically, Asia has tripled its investment from 2007 to 2013. M&A activity plays an important role in private equity markets, both as an indicator of activity and as an exit route for PE firms.
PRIVATE EQUITY DEALS IN AFRICA ARE FINANCED WITH FAR LESS DEBT THAN DEALS CONCLUDED IN DEVELOPED MARKETS
The debt-funded portion of deal multiples paid in Africa remains low at around one times EBITDA. In Africa, less than a third of unlisted investment capital comes from debt, whereas in the developed world this number is closer to two thirds. This very low level of debt means that these deals take on little extra risk through financial leverage and rely on real earnings growth for returns.
EXCEPTIONAL GROWTH EXPECTATIONS FOR TELECOMS, AND CONSUMER SECTOR CONTINUES TO SOAR
From a sectorial perspective, the breakdown reveals strong contrasts in valuations. Consumer staples are highly valued by the market at a P/E greater than 20x, while financials and energy appear somewhat cheaper coming in around the 10x and 5x levels respectively. On a forward-looking basis valuations are favourable continent wide. Telecoms appear to carry the highest earnings growth expectations at a forward P/E of 4,41x versus an historic P/E of 10,29x.
LISTED MARKET TRADING COSTS VARY SIGNIFICANTLY ACROSS THE CONTINENT
There has been a notable decrease in explicit trading costs in larger markets such as Nigeria and Kenya. Some of the less developed markets still carry relatively high costs, creating a wide range of cost levels in the regions. The total cost of a “round trip” (buying and then selling a share) can vary from as much as 3.16% (Zimbabwe) to as low as 0.84% (South Africa) of value traded. However, as liquidity increases and these markets deepen, the costs in these markets should align closer to the norm.
The Bright Africa report includes the first comprehensive publically available reference point for monitoring these trading costs going forward.
FOREIGN EXCHANGE (FX) SPREADS AND VOLUMES VARY WIDELY ACROSS MARKETS
Costs and liquidity constraints vary widely across the markets and should be considered when implementing FX strategies. FX spreads can range from 4.83 USD pips (Namibia) to 66.12 USD pips (Mauritius), and daily volumes can range from 22.5 USD MM (Tanzania) to 312.50 USD MM (Nigeria).
Research done on investor attitudes, published in The Search for Returns, shows that African markets are expected to be a significantly greater recipient of global capital than they have been in the past, and that African fund managers, both listed and private, will have to comply with the expected global standards in order to benefit from this shift.
Listed markets in Africa are evolving, and trading conditions are improving; expected demutualisations and regulatory changes are likely to result in an improved investment environment. Listed market valuations reflect the high growth expectations of investors in consumer related sectors, while other sectors have significantly lower valuations.
Africa’s private equity market continues to develop, with investments happening to a varying extent across all regions and across many sectors.
Mergers and acquisitions on the continent are an important component to consider, particularly as a potential exit route for private equity investments. M&A transaction numbers have continued to recover after the global financial crisis, and currently almost 1000 such transactions are reported each year, with a significant number expected to be unreported.
For more information log on: www.riscura.com
Click on link to read full Bright Africa report: RisCura Bright Africa 2014
Albrecht Gantz, RisCura Mauritius Director