Among many industry players, private equity (PE) has rapidly developed as an alternate source of funding for corporations throughout Africa, especially in the Maghreb region – and Morocco is no exception. Initially dominated by development finance institutions (DFIs), the sector is attracting an increasing number of private funds, both foreign and domestic, thanks to the rapid growth of pension assets. While channels for divesting remain somewhat constrained, recovery in the equities market will add the option of public listing.
GOOD OPTION: The challenges associated with accessing bank financing and the limited range of viable capital markets in Africa and the Maghreb mean that PE remains a comparatively attractive form of financing for firms keen to expand. However, in terms of overall investment, PE comprises a very limited arena within the broader scope of financing activity. In North Africa, for example, PE is equivalent to less than 1% of GDP, roughly a tenth of the total activity in more developed OECD markets. Furthermore, it also lags behind other emerging markets. PE fundraising for China and India is equivalent to more than 10 times that of African funds, and there are more than 430 Asia-oriented vehicles currently active, as opposed to the roughly 175 funds focusing on Africa. Similarly, of 175 Africa-focused funds, less than a fifth are actually based on the continent.
STRONG START: While still relatively new in Africa, PE captured the attention of foreign funds eager for returns in the face of lacklustre global growth. The original source of such longer-term financing came from DFIs like the World Bank’s International Finance Corporation (IFC), the UK’s Commonwealth Development Corporation (CDC), the US’s Overseas Private Investment Company, Norway’s Norfund and Germany’s DEG. Private funds began to take notice when the IFC’s best-performing funds were those in Africa.
However, it has not been just foreign funds that have been expanding their presence. Domestic funds have also emerged in a number of the continent’s largest growth and emerging markets, such as South Africa, Nigeria, Egypt and Morocco. In Morocco specifically, PE first emerged domestically almost 20 years ago, following the establishment of Moussahama, a fund of Banque Centrale Populaire (BCP). It took several more years until new funds came about, both privately managed, as in the case of Capital Invest, and publicly managed, as in the case of the large state-owned Caisse de Dépôt et de Gestion (CDG). In fact, by the end of 2011, the total cumulative amount of capital raised was equal to around Dh8bn (€711.2m), Dh3bn (€266.7m) of which came from regional Africa and Middle East and North Africa (MENA) oriented funds, and a significant increase from roughly Dh400m (€35.56m) during the 1990s.
GROWING FAST: The increase in Morocco-oriented funds reflects a broader uptick in interest throughout the region. Although it is a challenge to obtain accurate figures on total PE activity in the MENA and sub-Saharan Africa regions, given that up to 30% of PE investments may be unannounced (and of those transactions that are announced, upwards of a quarter of them have not disclosed their value), there is nevertheless a clear increase in fundraising and commitments.
Total PE investments in Africa grew from $151m in 2002 to $3bn in 2011, according to the Emerging Markets Private Equity Association (EMPEA), with South Africa, Egypt and Nigeria taking the majority. Dominant forms of PE have been management buyouts and restructuring via financing of greenfield or expansion investments. Although 2011 saw a modest dampening of fundraising and direct investment in the MENA region following the uncertainty engendered by the Arab Spring, in 2012 capital commitments and capital invested in those markets jumped significantly by 29% and 303%, respectively.
Even amidst the bouts of political instability, Egypt clocked in as one of the largest destinations for PE investment in the region, receiving just under a quarter of the total capital in 2011, followed by Gulf heavyweights such as Saudi Arabia. However, it was Morocco that saw the largest share of investments by volume, with more than a third of total investments in the MENA region. And while South Africa dominates the Africa PE scene in terms of both activity and domicile, Morocco also serves as a key base for regionally focused PE funds, home to roughly 6% of all Africa-oriented funds.
COMPOSITION: The nationality of participants has also evolved. A number of North African countries have seen a significant increase in terms of EU and Gulf investment into PE funds. Morocco, for example, has seen a relative decline in the percentage of domestic investors in fundraising, due to a very encouraging increase in participation by EU investors by some 14% over the past five years. However, it is a different story in sub-Saharan Africa, where involvement has tended to be weighted towards foreign capital. Yet in line with the rising levels of both GDP and income, operators are increasingly targeting local capital. A number of pension reforms in recent years in countries like Ghana and Nigeria have helped pave the way for an increase in PE participation by pension funds – which in Nigeria alone total more than $13bn in assets under management. In South Africa, for example, a change in regulations on PE allocations in pension fund portfolios allowed for a doubling in PE investments. Crucially, the past few years have also seen a shift in terms of actors. Increasingly, financial institutions – particularly domestic financial institutions –are playing a larger role than ever before in management and investment alongside the long-standing development players, with managers such as Capital Invest, owned by Morocco’s BMCE bank, and South Africa’s ABSA Capital funds.
PLAYERS TO MARKET: The IFC led the way in the first PE deals in the early 2000s in Africa, and it has been followed by a wide variety of players elsewhere on the continent. Egypt’s Citadel Capital is perhaps one of the largest Africa-oriented players based on the continent today. The firm first began investing in 2004 and now has roughly $9.5bn assets under management, spread across 19 funds, 15 countries and more than 100 different companies. The firm splits its activities between growth companies, such as Nile Logistics and Egypt Refining Company, and portfolio investments.
However, several foreign operators have increased their Africa focus as well. Gulf PE investors, such as the UAE’s Abraaj Capital and Saudi’s Kingdom Zephyr Africa Management, have played a more significant role in recent years, but one of the largest firms is Actis. Originally the CDC’s PE arm but later spun off as an independent fund manager, Actis is an emerging-market focused firm with $1.5bn invested in Africa. Leading several top deals across the continent, including Nigeria’s largest shopping mall (The Palms) operator Persianas and industrial and property group UACN, Actis has a proven record of successful exits. An early investor in telecoms, Actis sold its stake in Starcomms in 2008 through an initial public offering (IPO). The fund’s current investments include $151m in Vlisco Group, a well-established West African fashion fabric producer, as well as Nigeria’s Diamond Bank, in which it invested $134m.
Aureos Capital is another key player. The PE firm was originally spun off by the CDC in 2001, but then separated via a management buy-out in 2008 and was later sold to the UAE’s Abraaj Capital in February 2012. A sign of looming consolidation in the global PE industry, the sale demonstrates the appeal of Africa-focused funds. With some $1.3bn under management, Aureos’ investments in Africa have included multimillion-dollar deals in Kenya, Nigeria, Ghana and Senegal in recent years. Emerging Capital Partners (ECP) has also moved towards pan-Africa funds. Raising some $613m in 2010 for its third pan-Africa fund, ECP now has $1.8bn under management. Its most substantial investments have gone to projects in Morocco, Algeria, Nigeria, Côte d’Ivoire, Kenya and Gabon, where it has invested upwards of $50m in each. The firm says it invested over $1bn in total on the continent in 2010. As one of ECP’s most invested countries in Africa, recent additions to the fund’s Morocco portfolio include Almes, Finaccess Group, Osead Maroc and Veolia Water Maroc.
Elsewhere, Tunisia’s Tuninvest has been one of the more prominent regionally domiciled operators and fund managers. The firm first began raising small generalist funds for the Tunisian market in the 1990s. It soon branched out to the rest of the Maghreb, with its Maghreb Private Equity Fund – now in its third iteration, closing in 2011 at €96m – in 2000, and later in 2004 to grow firms in West and Central Africa, like Alios Finance and Atlantique Telecom, with its Africinvest funds. The firm currently has 11 funds with some $700m in assets under management.
NEW FOCUS: PE investments in both North and sub-Saharan Africa have also evolved in terms of their sectoral targets, with service sectors becoming the biggest beneficiaries of this shift. Although much PE continues to favour non-cyclical sectors, such as transportation, agriculture and energy, as evidenced by some of the activity by Actis, among the more popular targets in growth markets in West Africa have been industries such as retail and real estate, driven by rising purchasing power and an encouraging demographic bulge, as well as improved distribution supply chains and increasingly formalised planning rules. In the MENA region, technology and telecommunications have seen some of the biggest jumps. In 2011 some 38% of total transactions were in the information technology and telecoms industry, as opposed to 19% five years earlier.
Curiously, although buy-outs and growth investments have remained the most common form of development stages for PE participation, in Morocco there has been a distinct increase in PE via seed funding, venture capital and turnaround financing investment. Between 2006 and 2011, according to the UN Conference on Trade and Development, roughly 15% of firms benefitting from PE financing fell into one of those three stages, as opposed to less than 9% in the five years prior.
EXIT STRATEGY: While PE investment is flowing in, a lingering concern lies in the options for divestment over the five-year time span. “Exit is one of the biggest questions we ask ourselves at the time we enter into a deal,” John Van Wyk, partner and head for Africa at Actis, told a conference in April 2012.
A number of the earlier funds in the MENA region are beginning to reach the expected end of their life cycles, which has made the question of managing those exits ever more pertinent. In 2009 there were only seven exits by PE operators, but that more than tripled in 2010 before reaching 30 in 2011. The value of those 30 exits was over $1.2bn, and included sales of manufacturing firms, retailers and mobile payment firms. The more popular option has been trade sales to strategic investors and management buy-outs, as was the case with Actis’s investment in developer Persianas in Nigeria. “We try to invest in businesses that will have strategic appeal to a trade buyer,” said Van Wyk. A number of funds have yet to prove their exit credentials.
Investors’ eagerness for profit is also affecting expected returns. “Interestingly, because interest rates are high, this actually raises expectations on the part of investors who are looking for returns of up to 30%,” Olubunmi Adeoye, vice-president for PE at Capital Alliance Nigeria, told OBG. In the MENA region, a poll taken by the MENA Private Equity Association found that 65% of fund managers are aiming for an internal rate of return (IRR) of between 20% and 29% for 2012. As a basis of comparison, the IFC’s Africa portfolio of PE funds clocked up an annualised return of 17.8% in 2012 – better than the broader emerging market index, but clearly far lower than the targeted IRR for many operators.
GOOD PROSPECTS: While the equities market may indeed bounce back in 2013, strategic sales and management buy-outs will continue to dominate exit strategies in the foreseeable future. Yet with such high interest rates domestically, the scope for management buy-outs is limited to smaller deals. But as an increasing number of Western corporates seek higher returns by growing their emerging-market operations, there is not likely to be any shortage of interest for such sales.
Global PE funds clearly see the potential for lucrative returns from African nations’ demonstrated growth potential, though significant constraints remain. Beyond the challenges of deal making and due diligence in growth and emerging markets in both North and sub-Saharan Africa, the opportunities for divestment remain limited. However, with the planned deepening of the capital markets and increasing interest by multinationals for market access via acquisitions, many of the existing PE investors in economies like Morocco’s are likely to be lucratively rewarded.
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