Private equity bubble could hit investors
Rapid growth in Africa’s buyout industry, coupled with the lingering commodities bust, has raised concerns that a private equity bubble is imminent.
"There is a lot of private equity money flowing in and there will be long tears," African Rainbow Capital co-CEO Johan van Zyl told a forum organised by law firm Hogan Lovells.
"The cycles are quite severe in Africa, much deeper than what you see in Europe."
People planning to invest and sell quickly brought "the wrong kind of money", he warned.
"Their terms aren’t really aligned to the opportunity. The African opportunity is essentially a long-term one."
The Boston Consulting Group, a business consulting firm, found only 12 private equity funds based in Africa, managing a combined $1bn, existed in the early 1990s. By the end of 2015, there were more than 200, with $30bn in assets.
"In the view of some analysts, the growth has come too fast," said Boston Consulting. "Too much money is chasing too few sound investments, they [analysts] fear, pushing up prices of corporate assets. What’s more, the surge of capital is coming just as a sharp downturn in commodity prices has slowed economic growth across the continent, reigniting fears of currency devaluations and dividend repatriation."
The price of gold has dropped 26.84% in the five years since September 2011. The IMF said economic growth on the continent fell to its lowest level in about 15 years in 2015, and is expected to slow further to 3% in 2016. As private equity funds have terms that require them to sell or list an investment within a certain time, usually 10 years, funds maturing in
2016 may have a hard time offloading assets.
But Jeff Buckland, head of the private equity practice at Hogan Lovells, does not see a bubble emerging "in the sense that the price of investing in African business has been inflated to unsustainable levels".
Many of the firm’s clients had "similar invested parameters in terms of the size and past performance of companies they are mandated to invest in".
"This means that there is huge interest in investing in private equity in Africa, but a limited pool of companies which currently meets these parameters. This does not necessarily mean that prices are inflated, only that it can become more difficult for investors to get the high returns they expect, especially over shorter investment horizons," he said.
Erika van der Merwe, CEO of the Southern African Venture Capital and Private Equity Association (Savca), indicated there was an option to extend an investment by up to two years with investor approval.
"The RisCura-Savca Quarterly Private Equity Performance numbers continue to show firm returns from the South African private equity industry, with the latest number — for the 10 years to the second quarter of 2016 — reflecting an internal rate of return of 18.1%," she said. "This compares with the 12.6% generated by the local listed market over the equivalent period."
Van der Merwe said there was no reason to believe the African private equity industry was overheating. "The funding shortfall across the African continent is sizeable, and may take years to shrink," she said.