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We cross boundaries with our clients to create value. However, stronger competition for deals, recent macroeconomic headwinds and operational challenges in Africa are requiring PE funds to put greater emphasis on value creation to continue delivering attractive returns. Africa has long been seen as the last frontier for investing, and since the turn of the millennium, the continent has become increasingly attractive for PE investors. The emergence of African private equity as a popular asset class has had much to do with Africa’s compelling economic fundamentals. 2000, according to the Economist Intelligence Unit.
This rapid economic growth has been supported by a growing population, greater market liberalisation and increased macroeconomic stability. PE investors in Africa, however, are facing some very real challenges, including greater competition for a limited number of attractive assets, renewed macroeconomic headwinds and distinct local operational challenges. This has led to a large increase in competition, raising valuations and multiples being paid for assets. Recent years have also brought renewed macroeconomic challenges. The brisk decline in key commodity prices since 2014 has negatively affected the many African countries that still rely heavily on the export of natural resources.
That has been compounded by recent political uncertainty across Africa, including in three of the largest African markets: South Africa, Nigeria and Kenya. This economic and political uncertainty has resulted in the rapid depreciation of many African currencies. In Africa, many companies are still run by their original founders or their families, with many afraid to relinquish control to new investors. Many African governments encourage local economic empowerment by limiting the extent of foreign ownership. Faced with these challenges, African PE funds are increasingly looking to promote value creation in their portfolio companies to be able to deliver compelling returns for investors. Since the global financial crisis, PE funds around the world have benefited from market beta—underlying economic growth, rising equity values and readily available low-cost debt—to help deliver attractive returns.
With these passive forces now waning, PE firms are having to further develop the strategic and operational skills needed to create alpha in their place through active value creation. PE firms that adopt an adviser-led approach typically take a less interventionist approach to their portfolio companies. They will selectively lean in on particular investments to help shape the management team’s goals and supply resources to help deliver on those goals. Adviser-led value creators typically eschew dedicated portfolio teams and instead assemble a network of external experts who can address specific needs.