Buyout groups investing in Africa are turning east and shunning the oil-rich western part of the continent as they grapple with the effect of low commodity prices on private equity’s final frontier.
In the decade before oil prices plummeted, west Africa — particularly Nigeria — was the most attractive region on the continent for global private equity groups from Carlyle to Actis looking to tap the potential of the “emerging African consumer”.
But with Nigeria in economic recession for the first time since 1991, investors say they are looking elsewhere on the continent for deals in sectors from consumer goods to healthcare.
“In the short term, in the next 12 to 24 months, east Africa is certainly more appealing than west Africa,” says Natalie Kolbe, head of private equity for Actis. The emerging market-focused group invested hundreds of millions of dollars in Nigerian companies and infrastructure projects in the years before oil prices crashed, in 2014.
“The overriding reason” why the group is shifting its short-term focus on the continent, she says, “is the [Nigerian] currency”.
“The east African currencies are floating and settled. The Nigerian naira has not settled down yet,” says Ms Kolbe. “As long as you have this parallel market and uncertainty . . . you’re going to have investors standing on the sidelines.”
This is mainly leading them to Kenya, east Africa’s largest economy. Fears of violence around elections in August notwithstanding, Kenya’s diversified economy has not been hit by the commodities slump. It is expected to grow above 5 per cent this year.
With a population of 160m people, the entire east African region combined has a smaller population than Nigeria. But investors say there are many companies in Kenya ready for relatively red tape-free expansion into markets such as Tanzania and Uganda.
“The fastest growing consumer market today is actually Kenya,” says Felix Olale, a partner at LeapFrog Investments. The group has backed finance and healthcare companies on both sides of the continent but currently sees the more diversified economies in the east as riper for investment.
Mr Olale says that in Nigeria, the central bank’s handling of the currency crisis sparked by low oil prices is troubling for private equity groups like his who seek to make dollar investments in local companies.
“This gives you a bit of a pause as an investor,” he says. “Dollar for dollar . . . Kenya today versus Nigeria, you might end up going to Kenya.”
Genevieve Sangudi, a managing director at Carlyle, which closed its first Africa fund, of $700m, in 2014, says: “It’s been a challenging time overall to invest in Nigeria.”
Carlyle has “taken a very serious look at opportunities in Nigeria” over the past 18 months, she adds. But the group — which has $162bn of assets under management — has not announced any investments in Nigerian companies over this period.
From 2014 to 2016, west Africa made up a larger percentage of private equity deals on the continent than east Africa, at 26 per cent versus 18 per cent, respectively, according to African Private Equity and Venture Capital Association.
But investors say there is now more activity in east Africa, and even a maturing “secondary” market, as private equity groups look to sell their stakes in businesses to other buyout houses.
A 2016 Deloitte study forecast that transaction sizes would grow that year because of increased competition and more investment opportunities in east Africa and stagnate in west Africa.
There were 41 disclosed private equity deals in east Africa last year with an average deal size of $38m, according to Kenya-based financial advisory firm I&M Burbidge Capital. Similar data for west Africa were not available but anecdotal evidence from disclosed deals suggests sizes are down dramatically from several years ago.
Closing deals in Nigeria has proven especially difficult for private equity groups considering backing consumer goods companies that import raw materials but make sales in the local currency, says Nigel Wellings, a private equity partner at Clifford Chance, the law firm.
“If you have a founder who felt their business was doing really well two years ago, they don’t want to hear from a private equity firm that it’s only 75 or 80 per cent of that amount,” he says. “They just won’t do the deal at this stage. There are a lot of conversations going on but it’s more difficult to get deals over the finish line.”
Nigeria, as the biggest market by far in west Africa, has dragged down sentiment across a region that is more diverse than east Africa — but also seen by investors as more complex to navigate, in part because some nations are French-speaking and also because they see barriers to expanding quickly across borders than in east Africa.
Abraaj, a major private equity investor on the continent, has poured $3.2bn into 80 companies across Africa since 2002 and is sanguine about prospects in Nigeria in the medium to long term.
Mustafa Abdel-Wadood, managing partner and global head of private equity for Abraaj, says the group has been able to navigate “significant headwinds” in Nigeria over the past two years by focusing on “export-driven” businesses.
He cites the purchase of a minority stake for an undisclosed sum in Indorama Corporation, sub-Saharan Africa’s largest fertiliser producer, last year.
He also says Abraaj was interested in expanding its investments in healthcare in Nigeria. But he says the approach the company has pursued in east Africa — “of buying into businesses and helping them grow” — could not be replicated in Nigeria, where “significant building of businesses” is still required.