Historically, investment in Africa has been mired by instability and poor infrastructure; however, private equity firms are increasingly interested in making investments in the region, having previously had little exposure. Data from Preqin’s Funds in Market online service shows that Africa-focused fundraising has reached record highs: funds closed in 2015 have raised double the amount accumulated in 2014, currently totalling $5bn. Much attention has been paid to large investors based outside Africa, such as Helios Investment Partners, which raised a $1.1bn Africa-focused fund earlier this year, and The Abraaj Group, which has raised two Africa-focused vehicles in 2015, aggregating a combined $1.4bn. Despite high levels of Africa-focused fundraising, a key concern is that private equity firms managing an Africa-focused fund may struggle to deploy capital due to the limited number of investment opportunities. Using Preqin’s Fund Manager Profiles database, we take a closer look at African private equity.
The chart above illustrates that Africa-based fund managers have raised the majority of Africa-focused capital in the last decade, despite the headline-grabbing amounts collected by Helios Investment Partners and other large Africa-focused firms based outside the region. When the 160 firms which have raised Africa-focused funds are broken down by country, Preqin data shows 52 firms based in South Africa that have collected capital for investing in Africa. These firms have raised $11bn over the last 10 years. South Africa has long been one of the wealthiest and most developed African nations, offering a relatively stable and prosperous business environment.
Growth capital accounts for a significant proportion of fundraising among firms investing in Africa from outside the region; $5.5bn of the $9.8bn raised by North America- and Europe-based fund managers has been collected through growth funds. In contrast, fund managers based in Africa have raised $6.6bn through buyout funds and $3.1bn through growth funds. Growth investments are common in developing economies as they allow founders and family businesses to accept investment from private equity firms without relinquishing control of the business. The fact that Africa-based private equity firms are more likely to invest through buyout vehicles than growth highlights how local knowledge and expertise from domestic managers is vital when making control investments.