Leaner, fitter private equity firms are set fair for a positive 2018

22 Jan 2018

By Paul Boynton, Chief Executive Officer, Old Mutual Alternative Investments

A new year is always an opportunity for a fresh start — it is a chance to put new plans into action and do some fresh thinking. It is not difficult to start the year in an optimistic mood, although the question is: is it justified? The African private equity (PE) industry has endured some slower years recently, so nothing is guaranteed for us, regardless of how positive our outlook is.

However, if 2017 was a guide to 2018, our optimism for the year is well founded. Last year, African private equity produced a strong all-round performance in terms of funds raised, successful exits completed, and the number and variety of projects that were set in motion. Thus, we have every reason to believe that 2018 will be better.

After the sharp slowdown of 2016, economic growth in sub-Saharan Africa rebounded last year on the back of firmer commodity prices and a general improvement in the world economy, particularly recoveries in the US, Japan, and the EU. The second strongest growth rate in almost two years was recorded in the third quarter of 2017, and we expect continued commodity price rises and an improvement in oil prices to drive further economic growth across the region next year.

While improving external factors played their part, our industry was strengthened by our own efforts, with improvements sought right across the value chain, from increased rigour with due diligence and project selection and management, through to greater focus on governance, the environment and social outcomes.

The downturn was tough for private equity, but its legacy has been positive overall, producing greater fee and performance transparency from GPs, and better quality data to benchmark progress. It also led to a huge amount of dry powder accumulating in the system, ready to be invested in the right projects in 2018.

One of the reasons we are particularly optimistic for the year ahead is the demand for new and large infrastructure projects. Across the continent, there is a burning need for new roads, railway lines, modern ports, airports, power generation, mass housing, new schools, and hospitals. If we narrow it down and look only at some of Africa’s transport needs, we can begin to see the scale of the challenge and the opportunity.

Currently, transportation costs are adding up to 75% to the price of goods in parts of Africa, and moving goods through African ports is 3-4 times more expensive than in Europe, with long docking times, poor handling capabilities, inefficient port layouts, and slow clearance by regulatory agencies.

Looking at roads alone, Africa is arguably lagging the world, with only 34% of the population having access compared with 50%, let alone developed nations.

In sub-Saharan Africa, three-quarters of the roads are currently unpaved, which means slower freight deliveries and more frequent vehicle breakdowns and delays, adding to the costs of transportation. Its ports are also congested and at capacity. In South Africa, improving the rail network is one of the government’s top priorities, and there are now projects in development that will increase freight rail volumes and container traffic.  There are also moves afoot to increase airport capacity.

According to the World Bank, African infrastructure projects will need around US$105bn of new investment a year for at least the next ten years. And McKinsey estimates that there will be an additional 187 million Africans living in cities over the next decade, and by 2045, an average of 24 million additional people are projected to live in cities each years, which is larger than Chinese or Indian urban population growth.

While our outlook is optimistic for the year ahead, there is a cloud on the horizon if the Chinese economy slows down. Its government has invested a total of US$220bn into Africa since 2000, according to the Brookings Institution, and is responsible for around one-sixth of all lending to Africa.

More positively, African private equity could benefit if the nine-year bull run on the major international equity markets ends this year or in 2019, as investors liquidate their investments and divert at least some of their funds to good PE projects with the potential for reliable double digit returns over the longer term.

Whatever happens, with strong project demand, improved corporate governance, rising confidence and leaner, fitter private equity operations battle hardened after some slower years, the industry is well positioned for the year ahead.                                                

About the author

Paul has been Head of Alternative Investments since 2004. This boutique is responsible for the group’s investments in infrastructure, private equity, impact investment and mezzanine debt. He chairs the Alternative Assets Investment Committee and has served on the boards of African Infrastructure Investment Managers, Assore, African Clean Energy Development, CIT, J&J, Life Healthcare, Metcash, Mezzanine Partners, Old Mutual Investment Group, Pepkor, Tourvest and Pembani. He also chaired Green Hands, Old Mutual Investment Group’s Social Development Forum, for 10 years.

Paul joined Old Mutual in 1995. He spent five years as the Portfolio Manager of the Old Mutual Life Funds (at the time a US$50bn portfolio and the largest balanced mandate in the country) and three years as Head of Investment Views, formulating the investment house view and model portfolio for Old Mutual Investment Group. Over these periods, the Life Funds and fully discretionary balanced funds, respectively, delivered top quartile performance. Find out more here

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