With its own set of unique circumstances, how can investors make the most of the continent’s investment lifecycle?
By almost every metric, Sub-Saharan Africa has an infrastructure investment deficit. The World Bank estimates that the region has an annual shortfall of around $93 billion, which according to the African Development Bank, means that African nations lose the equivalent of approximately 2.1 percent of annual GDP. Private equity investors can choose from a wide array of major projects that enjoy regulatory support – but do the opportunities outweigh the risks? And, when can investors expect to see a return?
Perhaps the most important matter to address is bankability. Private equity (PE) investors must assess several factors, including whether a project has sufficient, reliable and predictable revenue streams. Reliability in the African context is, however, less assured than in developed markets, which means managing a fund requires significantly more analysis and careful management.
A longer-term cycle
Traditionally, a PE firm’s business model relies on success in both raising funds and meeting its target return by effectively deploying and harvesting fund capital. PE funds structured as limited partnerships (LP’s) with a typical lifespan of a 10-year term plus two one-year extensions, commonly referred to as the ‘10+2’ model. In mature markets, a fee of 2-2.5 percent of Net Asset Value is typical within the PE industry. For first time funds, the fee is typically higher at 2.5 percent, and it applies to the whole committed capital. However, for more passive managers, fees can be lower, in the region of 1.5 percent- 2 percent of the fund’s aggregate capital commitments.
Fund management in Africa is the polar opposite of passive. Many of the largest infrastructure projects in Africa have a long-term investment life-cycle and their bankability rests upon sound, careful management in a less proven market. Private equity fund managers are charged with carrying out significantly more work in Africa to ensure that they are right for institutional investors such as sovereign wealth funds, whose financial returns are also tied up in social impact and sustainability.
Investors that put their money in national infrastructure in Africa are by default investing in the long-term productivity of the nation and share national objectives of economic diversification and GDP growth: the bankability of a project is therefore intimately connected to its socio-economic success. These projects must demonstrate sustainability – and that is an additional consideration that makes management of African projects more complex. This is especially so when PE managers invest on behalf of sovereign wealth funds – Angola’s FSDEA is a case in point. Bankability and sustainability do not always come easily in the African region or in countries such as Angola, which is a relatively young country in terms of peace and stability. Private equity investors and the fund management company working on their behalf, assume more risk.
The good news is that countries like Angola often deliver the biggest and most exciting prospects and an increasingly stable revenue stream. The country’s first ever major public-private-partnership (PPP) is part-funded by the State, Chinese state-backed funds and private equity. The early-stage nature of the African market (underpinned by unique socio-economic objectives and state-backed funding initiatives) – means that it can enjoy the benefits of a private equity investor that might typically not enter until the mid-end of the investment life-cycle. Rare bankable projects in Africa gain quickly in value as the demand for such projects is very high thus representing a significant opportunity for private equity investors to benefit from. This, in turn, contributes to a stable revenue stream and stronger bankability prospects for all stakeholders.
For private investors and private equity fund managers, 2017 and beyond represents a unique moment in Africa’s journey towards diversification and sustainability – but the region is a long way off from offering the assurance of developed markets. Many African countries are now more transparent and well-governed than at any point in their history. Many are enjoying unprecedented levels of FDI and a powerful commitment from policymakers in national infrastructure development. Consequently, we are now at a unique moment that promises better long-term prospects not only for investors but millions of Africans.