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African private equity in demand

18 Sep 2012

Changes to Regulation 28, which allow an additional 5% of pension fund assets to be invested in the rest of Africa, are helping to boost private equity funds that invest on the continent.

Regulatory changes aside, Derrick Roper, CEO of Novare Equity Partners, said other factors contributing to their success include Africa’s new status globally as a sought-after investment destination, as well as the actual returns being generated.

“Some private equity funds focused on sub-Saharan Africa are enjoying significant inflows as investors increasingly buy into the African growth story,” said Roper. He added that in frontier markets, private equity vehicles are often the best option to access investment potential.

“This is mainly because the listed equity markets in most countries are currently too limited for larger institutional investors. Also, with private equity, investors exercise stronger control over the underlying investments, which can be an important factor.”

Roper added that South Africa, with its deeper and more regulated financial markets, could serve as a model for some other countries.

However, with private equity investments, returns tend to reflect the performance of the underlying economy. And economies in sub-Saharan Africa have experienced strong GDP growth in recent years.

Youthful demographics and a growing consumer group are the main growth drivers, making retail, property, consumer goods and agriculture good sectors to invest in - particularly in countries like Ghana, Angola and Nigeria.

Roper is particularly interested in the property sector. “Aside from economic growth fuelled by consumer spending, the case for property investment is supported by urbanisation and investment in under-developed infrastructures in fast growing cities.”

He said urbanisation, facilitated by improving infrastructure, makes it easier for developers to optimise utlisation by concentrating property investments in areas where more people live. There is demand, he says, for office, retail and residential property.

Indicative of the limited supply of facilities is the lack of modern shopping space in many cities in sub-Saharan Africa where the scope for retail property development is enhanced by the involvement of store owners like Shoprite and Massmart.

However, investing in longer term projects in the region has its challenges, amongst them finding the correct opportunities and dealing with relatively slow moving authorities. Debt financing is more difficult to come by and leveraging strategies more difficult to achieve than in developed markets.

Operating costs in sub-Saharan Africa are also high. But Roper said real rental yields of over 10% for retail, residential and industrial properties are achievable.