The prices private equity firms pay for stakes in African companies are the highest in six years, driven by record fundraising and competition for the continent’s expanding middle class.
The median price for buyouts in 2015 increased to more than seven times the ratio of a company’s value to its earnings before interest, depreciation, tax and amortization, compared with 5.4 times in 2012, Cape Town-based RisCura Solutions (Pty) Ltd. said in a report on the industry released Wednesday.
“Industries serving consumer staples and discretionary spending fetch the highest prices because of favorable demographics in the growing middle class,” Rory Ord, head valuations at RisCura, said by phone. “High growth expectations, fierce competition and decreased risk perception contribute to higher sale amounts.”
Private-equity companies amassed $4.3 billion for investments opportunities in Africa last year, the most in six years, with investors attracted to consumer-facing companies as improvements in access to financial services and mobile technology open up markets.
The middle class in South Africa, the continent’s most industrialized economy that accounted for 40 percent of its private equity deals in 2015, is expected to grow by 12 percent this year to 10.1 million people, according to the University of Cape Town. The number of middle-class households in 11 sub-Saharan African countries from Angola to Nigeria, who consume between $15 and $115 a day, tripled to 15 million between 2000 and 2014, and may balloon to 40 million by 2030, according to a 2014 study by Standard Bank Group Ltd.
The trend of higher prices will probably continue for the next few years as large private equity firms such as Helios Investment Partners LLP, Actis LLP and Carlyle Group LP spend their investment pools, Ord said.
Five Africa-focused private equity funds have closed this year, raising a total of $575 million, including the $295 million Investec Asset Management Africa Frontier Private Equity Fund 2, according to Preqin Ltd. Ord said he couldn’t provide examples of expensive deals because the information is private.
African prices are on par with those in Latin America and southeast Asia excluding China, while the U.S. averages about nine times the ratio of enterprise value to earnings, and the deals contain more debt, he said. Asset costs in western Europe and China are also higher than Africa because of less risk, he said.
Requests for comment on prices from investors who bought assets last year, including Abraaj Group Ltd., Investec Asset Management Ltd., Old Mutual Private Equity, Synergy Income Fund Ltd. and Fanisi Venture Capital SCA weren’t answered or declined because the information is sensitive.
Fundraising will drop to $2 billion this year, less than half of 2015, because of economic headwinds, the potential downgrade of South African debt in June, and because the largest firms closed their funds last year, Ord said. A report by S&P Global Ratings saying that South African banks are adopting a more defensive continental strategy rather than expanding could make it more difficult for private equity companies to sell their stakes, he said.
“The private equity industry would probably want the banks to be a bit more bullish on the rest of Africa to form an exit route for their investments,” Ord said. “Of course they sometimes go through the hands of a few private equity firms as they grow.”