2021 Deloitte Africa Private Equity Confidence Survey - June 2021
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Contents Foreword 02 Key highlights 04 Economic climate 06 Deloitte insights: Market approach valuation post-COVID-19 11 Investment landscape 12 Deloitte insights: Providing growth solutions to private enterprises 19 Fundraising environment 20 Deloitte insights: Data analytics in PE deals 24 Sector focus 26 Deloitte insights: Early intervention can help reduce strain on underperforming portfolio companies 31 Acronyms 32 Methodology 33 Acknowledgements 33 Endnotes 34 Contacts 35 01
2021 Deloitte Africa Private Equity Confidence Survey Foreword We are pleased to present the 2021 Deloitte Africa Private Equity Confidence Survey (PECS). This publication is centred around valuable insights into how fellow private equity (PE) practitioners view the African PE landscape, specifically their future expectations over the next 12 months. To supplement the forward-looking Gladys Makumi Clinton Wolder perspectives, the publication also Partner Partner incorporates publicly available Financial Advisory Financial Advisory macroeconomic data and commentary on Deloitte East Africa Deloitte Africa the current PE landscape and foreign direct investment (FDI) trends. Prior editions of the PECS have focussed on East, Southern and West Africa. For the 2021 publication, we are excited to have extended the survey to also include North Africa. Despite a challenging 2020 and the Damien Jacquart Temitope Odukoya prevailing uncertainties around the Partner Partner timeframe of the pandemic, investment Financial Advisory Financial Advisory and economic conditions are expected Deloitte Francophone Africa Deloitte West Africa to improve as countries implement a range of measures to recover from the impact of COVID-19. While there will be various headwinds and challenges to navigate, including effective vaccine roll-out strategies, growth prospects are positive. As a proven agile asset class, the PE industry is expected to play a key role in the economic recovery and projected increase in investment activity over the next 12 months. Although investment strategy and related returns will be key, we also foresee an increased social responsibility to drive PE activity. This aligns with the survey expectation that funding will largely be obtained from development finance institutions (DFIs). We would like to thank all those who completed the survey and thereby contributed to us being able to deliver the message of investor confidence over the next 12 months. 02
2021 Deloitte Africa Private Equity Confidence Survey Key highlights Economic climate Africa’s Gross Domestic Product (GDP) growth is forecast to rebound in 2021 and 2022 after the adverse impact of COVID-19 in 2020. This is supported by a projected improvement in exports, commodity prices, and private consumption. In line with an anticipated rebound in growth across the continent, respondents expect the overall economic climate in the four regions covered in this report – East, North, Southern and West Africa – to improve over the next 12 months. Ghana, Kenya, Morocco, and South Africa are the expected key target investment countries in their respective regions. Investment landscape An average lifecycle of five to seven years from initial PE activity is expected to increase across all regions, driven investment to exit is expected across three of the four largely by the anticipated rebound in economic activity. regions, except for Southern Africa. In Southern Africa, most respondents expect this to be more than seven years. The number of exits is expected to remain the same over Most respondents expect an increase in PE investments the next 12 months across the four regions. This is largely over the next 12 months across East, North, Southern, expected as current adverse economic conditions and and West Africa based on the expected recovery from the COVID-19-related economic and commercial uncertainties adverse economic impact of COVID-19. impact transaction activity, valuations and the timing of exits. Respondents expect average deal sizes to largely remain Sales to strategic investors and secondary sales to PE are below US$50m, in line with the growing level of mid-fund- expected to be the favoured exit routes for all regions. sized deal activity across the continent. 04
2021 Deloitte Africa Private Equity Confidence Survey Fundraising environment The fundraising environment is largely DFIs are expected to be the most preferred expected to improve or remain the third-party source of funding over the next same across all four regions, based on 12 months. DFIs have played and continue the expected improvement in economic to play a key role in the PE industry. forecasts and increase in transaction activity. The United States (US) and Europe are Fundraising timelines are expected to expected to be the largest sources of funding increase across all four regions, driven by for most of the African regions. In Southern an anticipated tightening of fundraising Africa, South Africa is projected to be the processes and related requirements. largest source of funding for the region. Key sectors of interest before the COVID-19 pandemic included Education and Green Energy. Sector focus The COVID-19 pandemic has highlighted the importance of and likely greater focus on certain key sectors such as Healthcare and Pharmaceuticals, Education, and Technology, Media and Telecommunications (TMT). 05
2021 Deloitte Africa Private Equity Confidence Survey Economic climate The COVID-19 pandemic has widely tested As economic activities have resumed in increased domestic demand. East Africa’s the resilience of African economies and has most parts of the continent, SSA growth economic growth is forecast to rebound to severely impacted some of the continent’s is forecast to rebound to 3.4% and 4% in 4.5% in 2021. fastest-growing economies. 2021 and 2022 respectively, supported by expected improved performance in Having decreased from 9% in 2019 to Having battled with sluggish growth exports, commodity prices, and private 6.1% in 2020, the slowing yet still positive since 2016, Africa’s aggregated growth consumption.2 growth rates seen in Ethiopia in 2020 (and performance was not left unscathed by expected in 2021, at 2%), result from a the COVID-19 pandemic. The pandemic Regional economic outlooks series of economic shocks, which include has seen African governments prioritise East Africa’s economic growth has been the spread of COVID-19, the disruption of emergency responses to the global health largely driven by strong public spending on the global air transport sector, a worsening crisis, including lockdown measures, which infrastructure, and incentives for industrial food security situation, and escalating have detracted from the pursuit of robust, development. The economic disruption violence in the Tigray region. In addition, inclusive, and sustainable growth strategies resulting from the COVID-19 pandemic security risks surrounding general elections across all regions. has seen the region’s expected growth scheduled for June 2021 are expected to for 2020 drop to 1.8%, down from 7.2% further weigh on consumer and business GDP growth in Sub-Saharan Africa (SSA) in 2019, making it the only African region activity. The country is projected to see a was recorded at 3.2% in 2019. GDP growth to record positive growth in 2020. This distinct growth recovery in 2022 to 8.7%. in SSA then contracted by -1.9% in 2020, was supported by Ethiopia’s economic owing to sizable direct and indirect impacts performance,3 public infrastructure on economic activity through both demand spending, industrial development, and and supply shocks.1 Figure 1. Weighted regional real GDP growth (%), 2019-23f 8.0% 7.2 7.3 6.0% 4.8 5.3 4.5 4.0 4.0 4.1 4.0% 3.7 3.7 3.5 3.5 3.4 2.5 2.5 2.4 3.2 2.0% 1.8 1.5 1.3 0.2 0.0% -0.7 -2.0% -1.8 -1.9 -4.0% -6.0% -6.0 -8.0% East Africa North Africa Southern Africa West Africa SSA 2019 2020 2021f 2022f 2023f Source: Deloitte Africa analysis based on International Monetary Fund, World Economic Outlook, April 2021 06
2021 Deloitte Africa Private Equity Confidence Survey Most East African economies experienced i.e. a halt in economic activity largely in country was the least affected by COVID-19 economic contractions in 2020, impacted Q2 of 2020. The country’s growth rate in the region in 2020. However, growth is by reduced trade flows and temporary is projected to rebound to 3.1% in 2021, expected to slow further in 2021 to 2.5% closures of businesses. Rwanda’s economy supported by an expected recovery in and then recover to 5.7% in 2022.15 contracted by -0.2% in 2020 from 9.4% household consumption and exports.9 in 2019 and is expected to rebound to Morocco entered a recession in 2020, 5.7% in 2021. The latter is driven by an In West Africa, GDP growth dropped from owing to a drop in domestic demand, expected recovery in the services sector 3.5% in 2019 to -0.7%10 in 2020, largely disruptions in value chains, decline in and a generally revamped private sector. from the economic slowdown in Nigeria, private consumption, as well as a drought In Kenya, the National Treasury estimated a decline in commodity prices, reduced which contracted agricultural value added the country’s growth rate to reach 0.6% financial flows, and a slower recovery from by 7.1%.16 Economic growth in Morocco saw in 2020, down from 5.4% in 2019.4 With the 2015/16 recession.11 In 2020, West a sharp decline from 2.5% in 2019 to -7.0% the country having faced a third wave Africa was the second-best performing in 2020, but is expected to recover to 4.5% of infections in March 2021,5 growth region after East Africa, recording the in 2021.17 recovery continues to be uncertain. A key smallest growth contraction in Africa in risk to Kenya’s economic performance 2020. Growth in the region is expected to While these forecasts currently reflect in 2022 is the scheduled elections in the rebound to 3.5% in 2021. an expected economic rebound and same year, which may potentially impact subsequent recovery in GDP growth across economic activity. Other risks include the In the region’s biggest economy, Nigeria, regions, this outlook is subject to various slow vaccine roll-out and another possible economic growth declined from 2.2% in risks (both domestic and external). wave of infections in Q3 of 2021. Growth 2019 to -1.8% in 2020. Nigeria is expected is forecast to rebound to 6.6% in 20216 as to see a slow recovery to its pre-pandemic Projections are highly dependent on activity is expected to resume following the levels in 2021 (2.5%) and 2022 (2.3%).12 the containment of the virus, vaccine COVID-19 lockdowns, boosting tax revenue Ghana suffered from a reduction in export distribution, continued progress in and government spending. revenues from oil and cocoa, and from structural transformation, leveraging the effects of the COVID-19 pandemic initiatives such as the Africa Continental Southern Africa experienced the largest measures, such as disruptions to global Free Trade Area (AfCFTA) agreement, contraction among its peer regions in 2020. commodity-based supply chains, and commodity price developments, GDP growth contracted by -6% in 2020, decreased commodity exports. However, economies’ debt trajectories on account impacted by poor economic performance growth rates in Ghana remained positive of mounting fiscal deficits, as well as the in the region’s largest economies, South after dropping from 6.5% in 2019 to 0.9% in policy measures adopted by countries in Africa and Angola, as well as other factors, 2020. Growth, although marginal, stemmed the region.18 which included supply-side constraints, from the positive contribution of net gold weak commodity prices, eroded export exports, combined with favourable gold growth, and constrained fiscal space.7 and cocoa prices, as well as a recovery Southern Africa’s growth rate is projected in the Construction and Manufacturing to rebound in 2021 to 2.5%. sectors.13 The country is expected to see growth of 4.6% in 2021 and a further South Africa has been grappling with low increase to 6.1% in 2022.14 growth, increased public debt, and high unemployment rates for many years.8 Real North Africa’s GDP growth declined from GDP growth in South Africa declined from 3.7% in 2019 to -1.8% in 2020. The region is 0.2% in 2019 to -6.9% in 2020, supressed projected to have a strong rebound in 2021 by the above-mentioned factors which to 7.3%, with growth reducing to 1.5% in were further impacted by the country’s 2022. Real GDP growth in Egypt dropped response measures to contain the virus, from 5.6% in 2019 to 3.6% in 2020. The 07
2021 Deloitte Africa Private Equity Confidence Survey Respondents’ views on the economic Figure 2. Expected change in the economic climate by region over the next 12 months outlook and focus of funds In early 2021, Deloitte Africa surveyed general partners (GPs) and limited partners 70% (LPs) to understand their views of the 65% impact of COVID-19 on the economic 57% 59% climate, the country focus of funds, 60% 56% the investment landscape, fundraising environment, and sector focus in East, 50% North, Southern and West Africa over the next 12 months.19 40% A summary of the results is discussed in 31% 32% the sections that follow below. 30% 26% 25% Overall perspective 19% 20% Following the onset of the COVID-19 pandemic and the resultant slump in 11% growth across Africa in 2020, respondents 10% 9% 9% expect the overall economic climate in each region to improve. 0% East Africa North Africa Southern Africa West Africa Regional insights Economic growth in East Africa is Improve Remain the same Deteriorate projected to recover in 2021 and 2022. The vaccination campaigns, growing consumption, investment, and trade will be Source: Deloitte Africa analysis based on PECS 2021 results the key drivers for a projected economic Note: Regional totals may not add to 100% due to rounding. rebound. While more than half of respondents The majority of respondents are optimistic The expected improvement in West Africa expect an improvement in North Africa, regarding the economic outlook for follows the anticipated continued progress one in four respondents feel that the Southern Africa, although a stuttering in managing the pandemic, as well as the region’s economic climate is likely to vaccine roll-out programme coupled with expected success of vaccine distribution in deteriorate over the next 12 months. Only fears of further waves of infections as well countries within the region. Egypt’s economic growth has been strong as fiscal pressures, exacerbated by COVID- and resilient, despite the adverse health 19-related costs, and tighter monetary impact of the pandemic.20 Other countries policies, could impact on expectations. In in the region contracted significantly in South Africa, electricity supply shortages 2020. Effective vaccine campaigns in the will remain a binding constraint on growth region are likely to boost consumer and over at least the next two years. business confidence, consumption, and investments. 08
2021 Deloitte Africa Private Equity Confidence Survey Figure 3. Countries in East Africa that funds aim to focus on over the next 12 months Although East Africa has been a smaller PE investment destination, only attracting about 16% of deals by volume, and 8% 30% 27% by value over the 2014-19 period,21 the region is expected to be a key investment destination going forward, owing to its 25% attractive macroeconomic outlook. 22% The focus of funds in East Africa over the 20% 19% 17% next 12 months is expected to be on Kenya, Uganda, and Ethiopia. Ethiopia and Kenya 15% have been key investment destinations for 15% FDI in the region over the 2016-20 period.22 Kenya’s attractiveness to international 10% investors stems from its diversified economy and continued focus on infrastructure development, its status as 5% the largest economy and commercial hub of East Africa, as well as supporting policies such as the Big Four Agenda and Vision 0% 2030.23 Kenya Uganda Ethiopia Rwanda Tanzania Ethiopia has become attractive for PE and other investment owing to the current regime’s economic reforms, the size of its Source: Deloitte Africa analysis based on PECS 2021 results population, and relatively high economic growth forecast. The demand for capital from the growing private sector, and local banks’ inability to meet this demand, makes Figure 4. Countries in North Africa that funds aim to focus on over the next 12 months Ethiopia an ideal destination for PE funds. However, persistent foreign exchange 35% 34% shortages in the country present a major 32% challenge to private investors. 30% North Africa has been a key investment destination for FDI over the 2016-20 25% 24% period, with Egypt (1st), Morocco (4th) and Algeria (5th) among the top five recipients of FDI flows in Africa.24 Morocco and Egypt are 20% expected to be the key focus of funds in the region, having been notable destinations for deal activity prior to COVID-19.25 15% 11% Despite the adverse impact of COVID-19 10% on Morocco’s economy, respondents still consider the country to be a key focus for investment in the region. Egypt has 5% gradually established itself as a venture capital hub, attracting multiple early-stage 0% deals, and is likely to remain an attractive destination for PE investment in the region. Morocco Egypt Tunisia Algeria Source: Deloitte Africa analysis based on PECS 2021 results 09
2021 Deloitte Africa Private Equity Confidence Survey Southern Africa has been a key Figure 5. Countries in Southern Africa that funds aim to focus on over investment destination for PE over the the next 12 months years, based on the number of deals over the 2014-19 period. By value of deals, the 45% region has been overtaken by both West 42% and North Africa.26 Similarly, it has also 40% been the third-largest destination (20%) for FDI in Africa, after North Africa (43%) and West Africa (23%) over the 2016-20 period.27 35% The focus of funds looking at Southern 30% Africa is expected to remain concentrated on South Africa, followed by Mozambique and Botswana. South Africa and 25% Mozambique have also been key destinations for FDI over the 2016-20 20% period.28 15% South Africa is the largest and most diversified economy in the region, and 11% 10% PE investors are expected to target 10% 8% 8% quality, well-priced assets that become available in a post-COVID-19 depressed 5% 5% 5% market environment. PE has proven to 3% 3% 3% be an agile asset class in the region, with 1% PE funds being able to navigate their 0% South Africa Mozambique Botswana Namibia Zambia Angola Zimbabwe Madagascar Malawi Mauritius portfolio companies effectively through the Eswatini COVID-19 lockdowns and related economic downturn. This is expected to continue going forward, with PE expected to be a key investment driver in the post-COVID-19 Source: Deloitte Africa analysis based on PECS 2021 results pandemic economic recovery. In West Africa, key investment countries Figure 6. Countries in West Africa that funds aim to focus on over the next 12 months are expected to be Ghana, Côte d’Ivoire, Nigeria, and Senegal. These four countries 25% represent the strongest economies relative to other countries in the region, in terms 21% of economic performance. Furthermore, 20% 20% these four economies are significantly 17% more industrialised than other countries in 16% the region. 15% West Africa has been a strategic 10% 9% investment destination for funds in recent years, having been the top region for PE investment by value over the 2014- 5% 19 period. Deal activity (by value) has 5% 3% been largely in Nigeria, despite various 2% 2% 2% macroeconomic, political, and security risks 1% 1% 0% in the country, with Ghana in second place. Ghana Côte d’Ivoire Nigeria Senegal Benin Burkina Faso Togo Guinea Mali Sierra Leone Cape Verde Liberia Nigeria and Ghana both have also been key recipients of FDI in the region.29 Source: Deloitte Africa analysis based on PECS 2021 results 10
2021 Deloitte Africa Private Equity Confidence Survey Deloitte insights: Market approach valuation post-COVID-19 T he COVID-19 pandemic has had a annually. It is therefore critical that the It may be wise to underweight the market major impact on capital markets’ following factors are considered when approach and to rely more on the income volatility and share prices across attempting to apply the market approach approach with scenario analyses, as this the globe. Market capitalisations reduced for valuation purposes: method may articulate the uncertainty significantly in a short period, but the in the earnings potential of the company subsequent monetary and fiscal policy • Ensure that the earnings base of the and its potential range of value more changes have helped return markets to company is normalised to exclude adequately. pre-COVID-19 levels. any once-off or extraordinary items related to the pandemic. The earnings In the wake of this volatility, the Deloitte metric should reflect a sustainable level Africa Valuations team is often asked what of profitability that the company could the key considerations are with regards to maintain into the future. applying the valuation market approach, • The reporting date of the company given the observed market volatility should be considered, as the most that has been wrought by the COVID-19 recent and up-to-date information pandemic. In performing a valuation based relating to the comparable company on the market approach and comparable should be used in the valuation. companies, information that is applied needs to be carefully assessed, as the • Industry multiples observed in 2020 answer is not as straightforward as it would may be understated (in industries appear. where significant share price declines Damien Jacquart were observed) or overstated (in Partner, What needs to be considered is how industries where significant share Financial Advisory, valuation multiples are calculated, and how price increases were observed), given Deloitte Francophone Africa the inputs of these valuation multiples have that reported earnings at that point in potentially been affected by the pandemic. time may not have reflected the future Valuation multiples express a ratio of impact of the pandemic on the earnings market value of the company (equity value of the business. or enterprise value, which is a function of • The comparability of companies in the share price times shares outstanding) different geographies and subsectors with a reported financial income statement should be assessed in depth, as the metric, such as earnings before interest, pandemic did not uniformly impact all taxes, depreciation, and amortisation sectors of all countries across the world. (EBITDA) or profit after tax (PAT). • Forward-looking earnings and Mohsin Kahn On the one hand, equity values are a multiples may be volatile, given the Partner, forward-looking view of the business, rapidly evolving situation. Economic Valuations & Modelling Leader, often informed by investor and industry activity may be impacted by unexpected Financial Advisory, sentiment. On the other hand, a company’s lockdowns due to possible virus Deloitte South Africa reported financial information is a historical mutations and the outcome of vaccine figure that is reported quarterly or semi- roll-outs. 11
2021 Deloitte Africa Private Equity Confidence Survey Investment landscape Figure 7. Expected PE activity by region over the next 12 months 80% 74% 70% 65% 64% 60% 56% 50% 44% 40% 30% 30% 27% 23% 20% 10% 9% 4% 3% 0% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results Increase Remain the same Decrease Note: Regional totals may not add to 100% due to rounding. Overall perspective of COVID-19. Strong market activity is In Southern Africa, the “wait-and-see” In line with the anticipated improvement projected as transactions that were initiated approach adopted by many PE firms during in the economic climate, PE activity is before the pandemic are completed and the onset of the pandemic is expected to expected to increase across all regions. Key those that began during the pandemic begin result in heightened PE activity in 2021 drivers supporting the investment case in to pick up as economies reopen. and 2022. This is highlighted by 74% of the continent include a young population respondents expecting PE activity to driving productivity, rapid urbanisation, Distressed PE acquisitions and possible increase in the region. and accelerated technology uptake. funding opportunities are likely to increase, with companies expected to fundraise to Funders and investment committees are Furthermore, trading has commenced meet their working capital needs post- requiring increased due diligence and under the AfCFTA from 1 January 2021, pandemic. strong deal rationale to justify investments which is likely to also positively impact in the current economic climate. However, PE activity across the continent, as it is In North Africa, respondents are split investment strategies and targeted returns expected to encourage greater capital between an expected increase in activity will require capital deployment. Therefore, flows by reducing trade barriers. (56%) and activity remaining the same increased competition in the market is (44%). Deal activity is anticipated to target expected as investors target quality assets Regional insights quality assets with strong cash flows; at the right price. Most respondents in East Africa (65%) however, uncertainty around another wave expect PE activity in the region to increase of infections and consumer spending may In West Africa investors have been over the next 12 months. This is in line result in PE firms adopting a “wait-and-see” focusing on strategies to preserve existing with the anticipated improvement in the approach for new investments and deal investments in the current adverse economic climate, as governments ease activity. COVID-19 environment. The expected measures instituted to curb the spread increase in PE activity is anticipated to be driven by the projected economic recovery 12 in 2021 and 2022.
2021 Deloitte Africa Private Equity Confidence Survey Figure 8. Anticipated investments by region over the next 12 months 70% 69% 64% 61% 60% 50% 50% 40% 38% 30% 27% 26% 26% 20% 13% 13% 10% 9% 6% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results Increase Invest the same Decrease Note: Regional totals may not add to 100% due to rounding. Overall perspective the expected improvement in economic surprising that 69% of respondents expect Prior to the pandemic, between 2014 and climate and anticipated increase in PE an increase in investment activity for the 2019, PE investment activity (number of activity, as vaccination programmes take region. deals) was on an upward trend, yet the total shape and economies begin to recover. annual deal value was declining.30 A similar The anticipated increase in respondents’ trend was seen with other investment In North Africa, investors are expected to investments in West Africa is consistent classes, where the number of FDI projects invest the same over the next 12 months. with economic growth expectations for the invested in Africa annually rose, although In order to maintain the same level of region, which are expected to create an total annual FDI in value terms declined investment, countries have implemented avenue for new investments. between 2016 and 2019.31 This suggests immediate investment policies such as growing investor interest, but smaller the new Egyptian banking law promoting average investments. investments and financial stability in Egypt.32 Looking forward, the results of the Deloitte PECS suggest that investment activity is In Southern Africa, PE firms have expected to continue increasing, with lower generally been conservative in deploying average deal sizes beginning to be favoured capital, both leading up to COVID-19 and (refer to Figure 9 below). during the initial phase of the pandemic. An improvement in the economic climate is Regional insights key to supporting an increase in anticipated Most respondents in East Africa (61%) investments over the next 12 months. expect an increase in PE investments Given the expected improvement in over the next 12 months. This aligns with economic conditions for the region, it is not 13
2021 Deloitte Africa Private Equity Confidence Survey Figure 9. The average deal size expected by region over the next 12 months 80% 73% 76% 72% 70% 58% 60% 50% 40% 32% 30% 28% 27% 20% 18% 10% 10% 6% 0% 0% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results
2021 Deloitte Africa Private Equity Confidence Survey Figure 10. Expected entry multiples on transactions by region over the next 12 months 60% 53% 50% 48% 43% 40% 45% 30% 30% 30% 29% 29% 27% 25% 21% 20% 20% 10% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results Increase Remain the same Decrease Note: Regional totals may not add to 100% due to rounding. Overall perspective global market and higher discount rates as of respondents (30%) expect multiples The presence of more PE funds on investors are anticipated to be more risk to decrease as there may potentially be the ground in African regions and the averse. The attractiveness of companies distressed assets that offer the right increase in the number of qualified African will also be affected, as most of them are investor an opportunity to acquire a executives have made it easier to identify reporting decreased earnings, as they business with strong trading potential at deals and to transact. However, this has recover from the effects of the pandemic. depressed prices. increased competition and put pressure on deal values and entry multiples. Based In North Africa, most respondents (53%) Entry multiples in West Africa are on survey responses, entry multiples on expect entry multiples to remain the same expected to largely remain the same transactions in North, Southern and West over the next 12 months, as economic over the next 12 months, as economic Africa are expected to remain the same conditions recover. conditions slowly recover and transaction over the next 12 months. activity resumes. Pre-COVID-19, transaction multiples were Regional insights increasing in Southern Africa as PE In East Africa, most respondents (43%) investors competed for quality assets in a expect entry multiples on transactions to growing mid-fund space. Looking forward, decrease over the next 12 months. Some respondents largely expect entry multiples of the factors expected to affect asset to remain the same (given the increases prices include increased volatility in the pre-COVID-19). However, a large portion 15
2021 Deloitte Africa Private Equity Confidence Survey Figure 11. Expected average lifecycle from initial investment to exit for investments made during the next 12 months 70% 67% 63% 60% 50% 48% 48% 45% 43% 40% 37% 30% 25% 20% 10% 8% 10% 6% 0% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results More than 7 years 5-7 years Less than 5 years Note: Regional totals may not add to 100% due to rounding. Overall perspective lifecycle to be more than seven years. PE An average lifecycle of five to seven professionals are expected to require years from initial investment to exit is a longer timeframe to control their expected across all regions, except for investments and manage exits to achieve Southern Africa. In Southern Africa, most required valuations. respondents expect this to be more than seven years. In Southern Africa, 45% of respondents expect the average lifecycle to be Regional insights between five and seven years, with 48% of Most respondents in East Africa (48%) respondents expecting timeframes of more expect the holding period to range than seven years. Although the region is between five and seven years, while likely to see positive economic growth and 43% expect the holding period to be increased investment activity, there are greater than seven years. The region’s headwinds to navigate, and investors will average holding period has recently been potentially need to hold onto investments five years.37 As a result of the change in for longer to achieve required returns. economic growth forecasts and the impact of COVID-19, it is expected that portfolio Historically, the typical average investment companies will take relatively longer to lifecycle of PE investment in West Africa generate required returns. has been at least five years.38 This is largely expected to remain the same for the next In North Africa, 67% of respondents 12 months, with 63% of respondents expect the average lifecycle to be expecting the average lifecycle to be five to between five and seven years, with 25% seven years. of respondents expecting the average 16
2021 Deloitte Africa Private Equity Confidence Survey Figure 12. Exits expected by region in the next 12 months 70% 62% 60% 50% 50% 46% 40% 39% 35% 33% 31% 30% 29% 27% 23% 20% 15% 10% 10% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results Increase Remain the same Decrease Note: Regional totals may not add to 100% due to rounding. Overall perspective PE exits are expected to be muted over the The economic recovery in West Africa A total of 278 exits were recorded across next 12 months as businesses recover from is expected to result in the restoration the continent over the 2014-19 period. The the effects of the COVID-19 pandemic. of investment activities, with exits in the number of exits increased from 40 exits in region being influenced by typical factors 2014 to 50 exits in 2016, before dropping to The majority of respondents in North such as economic and portfolio company 45 in 2018 and again 45 in 2019.39 Based on Africa (46%) are expecting exits to remain performance. responses, the number of exits is mostly the same, although 23% of respondents expected to remain the same over the are expecting more difficulties for exits. next 12 months across the four regions. An immediate challenge that impacts on This is largely expected as current adverse exits is the logistical trouble with travel economic conditions and COVID-19-related restrictions, which complicates the ability uncertainties impact transaction activity, of potential investors to conduct the valuations, and the timing of exits. necessary due diligence. Regional insights In Southern Africa, economic challenges In East Africa, the poor performance of that existed pre-COVID-19 were further portfolio companies resulted in the level exacerbated by the impact of COVID-19, of exits being lower in 2020 than in 2019.40 resulting in a number of transactions One of the biggest challenges that PE being put on hold, as sellers and buyers investors have faced in recent months has struggled to find common ground on been currency depreciation. Given that valuations. Going forward, the level of exits most funds are raised, invested, and need will depend on the ability of transactions to return capital to their investors in US to close and investors to find quality assets dollars, the depreciation of local currencies at the right price, with suitable growth impacts on portfolio performance. As such, prospects. 17
2021 Deloitte Africa Private Equity Confidence Survey Figure 13. Most dominant exit routes per region over the next 12 months 60% 54% 52% 50% 46% 48% 41% 40% 39% 38% 36% 30% 23% 20% 14% 10% 9% 0% 0% 0% 0% 0% 0% East Africa North Africa Southern Africa West Africa Secondary sales to private equity Sales to strategic investors Partial exit via refinancing IPOs Source: Deloitte Africa analysis based on PECS 2021 results Note: Regional totals may not add to 100% due to rounding. Overall perspective In North Africa, sales to strategic Based on survey responses, sales to investors are expected to be the most strategic investors and secondary sales to favoured exit route. These have historically PE are expected to be the favoured exit generated high returns in North Africa. routes for all regions. Initial public offerings (IPOs) are not expected to be a favoured In Southern Africa, the dominant exit exit route in any region over the next route is expected to be sales to strategic 12 months. investors, followed by secondary sales to PE. Strategic investors are expected to be Regional insights key drivers of projected investment activity In East Africa, secondary sales to PE are over the next 12 months, as the region expected to be the dominant exit route tries to recover from the adverse economic for PE firms, followed by sales to strategic climate and impact of COVID-19. investors. This is likely as PE firms would realise better valuations compared to In West Africa, secondary sales to PE IPOs. Capital markets in East Africa are investors are expected to be the dominant underdeveloped and have attracted only a exit route, given the number of active PE few listings in the recent past. market participants and their knowledge of the market dynamics. 18
2021 Deloitte Africa Private Equity Confidence Survey Deloitte insights: Providing growth solutions to private enterprises P rivately owned businesses are platform growth), and portfolio exits the engine room of the African (by identifying suitable buyers). This is economy. By diversifying operations done by specialist teams with extensive or expanding into new markets, privately knowledge of M&A advisory, buy and sell- held enterprises have been seeking side due diligence, M&A tax, valuations, options to grow their businesses across and modelling, as well as advising on the the continent, and will drive the continent’s optimum funding structure that helps future growth prospects. guide privately held entities, portfolio companies and the PE funders through Crucial parts of privately held enterprises’ complex transactions. Mabel Ndawula growth strategies include, for example, Deloitte Private Africa Leader, business continuity, which is key to any A key challenge, however, is that databases Partner, organisation’s success, and succession of privately held enterprises do not exist Deloitte Uganda planning. Attracting and retaining effective in most of Africa, and many of these senior management is vital to taking a companies, often also very profitable and business forward and developing its fast-growing, fly largely under the radar. expansion strategy. Although there are many opportunities for PE, it often takes time and considerable The effectiveness of management teams is effort to identify suitable targets. a particular area of focus for PE investors. Deloitte experience has shown that The economic challenges brought about having an effective management team in by the COVID-19 pandemic across the place, along with the growth prospects African continent will not only require of the company and a well-structured agile investors to navigate volatile and Maik Tiemann strategy, will ensure its success and make it distressed environments, but also present Associate Director, attractive to PE investors. several investment opportunities. Given Financial Advisory, the proven track record of PE investors as Deloitte South Africa To achieve this, Deloitte Private works closely being adaptable and resilient, the asset with privately held enterprises, to develop class has a key role to play in the post- their corporate and business strategy, COVID-19 recovery and rebuild. advising their management teams, and helping to drive the business and operating In Africa, the need for a more inclusive and model that will form part of their overall sustainable development path provides growth strategy. numerous opportunities for investors to generate adequate returns, in addition Deloitte Private also advises on the to making a long-lasting, meaningful corporate as well as mergers and impact on millions of people through acquisitions (M&A) strategy of private the rebuilding of economies. Private enterprises, supports PE investors and enterprises have a key role to play in the the management teams of portfolio rebuilding process by working more closely companies with acquisitions and buy- with alternative investment classes, such side opportunities (by identifying the as PE. right targets for bolt-on acquisitions and 19
2021 Deloitte Africa Private Equity Confidence Survey Fundraising environment Figure 14. Expected changes in the regional fundraising environment over the next 12 months 60% 56% 50% 50% 45% 41% 41% 40% 36% 30% 25% 26% 24% 23% 20% 19% 14% 10% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results Improve Remain the same Deteriorate Note: Regional totals may not add to 100% due to rounding. Overall perspective (41%). Fundraising and fund due diligence In Southern Africa, there was strong The total funds raised since 2014 processes were prolonged, given fundraising activity pre-COVID-19. peaked in 2015, largely boosted by COVID-19 travel restrictions. As such, Therefore, respondents are looking to drive first-time contributions from various US investors shifted their focus towards the projected increase in PE activity mainly and European institutional investors. stabilising existing portfolios, thereby with funds that have already been raised. Fundraising then slumped in 2017 on reducing fundraising activity in 2020. As The favourable economic outlook supports account of dropping commodity prices, as governments develop economic recovery the expected continuation of fundraising well as exchange rate volatility. Thanks to a initiatives to focus on the removal of activities, albeit that fundraising processes rebound in oil prices and Africa’s improving structural barriers for private-sector- are anticipated to be prolonged and to agricultural exports, total funds raised led growth, trade liberalisation, and an have stricter requirements. recovered in 2019.41 Following the COVID-19 enabling environment for manufacturers pandemic, the fundraising environment is and exporters, East Africa is expected to Almost half (41%) of the respondents expected to improve or remain the same see a recovery in fundraising activities. in West Africa expect the fundraising across all regions. This aligns with the environment to remain the same. This projected improvement in the respective In North Africa, most respondents expect is largely as funds were not significantly economic climates and anticipated increase the fundraising environment to either utilised over the past 12 months due to in PE activity. remain the same or improve over the next reduced rates of investment in 2020. 12 months. This is in line with the expected Regional insights increase in PE activity and an improvement In East Africa, respondents expect in economic climate over the next either an improvement in the fundraising 12 months, demonstrating LPs’ confidence environment (45%) or no change at all in the long-term attractiveness of PE in Africa. 20
2021 Deloitte Africa Private Equity Confidence Survey Figure 15. Expected fundraising timelines by region over the next 12 months 70% 61% 60% 56% 55% 53% 50% 40% 31% 32% 30% 26% 27% 20% 15% 18% 13% 13% 10% 0% East Africa North Africa Southern Africa West Africa Source: Deloitte Africa analysis based on PECS 2021 results Increase No impact Decrease Note: Regional totals may not add to 100% due to rounding. Overall perspective In North Africa, fundraising timelines are funding. Furthermore, fund managers are Fundraising timelines are expected to also expected to increase. The COVID-19 expected to require a more robust risk increase across all four regions, with crisis has raised several issues, including management framework, which is likely to the anticipated tightening of fundraising lockdowns, travel restrictions, and liquidity impact the typical timelines for fundraising processes and related requirements. problems that present obstacles to in the region. fundraising efforts in the region. Regional insights East Africa’s fundraising timelines are In Southern Africa, longer fundraising expected to increase. The East African timelines may be attributed to current PE market largely depends on US adverse economic conditions, travel dollar-based investors. Depreciation of restrictions, delayed vaccine distribution, currencies in the region due to the impact and increased scrutiny by funders due to of COVID-19, and the subsequent low US heightened COVID-19-associated risks. dollar-based returns, have seen revised investment sentiment towards East With the regional economy still in recovery Africa. Consequently, some international in West Africa, funders appear to be institutional investors have exited the more cautious in making funds available region or have delayed investments. This and are likely to undertake a rigorous could affect fundraising initiatives over the risk assessment before they can provide next 12 months. 21
2021 Deloitte Africa Private Equity Confidence Survey Figure 16. Preferred third-party sources of funding to be used by Overall perspective region in the next 12 months DFIs have played and continue to play a key role in the PE industry. This includes driving awareness of the importance of 8% private-sector development in Africa, as 10% well as promoting investment facilitation Insurance frameworks.42 10% 7% DFIs are the largest third-party source of funding and are expected to continue 2% playing a leading role going forward, as 0% shared prosperity and inclusive growth are Corporates 6% more important than ever, following the 5% COVID-19 crisis. Based on responses, the preferred third-party source of funding to 6% be used within the next 12 months across 8% all regions is Governments/DFIs. Banks 13% Regional insights 5% Respondents in East Africa expect to use Governments/DFIs as the preferred third- 35% party source of funding. The significant Governments/ 31% DFI investment in the region is likely due DFIs 24% to COVID-19-associated risks impacting on 32% the availability of commercial capital, as well as DFIs looking to make countercyclical 22% investments that impact investment Pensions/ 21% segments. Endowments 24% In North Africa, respondents also consider 22% Governments/DFIs to be the preferred third-party source of funding. Fund of funds 14% and Pensions/Endowments both represent 21% the second-most preferred source of Fund of funds 14% funding. 15% In Southern Africa, Governments/DFIs 12% and Pensions/Endowments are expected Private 10% to be the largest sources of funding, individuals although the adverse economic climate 10% and impact of COVID-19 may impact on 15% fundraising, particularly from Pensions/ Endowments. 0% 5% 10% 15% 20% 25% 30% 35% 40% DFI funding in West Africa is expected from various developmental opportunities East Africa North Africa Southern Africa West Africa that meet the investment objectives of DFIs that focus on the region. Source: Deloitte Africa analysis based on PECS 2021 results Note: Regional totals may not add to 100% due to rounding. 22
2021 Deloitte Africa Private Equity Confidence Survey Figure 17. Geographical sources for raising capital for investment activities by region within the next 12 months 26% 26% United States 16% 30% 19% 15% South Africa 47% 15% 0% 4% North Africa 0% 0% 16% 19% Middle East 14% 20% 30% 30% Europe 16% 28% 9% 7% Asia 6% 8% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Source: Deloitte Africa analysis based on PECS 2021 results East Africa North Africa Southern Africa West Africa Note: Regional totals may not add to 100% due to rounding. Overall perspective persist, the need for new funding sources funding is expected to be sourced from Key funding sources of PE in the past will intensify. Europe, followed by the US. have been predominantly from outside of Africa, including from the US and Europe.43 Regional insights In Southern Africa the largest portion of Although the US and various European Most respondents in East Africa expect to funding is expected to be sourced from countries have also been among the top raise capital from Europe and the US over South Africa, followed by Europe and the 10 sources of FDI into Africa since 2016, it the next 12 months. France has been a top US. Longer-term economic fundamentals is, in fact, emerging markets such as China, M&A investor in Kenya in the 2020 financial continue to attract funds to the region, Russia and the United Arab Emirates (UAE) year, while the United Kingdom (UK) had the given the established South African markets that have been the top three sources of FDI highest deal value for inbound transactions and possible higher returns available for into Africa.44 due to the Direct Pay Online acquisition in funders. the same period.45 In addition, many East Based on survey responses, the US and African funds have historically raised funds Countries within the West African region Europe are expected to be the largest from European-based DFIs. are beneficiaries of several developmental sources of PE funding for most African projects that make funds available for PE regions, except for Southern Africa, where In North Africa, funding sources have investment into the region. The projects South Africa is expected to be the largest been predominantly from outside the are backed by the US government, source of funding. As liquidity challenges continent, and the largest portion of countries in Europe, and various DFIs. 23
2021 Deloitte Africa Private Equity Confidence Survey Deloitte insights: Data analytics in PE deals Data analytics is a sector-agnostic concept, appropriate format, including focussed tools can be built, tailored to PE investment which means all M&A participants can data packs and visual dashboards, policies. These tools can be enhanced by leverage it to bolster their investment which will drive the “equity story” of the machine learning to understand items efforts and unlock value throughout portfolio company up for sale. such as propensity to transact on both the entire M&A lifecycle. PE firms stand the sell and buy side (therefore also using • A well-designed deal-sourcing tool can to benefit a great deal if data analytics data analytics to identify potential buyers also help identify potential buyers. and data science methods are applied on exit). Packaging this using visualisation effectively. There are three commonly software will give the investor a visual and asked questions relating to data analytics 2) How can portfolio companies dynamic snapshot of deal activity and a in PE deals: benefit from concepts such as data user-friendly interface. analytics and data science? 1) How does data analytics fit into the PE investment lifecycle? To ensure that returns through investments in portfolio companies are Data analytics can be leveraged throughout maximised, it is critical that value creation the PE lifecycle, including, but not limited is at the forefront of the investment to, the following areas: thesis. Typically, value creation focuses on areas such as revenue and margin, • Advanced analytics and machine- cost management, effective budgeting, learning concepts can be used to capex optimisation, operating models, and build deal-sourcing tools to assist working capital management. PE professionals to source the best investment opportunities based on Data analytics tools can be deployed in Nisha Dharamlall multiple data sources and investment each of these strategic areas and used Transaction Services Leader, criteria. effectively to transform the “office of the Financial Advisory, chief financial officer (CFO)” role, as well Deloitte Africa • The due diligence process can leverage as improve management decision-making data-modelling techniques to handle through data-driven reporting. Investment and process large amounts of deal data in the right technology, coupled with having and use visualisation tools to present a “digital” and “data” mindset, will set the key deal findings, both of which are portfolio company on the right path to critical for negotiating a beneficial sale unlock value for both management and the and purchase agreement. PE investor. • PE firms can unlock value in their portfolio companies through investing in 3) How can PE firms use data analytics and leveraging financial and operational and data science to source deals? Dave Weir analytics to streamline processes and Manager, improve decision-making and risk Being able to maximise PE fund returns Financial Advisory, management. starts with identifying the right investment Deloitte South Africa opportunity. Increased access to third- • When it is time to exit, a well-managed party M&A data sources and internal and maintained data environment deal data means that, with the right data will ensure sale readiness is achieved analytics and data science expertise, efficiently. All financial and operational robust target identification or deal-sourcing data points can be packaged into a deal- 24
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Sector focus While consumer-driven industries have come to the fore in recent years, PE fund managers have diversified their strategies to invest across sectors such as Information Technology (IT), Renewable Energy, Infrastructure, and Real Estate. Over the 2014-19 period, the largest number of deals was in the Consumer, Industrials, Financial Services, as well as IT sectors, which all link with a growing middle class. The sectors with the largest deal sizes in the same period (thus attracting a larger share of the deal value) have included Communication Services, Utilities, Energy, and Materials.46 Similar trends have been seen in terms of FDI inflows into the continent: the Energy and Resources sectors (Coal, Oil & Gas) attracted the biggest share of FDI by value over the five years to 2020. With an increase in digitalisation and the roll- out of payment solutions, the Financial Services sector has also been the most dynamic and attractive from an FDI project perspective. However, due to the lower required investment needed per project, the sector has only attracted a small share of investment inflows.47 The COVID-19 pandemic has exposed the importance of and likely greater focus on certain key sectors, such as Healthcare and Pharmaceuticals, Education, and IT/TMT, with PE houses attracted to tech-enabled businesses that can sustain growth through the current and any future regional or global disruptions. 26
2021 Deloitte Africa Private Equity Confidence Survey Figure 18. Sectors of most interest in East Africa before and following the According to respondents, prior to the COVID-19 pandemic (ranked) pandemic, sectors of most interest in East Africa included Education, Green Energy, Healthcare and Pharmaceuticals, followed East Africa (pre-COVID-19) by Infrastructure, Financial Services, and TMT. An interest in Education, and Education 1 Healthcare and Pharmaceuticals was Green Energy/Clean Tech 1 mainly driven by the increasing demand for quality education and better health Healthcare and Pharmaceuticals 1 services by the region’s growing middle Infrastructure 4 class. Financial Services 4 East Africa has proven its potential for TMT 6 renewable energy (solar, wind, geothermal, and hydro). This, together with the region’s Agriculture/Agribusiness 6 limited access to energy, has spurred interest in Green Energy. The Infrastructure Power/Oil and Gas/Utilities 8 sector has also seen growing interest. With Food and Beverages 8 governments lacking adequate resources to finance key projects, the private market Manufacturing and Industries 8 has shown a rising interest in infrastructure Retail 11 funding. Support Services 12 Financial Services has been viewed as a defensive sector, with attractive Travel/Hospitality/Leisure 12 returns driven by good governance and Real Estate and Construction 12 innovation around online and mobile money platforms. TMT interest has been driven mainly by increased innovations and measures undertaken by various East Africa (following COVID-19) governments. For example, in Ethiopia, the liberalisation of sectors such as telecoms Infrastructure 1 has attracted growing interest from Green Energy/Clean Tech 1 investors. TMT 1 The COVID-19 pandemic has adversely Financial Services 4 impacted the Entertainment, brick-and- mortar Retail, Hospitality, Leisure, and Education 5 Travel sectors. As such, most PE firms are keen to diversify their investment targets Healthcare and Pharmaceuticals 5 in businesses that will be more resilient Agriculture/Agribusiness 5 in the post-COVID economy. A stronger focus on Infrastructure, Green Energy, TMT, Power/Oil and Gas/Utilities 8 and Financial Services is expected going Food and Beverages 8 forward. Retail 10 Support Services 11 Manufacturing and Industries 11 Travel/Hospitality/Leisure 13 Real Estate and Construction 13 Source: Deloitte Africa analysis based on PECS 2021 results 27
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