South African Losing Private Equity Allure to Fast-Growing Rivals

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BLOOMBERG
18 FEB 2015

South Africa is no longer the destination of choice for private equity investors seeking to tap returns on the continent.

Buyout firms are increasingly targeting markets such as Kenya and Nigeria, Africa’s largest economy, where expansion this year is forecast by the International Monetary Fund to be more than double that of South Africa.

“Almost all the growth is outside South Africa’s borders,” Andrew Dewar, managing partner of Johannesburg-based Rockwood Private Equity (Pty) Ltd., which was spun out of Barclays Africa Group Ltd. in 2013, said in an interview on Feb. 13. “The shift from South Africa to the rest of Africa also means the way exits happen will change. You could use listings in London if you get to scale in Africa.”

South Africa’s economy is being hobbled by power shortages, with the state-run utility rationing electricity for 11 days so far this month, helping to push the rand to a 13-year low. Returns for buyout firms in the country have been shrinking for a decade and lag behind the benchmark stock index.

“We used to get a net IRR of 30 percent; now it’s about 18 to 20 percent,” Andre Roux, who founded Ethos Private Equity Ltd. in Johannesburg, said at a conference on Feb. 13. He was referring to the annual net internal rate of return, buyout firms’ benchmark for measuring the success of deals.

Southern Africa is now the third-most attractive region for buyout firms after West Africa and Sub-Saharan Africa, according to an African Private Equity and Venture Capital Association report released last year.

Carlyle, Swiss RE
Nigeria has attracted U.S. private equity firm Carlyle Group LP, the world’s second-largest manager of investment alternatives to stocks and bonds, which invested $147 million for an 18 percent stake in Diamond Bank Plc and said it would spend as much as $200 million in a second Nigerian company this year. Other targets for the firm include Ghana and Ivory Coast in West Africa, Carlyle said in November.

Swiss Re AG was lured to Kenya in October when LeapFrog Investments, a private equity firm that focuses on Africa and Asia, sold a minority stake in Kenya’s Apollo Investments Ltd. LeapFrog paid 1.68 billion shillings ($18 million) in November to gain control of Kenya’s Resolution Insurance and tap growth in health coverage in that country.

Nigeria, Kenya, Ghana, Zambia, Mozambique and Angola are the countries Ethos is looking to for expansion opportunities for its investments, Ethos Chief Executive Officer Stuart MacKenzie said in an interview on Feb. 13 at the conference in Stellenbosch, near Cape Town.
”˜Going North’

“South African corporates are going north in search of growth and part of our strategy is to take our investments there,” MacKenzie said.

AutoZone, an automotive-parts retailer sold by RMB Corvest and Zico Capital to Ethos in January, has expanded into Namibia, Zimbabwe, Swaziland and Botswana.

Tsebo Outsourcing Group Ltd., controlled by Rockwood, has expanded from South Africa into countries including Namibia, Botswana and in 2013 won its first pan-African contact from Barclays Plc to manage 2,000 sites across 12 countries.

EnviroServ Holdings Ltd., Rockwood’s waste-management company, has expanded into 15 countries outside of South Africa.

“Our portfolio is 90 percent outside of South Africa,” Peter Baird, head of Standard Chartered Plc’s buyout unit in Africa, said at last week’s conference. “We’re finding loads of good investments outside of South Africa. There’s lots of talk of a wave of capital washing over African private equity.”

IPO Choices
As much as $50 billion allocated to private equity in Africa has yet to be invested, according to the Southern African Venture Capital and Private Equity Association. Rockwood’s Tsebo may tap into that cash as the firm prepares to sell its investment by year end. There have been as many as 40 approaches for Tsebo, many from other buyout companies, according to Dewar.

The FTSE/JSE Africa All Share Index advanced 18.8 percent a year on average in the decade ended September 2014 compared with private equity’s annualized rate of return of 18.5 percent, net of fees, according to the most recent research from the private equity association.

As South African companies expand in Africa and gain from more rapidly expanding markets, it becomes more attractive to consider alternatives to Johannesburg’s stock market for initial public offerings, according to some executives.

A share sale for EnviroServ “would be better on London’s AIM than on the JSE,” said Rockwood’s Dewar. “We used to take a country discount to list in South Africa. Everybody’s growing pan-African and then that discount disappears.”