AFRICAN MARKETS WORTH WATCHING IN THE PRIVATE EQUITY SPACE IN 2020

By Fazil Hossenkhan,John Bellew Friday, January 31, 2020
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Private equity in Sub-Saharan Africa is off to a reasonably good start in 2020, with news of the year’s first deals coming through even before the month of January was out. Homing in on some sectors and markets worth watching from a private equity perspective are Paras Shah in Kenya, Fazil Hossenkhan in Mauritius, John Bellew in South Africa and Chris Green in Tanzania, all lawyers from African law firm, Bowmans.

Given the region’s electricity supply gaps and the intensifying focus on combating climate change, the energy sector, and renewable energy in particular, will likely be one of the most active sectors for private equity in 2020. Renewables have already brought some significant private equity investment to Sub-Saharan Africa in recent years, including the Kipeto Power (wind generation) Project in Kenya, the Miombo Hewani Wind Power Station in Tanzania and the Karoshoek Solar One Project in South Africa.

These countries, along with others such as Mauritius, are all showing promise in the renewable energy space for 2020 – albeit for different reasons.

Diversified energy mix creates opportunity

South Africa has been shaken by the national power utility’s ongoing rolling blackouts, stemming from plant breakdowns linked to years of inadequate maintenance. In late 2019, the South African Government announced plans to address the country’s energy constraints through a more diversified energy mix.

Renewables are a big part of this mix, especially wind and solar power.

Mauritius and Tanzania are still in the early stages of exploiting their renewable energy resources, offering a real untapped opportunity for private equity.

The Mauritian Government has put various incentives in place to attract investment in solar, wind and wave power. Most interest is likely to come from large ‘patient-capital’ investors that can afford the high initial investment and the relatively small local market.

Tanzania, on the other hand, has opportunities for small-scale investment, as well as large. The Tanzanian Government’s strategy to substantially increase energy generation has created ample room for small-scale renewable and off-grid energy projects. In response, there has been a fair amount of activity in the small end of the sector, where investors tend not to encounter as much government intervention as larger investors, especially international investors. It is essential, of course, for investors large and small, in all sectors, to be aware of Tanzania’s stringent local content and ownership requirements.

In neighbouring Kenya, meanwhile, energy prices are falling owing to the strides being made in boosting energy supply, mostly through renewable energy sources such as geothermal, solar and wind. Even though energy is a complex sector in which to invest in Kenya, private equity has shown it has the appetite, Kipeto Power being a recent example.

From education to consumer goods and real estate

Aside from energy, there are other areas of investment commonality.

Private equity investment in private education facilities has been noted in both South Africa and Kenya, but particularly Kenya, with its growing middle class and shortage of schools. Population and income growth are also driving private equity interest in and fast-moving consumer goods and retail, not to mention infrastructure such as roads and inland ports and health facilities.

Real estate is attracting attention in South Africa but more so in Mauritius, which is transforming from a monoculture economy built on agriculture. As part of this trend, private landowners are increasingly looking to partner with investors and private equity houses to convert and develop agricultural land into ‘smart cities’, malls, hotels and luxury villas. The Mauritian Government is on board, contributing by accelerating reforms around the granting of residence permits to investors.

Financial services are also doing well in Mauritius, which has become a thriving platform for facilitating investments into the African continent. Corporate and trust service providers in Mauritius are therefore capturing the attention of private equity houses, to the point that demand interest in this space currently exceeds the available opportunities.

South Africa, Mauritius’s main competitor as an African gateway, is enjoying steady interest from private equity companies seeking to purchase portfolio companies that have expanded into the rest of Africa while keeping their headquarters in South Africa.

Distinctive differences

As always, it will pay private equity players to consider the unique context of each African market and to resist the temptation to view the continent as one vast country. Investors should always bear in mind that there is no substitute for a thorough understanding of the local business environment in target countries.

In Tanzania, for instance, business practice is often far removed from the law and it is crucial to have a clear understanding of how regulators are likely to respond to corporate activity.

Similarly, in Mauritius, it is advisable to do some in-depth research on what is needed to exploit opportunities, and to engage with government agencies and benefit from the various incentives and facilitation schemes that are available.

The same goes for South Africa, Kenya and any other African country where private equity is investments are being considered: the better the due diligence, the less chance of unexpected consequences and the greater the prospects of success.

Here’s to a productive, prosperous 2020 for private equity in Africa.