With certain developed economies such as the UK and US throwing out a seemingly ever greater volume of “can you believe it” data apparently evidencing a resounding rebound out of the Great Recession, and the seemingly un-tameable bull of western equities markets appearing to charge ever stronger, it’s perhaps unsurprising that investors pause to take stock and to question the necessity for chasing alpha returns in exotic markets. If compelling, and relatively low risk, investment opportunities are available closer to home once more, does the emerging market (“EM”) paradigm stop making sense?
As the title of CREATE-Research’s recently published sixth annual report points out, however, “Not all Emerging Markets are created equal” . While the study reveals that institutional investors are becoming incrementally less positive towards EM opportunities (the percentage of ‘believers’ declining from 38% to 20% and ‘sceptics’ rising from 18% to 28% in the period 2012-2014), it makes it clear that it’s not a case of investors turning their back on the EM story. Rather they are simply increasingly focused on identifying those markets with fundamentals that present the greatest opportunity in the coming years. And frontier markets in Africa clearly engender the greatest faith — Sub-Saharan Africa (“SSA”) is ranked as both the number one EM region for offering the best returns over the next three years, and is placed second only to the US on a comparison of all markets across the globe.
And this sentiment is clearly shared amongst the private equity (“PE”) community. In the short few months since last updating on some of the key African PE developments such as Carlyle’s raising of its maiden SSA fund and Helios’s progress toward its new billion dollar African war-chest, a range of players including blue-ribbon international investors such as KKR and Rothschild, as well as major South African-player Ethos, have demonstrated their faith in the opportunity that exists across the continent.
Despite negative press around EM investing in light of foreign capital outflows and horror stories of investors with inadequately short investment horizons retreating with fingers burnt to better established markets, swearing never to return, in the SSA PE space a clear, positive, pattern is emerging. What we are now seeing is an ever growing list of experienced and well-capitalised players, who have carried out substantial diligence on the region and whom are able to pick and back the long-term growth opportunities available, increasingly raising funds and deploying capital in attractive value plays across the continent.
KKR, having completed over $485 billion worth of transactions globally and one of the biggest PE investors in the world, signed its first ever African deal in June, investing $200 million out of its $6.2 billion European fund into Ethiopian flower company, Afriflora. Similarly, in recent days, it has been reported that Swiss private banking group Edmond de Rothschild has raised $530 million for its first Africa-focused fund. In addition, it was announced this week that Ethos Private Equity, a pioneer of South African PE, has teamed up with the $150bn Public Investment Corporation and Development Partners International, to acquire a majority stake in Johannesburg-based logistics company RTT, to back a business plan for expansion into the rest of SSA.
While investor sentiment toward any asset class or market is an inherently fluctuating quantity, one clear pattern is emerging: right now PE investors are switching on, and into, the African opportunity at an ever growing rate. The question for investors who are still sitting on the side-lines therefore is whether to wait and see or to show a little faith…