Is it easy for PE firms to exit their investments in Africa?
A sixth annual survey titled “From origination to exit, how much value can your capital create? Published in 2018 by EY and AVCA, it provides update and analysis on exit activities on the continent.
It covers key important issues such as the number of exits, exit routes, holding period, etc.
Exit is one of the critical aspects of growing a PE industry in the continent, and it important to understand what exit options are available in the market now, which ones PE firms prefer over the other, and what policy makers need to do in improving the overall exit landscape.
This graph below shows the trend of total PE exits on the continent achieved between 2007 and 2017.
Some of the key issues in the survey are highlighted here below;
Are number of PE exits increasing?
With a slight decline to 49 exists in 2017 from 50 exits in 2016, it is still higher that 10 years ago when total exits achieved were 34 in 2007. More still needs to be done to ensure that we see more exits in the market.
We need to do more to attract more funds coming into Africa as potential buyers, we need to stimulate M&A market, and governments need to stabilize the policy and macrocosmic environment in creating the right environment for exit.
Where do we see more exits on the continent?
The number of PE exists are not uniform across the continent, we see for the 10-year period between 2007 to 2017, South Africa has remained as the dominant market for exists, accounting for 43 per cent of total exits. East Africa had a total of 10 per cent of all exits in the same period.
More needs to be done to attract more exit activity in EA market, Kenya is still the dominant force in the region, more is still desired in other member countries.
Which sector saw more exits?
For a 10-year period between 2007 to 2017, financials and industrials experienced more exit at 19 per cent each of the total exits, but the trend is changing now with consumer staples taking up the shape. For the period of 2016-2017, industrials remained dominant with 22 per cent, followed by consumer staples with 15 per cent, financials accounted for 12 per cent.
With population increase, growing middle class and increased urbanization, we expect to see more growth in the consumer industry.
How do PE firms hold their investments before exiting?
Holding period is still higher in Africa in comparison with the developed markets. This can be explained by many factors but one of them being PE firm going through tough changes in the market and can only wait for the right time to exit.
The average holding period for 2017 was 6.5 years, slightly improved from 7.7 years in 2016, but still way higher than the 3.9 years achieved in 2008. Shorter periods are better especially for PE funds that have shorter lifespan to 10 years.
Which route do PE firms exit through?
So apart from the number of exits we see, the issue of how firms exit their portfolio companies is also important to understand. In 2017, PE and other financial buyers accounted for 37 per cent of total exits.
Trade buy-outs have decreased to 27 per cent in 2017 from 50 per cent in 2016. IPO is still the less preferred option of all routes, accounting for only 4 per cent of all exits in 2017.
We need to improve our local bourses, deepening them and making them more liquid to attract more IPO exits.
Salum Awadh is CEO for SSC Capital, a corporate and investment advisory firm, and founder of Tanzania Venture Capital Network, an initiative that seeks to promote the growth of private equity industry in Tanzania
