For the past decade, Africa has been one of the world’s hottest growth markets for private equity investment. In the early 1990s, a mere dozen Africa-based funds managed a combined $1 billion; today, more than 200 funds manage upwards of $30 billion. More funds are making more deals in more industries and more countries—and are making more successful exits. The expectations of investors in private equity funds are also rising as development finance institutions are being joined by global institutional investors that are far more focused on high returns.
Is Africa’s private equity boom really being driven by economic fundamentals? Or is a bubble building? In the view of some analysts, the growth has come too fast. Too much money is chasing too few sound investments, they fear, pushing up prices of African corporate assets. What’s more, the surge of capital is coming just as a sharp downturn in commodity prices has slowed economic growth across the continent, reigniting fears of currency devaluations and dividend repatriation.
We believe that these concerns are understandable. But they are not the right concerns. It is true that many resource-dependent African economies have entered a period of economic uncertainty after a decade of robust growth. Yet the continent has economic strengths that should continue to present attractive growth opportunities for private equity for the foreseeable future. The region’s rapidly expanding companies can absorb immense foreign investment and generate high returns for investors. Another driver: Africa has tremendous needs for private capital to fund its continued growth. To fully capture this opportunity, however, investors need to broaden their investment approach.