Growth Investors Find Africa Irresistible

Now that most emerging markets have emerged already, private equity is looking for a fresh opportunity. For an increasing number of firms, Africa is it. Kingsley Chiedu Moghalu, former deputy governor of Nigeria’s central bank, calls the continent “the global economy’s last frontier.”

And the rush is on. Investors steered a record amount of money into funds dedicated to sub-Saharan Africa in 2014. Altogether, 24 funds raised $4.03B—more than triple the $1.25B closed by 15 funds in 2013.

One firm heavily invested is Development Partners International (DPI), a $1.1B Africa-focused private equity outfit that targets companies buoyed by Africa’s fast-growing middle class. In April 2015, DPI closed its second fund at $725M, well over the $500M target. DPI’s first fund, closed at just under $400M, is now fully invested in nine companies.

“PE in Africa is a maturing market but still has a lot of growth potential,” says Idris Mohammed, a partner at DPI. “This maturation is characterized by increasingly credible GPs that are raising significant funds.”

Another sign of maturation is the evolution of the African story. When DPI raised its first fund in 2007-2008, “it was less an Africa story than a search for yield and risk-adjusted returns,” Mohammed says. “With the second fund, it was much more a story about Africa. We had a lot of calls from people looking for an Africa opportunity, really trying to understand the growth story and buying into that story.”

The story is no longer about resource exports; it’s now about the rise of the middle class. African growth is being driven by domestic demand from an expanding consumer class who want products and services they previously did not have. They want financial services, fast-moving consumer goods, healthcare, education. In many service areas, like healthcare and education, growth in population has outrun the government’s capacity to provide services, so private institutions are stepping in. These are sectors DPI is targeting.

The firm’s new fund includes an investment in Université Privée de Marrakech, the largest private university in Morocco, which is growing at 20 to 30 percent annually. DPI is looking to expand the school outside of Morocco. Other investments from DPI’s current fund include a home furnishings business and a logistics company in South Africa.

However nice the story—any story—GPs are most interested in the ending. Mohammed says the question around exits in Africa has been resolved. “We’ve seen numerous exits in the last few years. In our fund alone, we’ve seen two. The first was an insurance business called Mansard Insurance that we sold to AXA for $247M. The second was a South African consumer products business called Liberty Star Holdings that we sold to Abraaj Group.”

Larger challenges remain. Some of them are mundane, like currency-related risk. Others come shooting out of nowhere to upend entire regions—terror groups like Boko Haram, diseases like Ebola, revolutions like the one in Egypt. DPI manages risk by taking a Pan-African approach and diversifying, though of course it can only do so much.

“Still, there is a lot that is good about Africa,” Mohammed says. “We just had historic elections in Nigeria with a smooth transition of power. And as for PE, barring a meltdown, this growth trend will continue. We are at the beginning of a long growth boom, and that is not something you can say about a lot of regions today.”