High level of activity set to continue
Southern African Private Equity and Venture Capital Association (SAVCA)/ Webber Wentzel data for the first three quarters of 2016 shows 140 deals reported across the sub-Saharan Africa (SSA) region. A third of these were in South Africa, but Nigeria, Kenya and Namibia also featured prominently. Statistics show a significant year-on-year increase in deal flow.
Sally Hutton, Managing Partner and private equity specialist at law firm Webber Wentzel, says: “Against a backdrop of economic and political volatility, it has been a surprisingly busy year for private equity deal-making. Our team is currently working on more than 40 live deals, including direct and follow-on investments and exits, across all sectors. Webber Wentzel has closed a number of transactions over the course of this year, while many have not yet been publically announced.”
In South Africa, deal flow has been concentrated in the consumer, industrials, healthcare and education sectors. These include Actis’ acquisition of a stake in Food Lovers Market; Carlyle’s acquisition of Amrod; Wendel’s acquisition of Tsebo; and Coast2Coast’s acquisitions of Scitec International and Remedica Holdings.
Hutton explains that it is rare these days to see a South African deal that does not involve a SSA component. “Most investment cases include a strategy for expansion of the South African platform into SSA jurisdictions.”
In SSA, Hutton says there has been a focus on consumer and energy & infrastructure deals: Black Rhino’s pipeline project for delivery of liquid fuels into Ethiopia via Djibouti; and AIIM’s sale of investments in three privately concessioned toll roads in Southern Africa, which remains the largest private equity realisation for toll road infrastructure in Africa to date.
The economic and political uncertainties in South Africa are another major trend that has given rise to buying opportunities: “We have seen a number of deals where South African founder investors have sought to introduce a private equity partner with a view not only to taking their businesses to the next level, but also to diversifying their portfolio and externalising some of their wealth,” she says.
There has also been a shift locally in how deals are being done, with auction processes becoming more commonplace. This reflects the increased competition for quality assets, says Hutton. “The advantage of these processes for the sellers is that they often drive up price, though the unintended consequence is sometimes a protraction of deal timelines. Buyers are also increasingly being expected to go on risk for costs for longer without the comfort of exclusivity and this can result in phasing the disposal process in an attempt to manage risk, thereby causing delays.”
Another challenge to timelines is the increased burden of regulatory approval, particularly where approvals are required in multiple SSA jurisdictions. “Lack of clarity and responsiveness from local regulators can cause significant delays. These processes need to be managed proactively from an early stage and may require early structuring consideration,” says Hutton.
On the other hand, warranty and indemnity insurance, which was first used in this market in the Waco disposal transaction in 2012, is now becoming a standard feature of most deals and increasingly common in SSA deals. This is because it facilitates a clean exit for private equity sellers and the ability to distribute sale proceeds immediately. “If managed correctly, this can facilitate the deal timeline.”
This year also saw the first listing on the JSE of a private equity firm, in this case a feeder fund of Ethos Capital, on which Webber Wentzel advised. “This enables Ethos to access capital from collective investment schemes and other fund managers investing in the listed space. We expect further transactions of this nature in 2017, as private equity funds seek to access alternative sources of capital that provide liquidity.”
With the deal-making pipeline being as robust as it is, more traditional fundraising for Africa focused funds has been a focus. Hutton says their fund formation team is currently working on 12 funds, either fundraising for their first close or in subsequent closes. “We are seeing an increase of evergreen structures – investments that have a longer profile and fairly consistent dividend yields. This allows for liquidity for investors – particularly relevant for infrastructure funds and debt funds. In addition, the proliferation of debt funds, which are dominating the current market, supports the seemingly favoured approach of deploying debt in the African market over one of acquiring equity investments, particularly in the case of family-owned investments. We also see a strong focus on alternative investment vehicles in the current market, with funds looking at how best to access capital from non-traditional PE investors – such as the Ethos Capital transaction.”
Hutton sees strong evidence the 2016 trends will continue into 2017. “We are seeing a good pipeline of deals that will carry over into at least the first quarter of 2017. Private equity firms that have had some flexibility to defer realisations in light of unfavourable market conditions now face pressure to dispose of mature investments. On the other hand, strong fundraising over the last two years has resulted in an abundance of committed capital needing to be spent by the funds targeting Africa.”
According to Hutton, Webber Wentzel has the leading, largest and longest-standing dedicated private equity team in the market. The team’s fully integrated offering includes mergers & acquisitions, funding, fund formation, tax structuring and equity capital markets. It receives regular industry recognition, such as Deals Legal Advisor of the Year at the 2016 Private Equity Africa GP & Advisor Awards and lead legal adviser on the Private Equity Deal of the Year (for the 5th consecutive year) at the 2015 DealMakers Awards.