We listened with great interest to four prominent private equity players in Africa in a discussion of prospects during and after COVID-19. The event took place in early November, and so was before the announcement by Pfizer and Moderna on their vaccines to tackle COVID-19. The panel discussion was part of the Africa Debate, an annual event put together by an established London-based business association.
Private equity houses are generally optimistic and did not disappoint in the discussion. They had to contend with the great returns available in China and foreign exchange issues in several African markets before COVID-19 struck, yet were able to highlight many positives. One investor who follows the script of the emerging middle class noted that 70 per cent of their companies qualify as essential businesses and have therefore remained open.
Another said that their investments in both telecoms and financial services had performed well with COVID-19 whereas the record for consumer goods had been mixed. His experience in Africa was that the crisis has helped large companies more than small operations, mirroring trends in advanced economies. A third mentioned a successful investment in a remittance business, driven by a shift from sending cash across borders (now often closed) in taxis to digital transactions. There is the general point, made in the context of infrastructure plays, that the global slowdown has made valuations more attractive.
Without travel, investors have been unable to send specialist outside contractors to factories for fire-fighting purposes. Whenever possible, they have sorted the problems out on Zoom. COVID-19 has accelerated programmes to deepen local expertise on the ground, while traditional due diligence has become highly challenging without travel. At the other end of the transaction, an exit via Zoom requires good knowledge of the buyers. Nonetheless one investor has concluded two transactions in the past month, one of which is in the fintech space.
In the Q&A session investors were asked about their target Internal Rate of Return (IRR). The first to answer came up with between 15% and 20% net, and the three others were happy to nod their heads in agreement. Another question covered the integration of ESG considerations into investment decisions. One investor had already said that all their decision-taking incorporated the impact on the climate. He argued that the valuation would suffer on a future exit from a climate-unfriendly holding.
Expectedly, working practices have also had to change. One company has worked hard to keep up morale as its employees work from home rather than network in their office. Its responses have included organizing a party on Zoom to celebrate the appointment of three new partners. Some of the time saved from travelling has also been used to bring employees up to speed on the world of Environmental, Social and Governance (ESG).
Overall, the momentum has slowed for the industry in Africa in terms of new deals, exits and fund-raising because of COVID-19. It was clear from the discussion, however, that participants were confident about the future post-COVID, which point may well have been brought closer by the news on vaccine trials we have since had from Pfizer and Moderna in the US.
Gregory Kronsten is Head, Macroeconomic and Fixed Income Research, FBNQuest