Backgrounder: Private equity in Africa

11. Deal-flow in Africa is mainly proprietary and generated by the personal networks of fund managers. Indeed, nearly half of all deals are sourced via networks or relationships, while one third are identified through company and sector tracking. Recently, however, there has been an increase in capital flows from general partners belonging to the African diaspora, whose remittances play an important role in the continent. Additionally, in South Africa, a change in the pension act has allowed local pension funds to quadruple their private equity allocation to 10 per cent, in line with more established public pension funds such as those of the United States of America and Canada.

12. Capital flow restrictions between African countries and the rest of the world represent another major challenge. Many countries are reluctant to open up their financial systems for fear of abuse, and most of the continent's financial systems are underdeveloped, making it difficult for capital to flow. In some cases, delays in processing paperwork and lengthy reserve bank approval procedures for moving funds further hamper the private equity industry. Other challenges include high borrowing costs (interest rates of up to 40 per cent in some countries); high taxation rates; a lack of experienced and proven African fund managers; and not enough institutional platforms for discussions between private equity players and Governments on issues affecting the industry. Indeed, many African Governments are not conversant about the industry and the scope of private equity operations, even within their own country.

V. Role of Governments

13. African Governments have a key role to play in promoting private equity as an important potential source of investment for national growth and development, and Africa's transformation in general. Policymakers have a multitude of levers available to make Africa a preferred destination for private equity capital, as opposed to competing regions such as Asia and Latin America, by enhancing the continent's investment attractiveness. The importance of private equity investment is underscored by the fact that those countries which have progressed the most are also those which have to date attracted the greatest share of private equity capital. The particular areas requiring government attention include the following:

A. Understanding private equity and its contribution to growth and development

14. Private equity on its own is not a driver of economic growth or upliftment, but it can be a catalyst and accelerator for growth, provided that there is already significant positive economic momentum.

B. Improving the legal and regulatory environment

15. First, the private equity industry needs policies and regulatory frameworks aimed at fostering its growth. In order to develop such policies, policymakers need a deeper understanding of the industry. Second, most private equity funds in Africa are currently registered in countries with favourable tax policies, good regulations and flexibility regarding the free flow of funds. No private equity player wants to set up a holding company in a country where there are restrictions about transferring funds in and out, and investment laws need to be improved to make it easier for private equity players to do business. Third, African investors cannot move around as easily as foreign investors, which deters investments; Governments should enact policies that encour-age local investment as much as foreign direct investment. In this regard, implementing protocols on the free movement of people and capital throughout Africa will be key if the continent is to improve the private equity industry.

C. Building the talent pool

16. Private equity is effective only when managers are prudent in using capital to grow businesses sustainably. However, in Africa, the industry is still new and the continent lacks experienced fund managers. Governments should create an enabling environment for Africa to attract and retain more talent in the form of skilled managers with operational experience, in order to help the industry to grow.

D. Creating awareness among key private equity players

17. Some African Governments have very little knowledge about the industry. Policymakers need to understand what issues are affecting and impacting the industry, including political risk. Moreover, there is little or no engagement between private equity players and regulators, resulting in communication gaps.

E. Improving the availability of funds for the private equity industry

18. Finding adequate financial resources for the private equity industry remains one of the biggest challenges for many African countries. As a result, there is an urgent need to explore ways in which Governments could facilitate the flow of capital into the private equity industry. Despite the fact that pension funds are currently not invested in companies that are listed on African stock markets, let alone in those that are not listed, African Governments should be encouraged to explore investing pension funds into private equity. Governments should also be encouraged to explore co-financing and co-sharing opportunities with private equity investors, such as infrastructure financing in the energy, telecommunications, and water sectors.

F. Encouraging the investment of African capital into the private equity industry

19. In order to build the African private equity industry, the sourcing of local capital markets and funds needs to be accelerated. There is also a need to improve the knowledge of local African investors through education, a better understanding of the asset class, incentives and a regulatory framework. There are significant sources of local capital (such as pension funds, family offices, sovereign funds, high net worth individuals, diaspora Africans) that could be tapped both for the investment and exiting of private equity assets.

G. Encouraging more impact investments

20. Although assessing the impact of private equity on the welfare of people is not an easy task, a number of private equity firms are in one way or another investing in projects that have an impact on the lives of people. Adequate consideration should be given to investing in sectors that could change the lives of ordinary people, all while making decent returns. In this regard, Governments should provide special incentives to encourage private equity firms to invest in sectors such as agriculture, which employ some of the continent's poorest people.

VI. Issues for discussion

A. Improving the availability of funds for the private equity industry

21. In the light of Africa's continuing funding challenge, there is a need to find ways for Governments to facilitate the flow of capital into private equity.

a. How can Governments encourage the use of pension funds for private equity investments?

b. How can Governments co-finance and co-share opportunities with private equity investors, such as infrastructure financing (in sectors such as energy, telecommunications, and water)?

c. How could development finance institutions get more involved in developing projects that are attractive and palatable to private equity investors?

B. Encouraging more impact investments

22. Impact investments that have direct and indirect positive effects on human well-being (education, health, employment, and the environment) are a necessary form of private equity that needs to be further encouraged.

a. How can private equity firms extend their investment portfolios by putting their money into key sectors such as agriculture?

b. How can private equity investment into small and medium enterprises (which is where most jobs are created) be encouraged?

C. Enhancing the role of Governments

a. African investors cannot move around as easily as foreign investor, which deters local investment. What policies should Governments introduce to encourage local investors as much as foreign direct investment?

b. What should Governments do to accelerate the implementation of protocols on the free movement of people and capital throughout the continent?

c. What should Governments do to accelerate African regional integration in areas such as trade facilitation and infrastructure networks, with a view to increasing the continent's investment attractiveness?

d. How can Governments encourage the private equity industry to support national development efforts?