PE-backed IPOs in Africa remain flat but impressive

Africa needs investments. The continent’s widely known potential for growth needs to be fueled by financing which Private Equity (PE) companies have been providing in recent times. The PE investment space in Africa is expanding, with a total of 953 deals from 2012 to 2017 valued at $24.4 billion. Usually, PE firms acquire businesses with the intent to exit at a higher equity value, but political uncertainties, weak economic environments, among others have often made desired exits difficult.

However, regardless of the challenges faced in African markets, the number of PE-backed initial public offerings (IPOs) in both African and global stock exchanges have remained relatively constant. Over the 2010-2017 period, PE-backed IPOs generated over $3 billion, contributing 16 percent in terms of volume and 23 percent in terms of value to total IPOs. This was according to a report analysing IPOs of African Private Equity portfolio companies on African and international stock exchanges released by the African Private Equity and Venture Capital Association (AVCA), in conjunction with PricewaterhouseCoopers (PwC) on Friday.

“IPOs are rarely used for African PE exits, with investments more often being exited via trade sales and through transactions to other financial buyers,” Enitan Obasanjo-Adeleye, Director, Head of Research, AVCA noted. In 2017, around 37 percent of the 49 exits recorded by AVCA were to other financial buyers.

She explained that “this can be attributed to fragmented regulation, political uncertainty and capital markets that need to be further developed. AVCA supports regulatory development to encourage IPOs for PE backed companies in Africa, notably the Kenyan Capital Markets Authority’s recent initiatives.”

Meanwhile, the report showed that the Johannesburg Stock Exchange (JSE) remains the most attractive exit destination for PE-backed IPOs, in terms of value and volume, with 9 IPOs worth $1.869 million between 2010 and 2017. Outside Africa, the London Stock Exchange remains the preferred destination for PE exits from African portfolio companies, with the second largest IPO proceeds of $600 million.

The study also reveals the low free float of PE-backed IPOs, suggesting PE firms tend to progressively exit their investments. In terms of performance, Sub-Saharan Africa PE-backed IPOs outperformed their North African counterparts over a one-year time horizon, with an average increase from offer price of 27 percent compared to 0 percent. This may be due to economic impacts and macro volatility over the period considered in the study.

“The consistency of PE backed IPO exits in Africa is welcome news, despite the challenges emerging markets have faced over the past few years. Further developing an enabling environment that encourages investors’ commitment, is key to driving more African PE exits on both African and international stock exchanges,” said Ziad Oueslati, Vice Chair, AVCA & Co-Founder and Managing Director, AfricInvest.

The study also provides evidence of the growing attractiveness and potential businesses targeting Africa’s middle classes, as highlighted by the large share of healthcare, consumer goods and financial services IPOs, which raised $1.1 billion, $544 million and $458 million, respectively.