Over time

As discussed in previous sections, the median EV/EBITDA multiples of listed equity in Africa have trended downward since the end of 2014. Conversely, median private equity multiples have steadily increased.

Let’s consider the increase in private equity multiples with reference to the trade-off between growth expectations and risk perception in Africa. When listed equity multiples started a slow downward trend in mid-2014 when the commodity cycle weakened, private equity multiples did not follow suit, but held firm all through 2015. In 2016 private equity multiples did weaken as expected and the relationship between listed and un-listed equity multiples appeared to briefly normalise.

The investment and growth outlook remained challenging during 2017 as the commodity cycle started to turn again. The continued impact of the downturn on countries and political uncertainty in some of Africa’s largest markets, continued to dampen listed market multiples. Private equity multiples, however, showed a marked improvement. The apparent convergence of listed and unlisted multiples could be the result of the gradual recovery of prices on the listed market, which has been slow to reflect improvements in investment conditions, or it could be the result of factors that specifically influence the pricing of private equity, but not listed equity.

One of these factors could be increased competition for attractive investment opportunities. A substantial amount of dry powder in the market and an increased number of deals taking place via auction in recent years, could be a reason that prices are being driven up for high-quality deals.

In the US, debt consistently remains a determinant of the multiples paid for private equity transactions and the availability of debt within the US market remains a contributor to fluctuations in multiples. In the US, multiples are typically determined by adding a relatively fixed equity margin onto the amount of debt that can be raised.

Of the African transactions with reported Enterprise Value, just over half of companies entered by PE funds in the 2009 to 2017 period reflected a Net Debt position on their balance sheets. The average Debt/EBITDA position of these companies was 1.9x over the period, which drops down to 1.63x if 2010 is excluded. The median Debt/EBITDA multiple was 1.27x at 2017, which represents a decrease compared to 2016.

The consistently low level of debt indicates that the private equity industry in Africa is still not debt driven, with poorly developed local debt markets. Most fluctuation in multiples relates to investors’ availability and willingness to provide equity funding.

PE firms do provide financing where obtaining affordable debt is not a viable option, as is the case across many African countries. There has also been a significant uptick in interest for private credit, with a number private credit funds being raised in recent years:

• USD 226.5m – Investec Africa Credit Opportunity Fund 1 (2015)
• TLG Capital – Africa Credit Opportunities Fund (2016)
• USD 280m – Vantage Mezzanine III (2017)