It is often difficult to interpret changes in private equity (PE) market prices over time because many of the drivers are unobservable. This Bright Africa Private Equity research focuses on the PE ecosystem in 2021 – including fundraising, dry powder, investments, and pricing – and considers some interesting trends.
Generally, the same factors that influence PE market prices also influence any investment’s price. For example, the balance between supply and demand of capital influences pricing, something that is well illustrated by buoyant equity markets and high prices paid for debt instruments (resulting in low yields) whenever central banks use quantitative easing as a policy instrument.
Within the market, the level of fundraising for PE funds and capital allocated and invested by other investors in the private markets, determine the supply of capital. To gauge this supply, we examined fundraising and dry powder levels for PE funds and deal-making activity. The fundraising directly reflects the capital raised by investment funds. At the same time, deal-making activity is indirect evidence of all capital available in the markets and supply of investable assets – this analysis has revealed some interesting changes and more on this can be found under our Investment Activity section of this report.
Historically, the volume of exits along with the quality of exit routes available in Africa was of central concern for investors looking to access African PE. This is evident in a recent African Private Equity and Venture Capital Association (AVCA) PE survey where many LPs and GPs cited limited exit opportunities as a challenge for PE fund managers in Africa over the next three years. However, data shows that exits are taking place in Africa: there were 270 exits recorded between 2015 and 2020 on the continent. In our Exits section, we look at the exit trends and analyse the recent developments.
The perception of risk and returns, compared to other investment opportunities, influences pricing. To shed some light on this, we explore the theoretical cost of equity, which reflects the perceived risk of the different markets. The gradual recovery following the dramatic impact of Covid-19 has resulted in a normalisation in perceived risk.
Growth expectation is another factor that contributes materially to pricing. Africa’s Overall GDP contracted by 2.4% in 2020, which is less than that of global GDP (3.6%), the eurozone (6.7%), and the Americas (4.3%). According to EY’s Africa Attractiveness Report 2021, the continent is projected to grow on average by 4% per annum until 2025.
After examining all of these factors that influence pricing, we then looked at price trends in both South Africa and Africa ex SA. We observed a significant difference between South Africa and the rest of the continent driven by notable differences in capital markets and the perception of risk and returns.
The perception of risk and returns, compared to other investment opportunities, influences the PE market. We explore the theoretical cost of equity, which reflects the perceived risk of the different markets.