Investment activity in consumer discretionary has increased from 14% of total transactions as of June 2019 to 18% as at June 2020, and investment activity in consumer staples has grown by 20% in absolute terms for the period ended June 2020.
Consumer products have historically been the focus of private equity in Africa, due to the perceived opportunities resulting from the continent’s growing middle-class. Within consumer discretionary, investor interest has moved towards internet and direct marketing retail, education and communication services, and publishing; possibly showing a shift from focusing on a broader target market with lower income to targeting a smaller market, but with a higher income.
Internet and direct marketing retail companies are classified within the consumer discretionary sector, and this subsector has enjoyed a growth of 45%. Given recent events because of the global pandemic, the shift to online retail may be accelerated. E-commerce in many parts of the world is likely to be revolutionised and could present substantial opportunities. Africa’s large and growing young population is expected to continue to drive demand for online retail and services. According to the United Nations Conference on Trade and Development’s Business-to-Consumer’s e-commerce index of 2019, Mauritius, South Africa, and Nigeria are the top three most prepared African economies to support online retail.
Despite the positive drivers for online retail and services, several factors limit e-commerce’s expansion throughout the continent. These include high costs of broadband, low bank card penetration, and limited e-commerce payment options. Ironically, these factors present opportunities to invest in innovative infrastructure solutions that enable e-commerce in Africa.
However, investment activity in the IT sector (ex-internet and direct marketing retail companies) experienced a muted growth of 2% from June 2019 to June 2020. Investment in this sector in Africa mostly consists of internet software and services, application software, data processing and outsourced service companies. South Africa, Nigeria, Egypt, and Kenya attract the highest level of investment into the IT sector on the continent.
According to Bain & Company’s Global Private Equity 2020 report, technology companies in general, and software companies in particular, outpace other industries when it comes to generating value through EBITDA growth. As such, competition for deals will continue to rise as capital aimed at the sector grows. Globally, several large tech specialists raised significant new funds in late 2018 and 2019, including Vista’s USD 16bn Fund VII and Thoma Bravo’s USD 12.6bn Fund XIII. Other large firms have launched specialist tech funds, including Advent and Bain Capital (Bain & Company, 2020).
The other two traditionally large sectors for investment, financials and industrials, have attracted similar levels of investment in the current year when compared to the prior year. Industrials includes the construction, engineering, transport, logistics, equipment, and machinery industries. Investment is mostly in the light industrial sector with a focus on import substitution. The two above-mentioned sectors have contributed a total of 10% and 14% of the total investment activity as of June 2020, respectively.
According to Deloitte’s Private equity and the post-COVID-19 economic recovery in Sub-Saharan Africa 2020 report, in West Africa, opportunities are expected for investment into resilient sectors such as fintech (including mobile money and e-commerce), healthcare and healthcare-related support, as well as Fast Moving Consumer Goods (FMCG) in Nigeria.
The report further highlights the renewed policy focus on regional agriculture and agri-processing production and trade. An opportunity arises to break the reliance on food imports from outside of the continent and to become more self-sufficient in food production at a regional level – shortening supply chains and boosting intra-regional trade. Although the private equity industry rarely invests in primary agriculture, agri-processing and logistics could offer significant investment opportunities. From the 2019 to the 2020 period, investment across all major African regions in agricultural-related industries has doubled.
In recent survey responses from private equity practitioners across East, Southern and West Africa, participants indicated a focus on investments in manufacturing, food and beverages, agriculture, and financial services over the next 12 months. Although the survey was conducted before the onset of COVID-19, these industries are still expected to play a vital role in the continent’s economic recovery, particularly in light of disruptions of supply chains globally and a greater emphasis on local and Africa-based production and trade (Deloitte, 2020).