As was discussed in more detail 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 EV/EBITDA multiples have steadily increased since 2011. There is a convergence of private equity and listed equity multiples at around 8x EV/EBITDA in 2018.
The increase in private equity multiples should be considered with reference to the trade-off between growth expectations and risk perception in Africa. Growth expectations in the most active Africa PE markets in 2014 were 7% (Nigeria), 3.3% (South Africa) and 6% (Kenya). Real GDP growth forecasts for FY19 are 2.15%, 1.20% and 5.84%, respectively. Overall economic growth then is not likely the driving factor. Has the reduction in risk on the continent been large enough to cause such an increase in multiples? Perhaps it’s more of a case of reduction in perceived risk, as investors grow more comfortable with the African investment landscape.
Another contributor to higher EV/EBITDA multiples is increased competition from strategic acquirers for attractive investment opportunities.
A final factor to consider is that the number of large, established companies in Africa is limited. As a result, the nature of private equity on the continent may be taking on a slightly more early-stage growth equity approach to African PE. This is achieved through investing in earlier-stage companies with higher risk, but also higher growth expectations. Earnings are still ramping up in the early stages of operations, resulting in a higher historic multiple being paid.
Rising prices and low leverage on deals may put downward pressure on future returns in the private equity space. Nonetheless, the upward trend in multiples continues to persist.
In the US, debt consistently remains a determinant of the multiples paid for PE 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 2018 period reflected a Net Debt position on their balance sheets. The average Debt/EBITDA position of these companies was 1.10x over the period, which drops down to 0.95x if 2010 is excluded. In 2018, the median Debt/EBITDA multiple was 0.46x, which represents a decrease of 64% compared to 2017.
In 2018, the median Debt/EBITDA multiple was 0.46x, which represents a decrease of 64% compared to 2017.
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. Instead, African PE is driven by earnings growth and multiple expansion. 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 was a significant uptick in interest for private credit, with several private credit funds being raised in recent years.