Africa ex. South Africa
The median EV/EBITDA multiples of listed equity across Africa Ex. SA have trended downwards since the end of 2014. Conversely, median private equity EV/EBITDA multiples across Africa Ex. SA have steadily increased since June 2012. Changes in growth expectations and perceived risk do not appear to adequately explain this price increase. Growth prospects are currently muted when compared to earlier in the decade, and although there has been some decrease in risk in specific countries over this period, it does not appear to have driven the price increase.
For the last two years ended June 2019 and June 2020, private equity multiples have exceeded those of listed multiples. Although this appears counter-intuitive as a result of the liquidity discount that should apply to prices in the private markets, the lack of liquidity in many African listed markets, the high cost of compliance, and the resultant lack of capital available to these markets complicate a direct comparison.
During the year ended June 2019, multiples increased by 6.5%, in line with lower risk perceptions and the large supply of capital available for investment. For the year ended June 2020, the impact of the pandemic is partially reflected by a decrease of 7.3% in multiples.
The muted decrease in pricing, despite the large increase in perceived risk and reduction in growth outlook, could be driven by competition from strategic and financial acquirers for attractive investment opportunities. With an increase in the number of deals taking place via auction in recent years, prices are likely to remain high.
A final factor to consider is that the number of large, established companies in Africa is limited, as previously discussed. As a result, private equity on the continent has more of an early-stage growth equity approach, often investing in investment in smaller, earlier-stage companies with higher risk, but also higher growth expectations. With earnings still growing rapidly in the early stages of operations, multiples calculated using historical earnings are often high. Rising prices and low leverage on deals across Africa Ex. SA may put downward pressure on future returns in the private equity space.
In line with listed pricing, the median South Africa private equity EV/EBITDA multiple has been steadily decreasing since June 2018. The country’s most recent challenges stem from the global COVID-19 outbreak. Due to the measures implemented to limit the spread of the virus, a widespread disruption across industries has resulted in a decline in economic activity, which is expected to lower asset quality and earnings, as seen in the decline in the median private equity EV/EBITDA multiple from December 2019 to June 2020.
The pandemic is expected to reduce demand for South Africa’s exports, weaken industrial, air freight and mining activity (amongst others) and increase the already significant levels of unemployment.
South Africa remains highly exposed to growth slowdowns in China and the EU, the decline in international tourists, and downward pressure on commodity prices. Sustained fiscal deficits will see public debt continue to rise.
The effect of the lower domestic real interest rates, increased global risk-off sentiment and slow domestic growth, will place the South African rand on a depreciatory trend over the coming quarters. Although, the extraordinary levels of quantitative easing occurring in developed markets is likely to trigger another search for yield, which emerging and developing markets are set to benefit from.
In the US, the availability of debt is consistently a determinant of the multiples paid for PE transactions. In the US, multiples are typically determined by adding a relatively fixed equity margin to the amount of debt that can be raised.
Of the Africa Ex. SA transactions with sufficient data to analyse, 56% of companies targeted for acquisition between 2009 and 2020 reflected a net debt position on their balance sheets. The average Debt/EBITDA position of these companies was 1.60x over the period.
The consistently low levels of debt indicate that the private equity industry throughout 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.
South African companies have largely followed a similar trend: In respect of South African transactions with a reported Enterprise Value, approximately 60% of companies entered by PE funds in the 2009 to 2020 period reflected a net debt position on their balance sheets. The average Debt/EBITDA position of these companies was 1.95x over the period. The sophistication of the South African debt market in comparison to other African countries can be considered a contributing factor to the slightly higher debt levels.
The debt level in African private equity increases marginally with transaction size but hasn’t risen higher than 2x Debt/EBITDA since 2011. Compare this to the global norm, where Debt/EBITDA rises more quickly and to a higher level as company size increases.
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 in private credit, with several private credit funds being raised in recent years.