Over time versus listed equity
Africa ex. South Africa
The median EV/EBITDA multiples of listed equity across Africa have trended downwards since the end of 2014 up until June 2020. Conversely, median private equity EV/EBITDA multiples across Africa ex SA have steadily increased since June 2012.
For the two years ended June 2019 and June 2020, the private equity multiples exceeded those of listed multiples. This appears counterintuitive as a result of the liquidity discount that should apply to prices in the private markets. However, the lack of liquidity in the listed markets, the high cost of compliance, and the resultant lack of capital available to these markets complicate a direct comparison.
For the period ended June 2021 a more conventional relationship between listed and unlisted multiples is observed. This is the result of a recovery in prices in the listed market and a decline in the private markets. While there may have been a general risk-off sentiment towards Africa, recent reports published by Preqin observe that investor interest in alternative investments in the rest of the world is rising. The reports recognise a strong global exit market since the height of the pandemic, which has translated into high returns for alternative funds. Historically, high entry prices with muted growth resulted in pedestrian African PE performance. The lack of new capital committed to the markets has allowed pricing to normalise as the market reaches equilibrium, increasing prospects for market-related returns.
For the year ended June 2020, the impact of the pandemic and negative market sentiment resulted in a decrease of 7.3% in PE transaction multiples. The median multiple further declined by 16.7% for the period ended June 2021 as lower fundraising and ongoing negative market sentiment affected pricing.
According to the African Development Bank, African economies experienced the worst recession in more than half a century following the pandemic. They were expected to grow by 3.4%, in real terms, in 2021 and still more in 2022, underpinned by an expected resumption of tourism, a rebound in commodity prices, and a rollback of pandemic-induced restrictions. The private market pricing appears to be attractive on a forward-looking basis.
South Africa
By June 2020, the novel coronavirus had reduced demand for South Africa’s exports, weakened industrial, air freight and mining activity (among others), and increased the already significant levels of unemployment. The high exposure to growth slowdowns in China and the EU, the decline in international tourists, and downward pressure on commodity prices further contributed to a poor economic performance in 2020. In 2021, there was a rebound in economic activity following the efforts to contain the virus. The South African budget, however, remains constrained. In line with listed pricing, the median South Africa private equity EV/EBITDA multiple steadily decreased between June 2018 and June 2020. However, the June 2021 median multiple improved by 18.8% year-on-year from 2020, with this trend continuing until the end of 2021. Interestingly, the rebound of South African PE prices over the June 2020 to June 2021 period was higher than Africa ex SA, possibly due to South Africa’s more robust financial system and established private equity industry.
Listed multiple values similarly have rebounded to pre-2019 levels. Emerging and developing markets continue to benefit considerably from investors seeking higher yields following the quantitative easing measures implemented in developed markets. However, with tampering efforts at play, markets such as South Africa stand to face risk-off sentiment with funds being remitted.
In the US, the availability of debt is consistently a determinant of the multiples paid for PE transactions. Multiples are typically determined by adding a relatively fixed equity margin onto the amount of debt that can be raised. Of the Africa ex SA transactions with sufficient data to analyse, 55% of companies targeted for acquisition between2010 and2021 reflected a Net Debt position on their balance sheets. The average Debt/EBITDA position of these companies was 2.33x over the period. This is a considerable increase in the average compared to our last reported 1.60x multiple in the prior period. Possible factors contributing to this movement could be that the industry has become more aware of the purpose of debt and the ability to achieve enhanced returns. Also, investors are slowly experiencing a mindset shift around debt and the risk it entails, specifically in Africa. Fund are managers focusing more on sustainable forms of debt, particularly from new, non-banking players.
The consistently low levels of debt indicate that the PE industry throughout Africa is not debt-driven and has poorly developed local debt markets. Instead, earnings growth and multiple expansion drive African PE. Most fluctuations in multiples relate 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 58.20% of companies entered by PE funds in the 2010 to 2021 period reflected a Net Debt position on their balance sheets. The average median Debt/EBITDA position of these companies was 2.0x over the period. The sophistication of the South African debt market in comparison to other African countries (collectively) can be considered a contributing factor to the slightly higher debt levels.
With the exception of the period ended June 2021, the debt level in African private equity increases marginally with size but hasn’t risen considerably over the years. Compare this to the global norm, where Debt/EBITDA rises more quickly and to a higher level as company size increases. For instance, more than 75% of total US leveraged buyout transactions in 2019 had an average Debt/EBITDA ratio of more than 6.0x (Bain & Company, 2020). Similar trends can be seen with Pitchbooks 2021 US PE data.
PE firms 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. Furthermore, the ability of private equity firms to obtain financing at an attractive rate forms an integral part of the value addition process on the continent, possibly also contributing to the rise in debt levels, as noted previously.