The talk of distressed asset investing in Africa is growing. But the purchase of such assets, and related debt, is not exactly booming, with some activist and hedge fund investors frustrated and other parties partially satisfied. By Kurt Davis Jr.
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The Africa growth story has its hiccups (like any other growth story). That said, the region has been one of the globe’s most exciting and hottest markets for private equity investment.
More than 200 fund managers control north of $30 billion targeted at Africa, compared to about 10 Africa-based funds in the early 1990s. The story for private equity in the region is very straightforward, with capital markets in many parts of the continent still relatively underdeveloped and banking still underserving the credit needs of the market.
The large majority of the private equity funds have effectively targeted growth equity in the region.
A total of $6.5 billion has been raised for African private equity from 2011 to 2016, according to the African Private Equity and Venture Capital Association (AVCA), with a total reported deal value over the same period of $22.7 billion for 900+ deals. In 2016 alone, 145 deals were reported totalling $3.8 billion, according to AVCA.
Development finance institutions (DFIs) have been adamant supporters of the African growth equity space, accounting for a majority of the capital in the space. Similar support has been extended to the impact investing.
Such capital alliance with the impact space, according to some cynic investors, has some fund managers labeling $50million+ deals as impact investments. That aside, distressed investing has faced the greatest push back and consequently least support.
The reality is that, despite strong economic growth numbers in many regional countries, commodity prices and country-specific challenges continue to create opportunity for distressed investment (and restructuring).
Consider the recent restructuring of Kenya Airways through a debt-for-equity exchange where debt holders wipe out significant portion of old equity holders and took ownership themselves. If the opportunities can be capitalized at that level of publicity and spotlight, then distressed asset investors should be excited.
Let’s explore the sectors offering the best opportunities for distressed asset investors.
Oil & Gas
No sector has arguably felt more pain in Africa in the last few years. The movement of global oil prices from nearly $115 in June 2014 to sub-$28 in January 2016 killed balance sheets in the region. Oil and gas companies lost value and ate up cash.
The banks and government coffers backing both companies and projects equally lost value and capital. The Brent price has recovered, with prices hovering around $63 (as of November 23, 2017).
The increased cash flow is boosting hope and covering capital costs (largely interest costs). But these changes have not resuscitated balance sheets and strengthened capital structures. Many companies require restructuring with few distressed investment players in sight.
Nigerian companies are calling on old funders to add new capital with mixed results. The scenario there only highlights the demand for distressed asset investors. Trading on bad debt in the global market is not new….see Venezuela.
‘There is a (pretty?) penny to be made’, as the saying goes, in countries such as Libya, the Democratic Republic of the Congo (DRC), and Equatorial Guinea, among others.
Metals & Mining
Observers will talk extensively about oil and gas in Africa (and for justifiable reasons with major countries, such as Egypt, Angola, Nigeria, and Algeria, dependent on one or both commodities).
Oil, as previously discussed, is up drastically today compared to early 2016. Gas is also up with another 3 percent gain estimated in 2018. Still, it is the challenges with other commodities hitting a larger proportion of the African countries.
Coal prices have jumped nearly 30 percent in 2017, benefiting companies in countries such as Mozambique and South Africa. The price could go either way in 2018 for companies just finding stability (after a couple of tough years), as prices will heavily depend on environmental policy and subsequent coal demand in China.
Iron ore is expected to fall around 10 percent, troubling producers in Mauritania, Algeria, South Africa, Morocco and Zimbabwe. Producers in both minerals would prefer less volatility as their capitals structures are unstable and their government either does not support them at the moment or will fall short of the sector’s demands as government coffers still require some time to regain their financial footing.
Producers in lead, nickel and zinc may get a boost in 2018 but gold producers could see a fall in prices. All in all, this space could see a significant amount of volatility which is troubling for cash flows, valuations, and capital structures in the African region.
Malls and shopping centers are very much core to life in Africa. The construction of these new buildings and centers in Africa has slowed in the last few years, with many big real estate investors sitting on ‘dry powder’, until the retail sector rebounds.
Some investors are always optimistic that the rebound is around the corner. But the reality is that consumer spending is not expected to increase in the near term.
Prior estimates on consumer spending were overstated in some countries and other estimates have been thwarted by the struggles with the ‘very new’ yet economically fragile middle class Africans.
Retailers, accordingly, have suffered recently with two problems: (1) under-performance on top line numbers (i.e., revenue) and (2) over-leverage to support expected (but lacking) growth with consumer spending.
Nakumatt is the perfect example of this troubling situation. Tuskys bailed out the infamous Kenyan brand. But Nakumatt is not exactly a rarity in the African context with many family businesses-turned-conglomerates highly leveraged and in need of a restructuring and capital infusion.
Private equity funds have tried their best to engage the distressed retailers, yet family owners have pushed back, unwilling to relinquish a more than a normal percentage of equity.
Buying the troubled debt also cannot be an acceptable growth equity strategy for private equity funds (in the eyes of growth focused distressed fund investors), thus creating opportunities for those with a more ‘distressed’ appetite.
Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at firstname.lastname@example.org