Mark Taylor & Barry Hawke
With the advent of the Great Global Lockdown, it seems appropriate to focus on how the market in Africa is developing, with particular emphasis on South Africa as one of Africa’s most sophisticated financial markets.
The good news is that investors are still investing in Africa. However, the landscape has changed considerably. Capital has become constrained since the advent of lockdown, resulting in businesses that are likely to either survive or even thrive post the pandemic being starved of funding. Many investors have observed this and are seeking legitimate opportunities. The consequence is that an increasing number of capital-seekers have realized that they need professional and experienced help from credible corporate finance advisors. This has been evident in the significant increase in enquiries that Neu Capital Africa has received since the lockdown started in South Africa.
Our observations on investor behavior shifts, based on various conversations with investors during April and early May 2020, are the following:
1) Mezzanine debt funds have always had a varied approach, possibly because of the nature of the instrument, being a hybrid of debt and equity. Despite the stimulatory reduction in interest rates in many countries, required returns for mezzanine or hybrid debt have not dropped and, in some cases, may even have increased. Security packages have also become more stringent. Mezzanine funding offers a credible alternative to any form of equity issue during periods of depressed valuations. This is specifically applicable for listed companies right now where weak share prices make equity capital raises prohibitively dilutive.
2) Traditional bank lending has become considerably constrained.
a) Large institutions (banks, pension funds) which are regulated are subject to close scrutiny of their liquidity and the requirement to conduct business prudently. Evidence of this was the recent recommendation by the South African central bank that banks suspend dividend payments and executive bonuses to shore up capital. The result is banks are obliged to focus first on their own balance sheets, and then perhaps consider their existing clients. This leaves little room for new clients with good investment opportunities.
b) Government-backed guarantee schemes for businesses, such as that announced in SA at the end of April, are designed to enable banks to release modest amounts of essential working capital to enable businesses to survive. Similar initiatives will likely be taken in other African countries. They do not, however, resolve the $5m to $50m mid-market funding gap for growth or acquisition capital.
3) Unlike banks, Private Equity funds can take large risks and over longer timeframes because they are rewarded with equity returns to compensate them for this risk. PE fund investment appetite is affected by several considerations:
a) PE funds can be located along a continuum between those which have a high proportion of dry powder and those which have fully deployed their capital into investments. In assessing this, one would need to take into account possible emergency funding for the PE fund’s existing portfolio investments. If a PE fund has plenty of dry powder, it is loving life because capital seekers have started to realise that prices of assets have fallen, and PE funds have greater negotiating leverage than prior to the Great Lockdown.
b) PE funds source their capital from Limited Partner investors which typically require that a PE fund must exit all of its investments within 10 years. As the PE fund approaches the end of its life, pressure mounts to exit investments. If the market is weak, Limited Partners may grant extra time grace to complete exits. However, it appears that some Limited Partners are becoming less willing to extend the life of PE funds. This results in PE funds being more flexible on exit price. This also suggests that some Limited Partners’ have their own liquidity constraints.
4) Multilateral and Development Finance Institutions are likely to remain an important source of capital.
a) DFIs, typically guided by foreign government policy, will take longer to implement changes and will have legacy programmes which will continue in the short term. However, expect a shift of focus to essential services, economic re-ignition, poverty alleviation and health interventions.
b) Much of the momentum towards Impact Investment in the mid-market in Africa has been led by DFIs and family offices, and the shifts of focus listed above are likely to be accelerated by the impact investment community.
c) We have also noticed some low-key re-direction of capital from African initiatives, we suspect, to fund more immediate home country demands.
5) Sovereign Wealth Funds will also remain important investors in Africa. Note that those SWFs which are dependent on oil or other resources, but which had not protected themselves against the precipitous drops in prices, will be reviewing their capacity for allocating capital to Emerging Markets in the short to medium term. The SWFs which have more resilient sources of capital will fill the vacuum but expect that this kind of funding will be a little less accessible.
6) Family Offices are harder to categorise. They tend to have more flexible investment mandates. Family offices also vary broadly between those which are preserving a legacy (ie more ‘risk off’), and those which are entrepreneurial (ie more ‘risk on’). The family culture and relationships also play a role in this nuanced dynamic. Pleasingly, we have found that a number of family offices are actively seeking investments. In addition, some have made very substantial pledges to support distressed businesses through philanthropic initiatives. Family offices can prove to be a great source of both capital and network opportunities during times of crisis like the current pandemic.
In our own assessment of opportunities, we have favoured working with established businesses which have a strong and cohesive management team, good economics, and prospects for recovering strongly in a post-Lockdown world. In future articles we will share our perspectives regarding which types of businesses Neu Capital Africa thinks will thrive across the continent.
Mazars corporate finance division and Neu Capital Africa – now rebranded as Cala Capital Africa – have announced the consolidation of their capital raising advisory capabilities to establish Africa’s leading mid-market capital raising practice. The partnership will see Mazars corporate finance division combine its technical skills and extensive footprint – which includes capabilities to service […]