As African private equity markets evolve, the ‘sweet spot’ is to be found at the smaller end of the deal size spectrum, according to Nick Tims, managing director in the client group at Investec Asset Management.

In the latest report for the Investec Investment Institute Journal, entitled ‘Private Equity in Africa: The Challenges and the Promise’, Tims and Francois van der Spuy of Investec Asset Management’s Private Equity Team, said that capital shortage, underdeveloped and under-representative capital markets, as well as ongoing generational changes in consumer and resource demand – together these can create a perfect storm for the private equity opportunity in frontier markets.

“Africa epitomises this paradigm and today’s capital deployed by private equity players is only beginning to tap the continent’s opportunity set. The implications of increased private market activity for Africa’s capital markets and the quality of the continent’s continued growth are potentially very significant,” they said.

The report examines the landscape of increased private equity investing in Africa, given a marketplace where a substantial amount of capital is being raised, both by established African firms and by new entrants.

According to the report, a substantial amount of capital is being raised, right now, for private investments in Africa, both by established African firms and by new entrants, small and large.

However, the new phenomenon is the appearance of global private equity players – global behemoths looking to allocate to Africa – alongside larger fund raises by traditional players and South African players extending their mandates north of the border.

According to Van der Spuy and Tims, the last decade has seen tremendous economic development and increased financial sophistication, but also, in places, a stubborn lack of change, economic and geopolitical setbacks, and mismatches of capital supply and demand.

“Yet, whilst the challenges of investing across the continent are still significant, opportunities abound, and private equity has the power to influence growth and effect real change. This is set against a backdrop of a macroeconomic growth story which remains intact,” they said.

The authors said that the larger end of the African private equity market is currently over-crowded – as the small number of deals, combined with extra interest by international (especially, but not only, South African) corporate buyers, causes a squeeze in valuations.

“Many private equity fund buyers have increased their own direct investment programmes, especially development finance institutions and also the dedicated African fund of funds. In many cases they are all looking at the same small number of available deals,” they said.

However, moving down the deal size spectrum into smaller markets reveals an abundance of opportunity: “In many ways, this is the ’sweet spot’ for private equity opportunity on the continent, something recently highlighted by the International Finance Corporation.”

“The overall picture is still one of an undeveloped asset class in a huge opportunity set,” added Van der Spuy and Tims.