Africa beats BRICS on LP charts

Limited Partner (LP) investors have selected Sub-Saharan Africa (SSA) as the most attractive investment region, the first time the region has beat the BRICs, according just released research from the Emerging Markets Private Equity Association (EMPEA).

SSA has catapulted to the top of LP charts, from number five in the previous annual survey, stealing attention from Brazil, China and India – which have historically dominated LP attention. Southeast Asia and Latin America ex- Brazil came in second and third, respectively, on the attractiveness index.

None of the BRICs made the top-three slots on the index – the first time this has been observed in the survey’s nine-year history. LPs are concerned that the BRICs have become very competitive, on the back of an increased supply of funds.

India is particularly being shunned for high deal entry valuations,  causing the country to continue on its downward slide, falling from sixth to ninth place on the index. The Middle East and North Africa region has dropped to last place. However, Brazil has seen the greatest fall in recent years since being ranked as the most attractive market for investment in 2011.

The LPs seem to be ready to back their increased appetite for SSA with actual commitments, with about 54% saying they plan to expand or make new commitments to the region.  This is compared to Southeast Asia and Latin America, ex-Brazil, which respectively came in second and third at 49% and 46%. SSA is also poised to see the largest influx of new investors, followed by Turkey and Southeast Asia, according to the survey.

LP reasons for trekking to SSA include the rise in the number fund managers with a track record, significant investment opportunities, low entry valuations, and fast-growing markets. Others also believe SSA is last frontier for global investing on the back of strong demographics, economic growth and improved regulations.

Improved appetite for Africa has also been helped by the growing number of LPs that are further along in executing their emerging markets private equity strategies. As such, a number are now diversifying beyond the BRICs, suggesting a maturation of portfolios. This is compared to previous years, when the bulk of the LP community was new to emerging markets and therefore selected the BRICs as their initial stop.

“We seem to be entering the next stage of growth for the asset class as track records begin to develop across SSA, Southeast Asia and parts of Latin America,” said Nadiya Satyamurthy, senior director at EMPEA.

LPs are in part being motivated by SSA returns expectations, as their confidence in the rest of the emerging markets dampens. The majority of LPs have  cut  their return expectations  for nearly all emerging market regions they are currently invested in, with the exception of  SSA,  where 64% anticipate net  returns of  at least 16% . This is compared to 57% who indicated the same expectations in 2012.

SSA’s political risks have also become less of a worry for LPs, with only 36% citing this as a deterrent – a significant drop from 66% in the previous survey. The investors are now also a lot less concerned about the low number of established GPs focused on the region, with only 36% expressing this as a concern- a decline from 50% in 2012.

LPs are on the other hand increasingly favouring General Partner (GP) teams that can demonstrate strong operational expertise in target sectors – a trend across all emerging market regions. The investors are also weighing in the length of the working relationship among GP team members, when selecting funds.

However, the LPs are less concerned about the presence of an anchor investor and the names of the other LPs in a fund. For SSA, the LPs continue to favour regional funds, as compared to country-specific funds – a trend observed in other emerging markets regions.

Overall, nearly 60% expect raise their commitments levels to emerging markets up to 2015.  The LPs continue to believe that emerging markets private equity will outperform developed regions.

EMPEA surveyed 112 LPs, with disclosed global private equity assets under management of nearly $430 billion and undrawn commitments of over $180 billion. The pool included public and corporate pension funds, insurance companies, sovereign wealth funds, banks, asset managers, endowments, foundations, family offices, development finance institutions, multilateral organizations and funds of funds.

See full survey here.