Sub-Saharan secondaries: charting new territory

There are attractive secondaries opportunities in sub-Saharan Africa given the limited competition for assets in the market, according to Mark McDonald and Henry Watson from Credit Suisse’s Private Fund Group. Below is an edited extract from their article from the book Private Equity in Sub-Saharan Africa: An introduction to fundraising, investing and growth opportunities, published by Private Equity International in February.

Secondaries in Africa is a very small portion of the global secondaries market, mirroring the fact primary fundraising on the continent has represented a relatively small percentage of the global total to date.

Still, fundraising was robust between 2005-08 and the significant remaining net asset value (NAV) in these funds mean that Credit Suisse’s Private Fund Group (CS PFG) expects activity in the African private equity secondaries market to increase as the primary market in Africa matures and the propensity for investors to rebalance portfolios continues.

Difficulties with due diligence in certain countries have historically restricted the number of secondaries investors in Africa. However, the increasing sophistication of general partners and limited partners and their growing familiarity with the secondaries market means a greater number of participants and more attractive pricing can be expected.

It would be reasonable to expect the secondaries market in Africa to converge in the long run on about a 2 percent share of the primary fundraising market, the rough share also seen in North America and Europe. However, CS PFG anticipates that, because of currency volatility and relatively longer hold periods for portfolio companies, the secondaries market in Africa may well end up larger, relative to the primary market, than in North America or Europe. While this trend may not manifest itself until there is a more mature private equity market, the African private equity market is especially suitable for entrepreneurial secondaries solutions.

The private equity market in Africa is much less developed than in North America and Europe, largely because the market developed so much later. Africa is relatively underpenetrated by private equity; the industry is both smaller and less mature than in other geographies, with the exception of a few highly experienced players. Since the private equity market in Africa took off much later, it is to be expected that the secondaries market is similarly less developed.

Secondaries transaction volumes increased in North America and Europe as LPs and GPs became comfortable and familiar with the concept of secondaries processes. Total fund liquidity options, multi-asset Dutch auction models and stapled primary fundraisings have been developed over time as the need and incentives for them arose. These various processes are already known to the LP community, especially to the more institutional investors. Given that the majority of the money invested in African private equity comes from experienced institutional investors that have been involved in the asset class since the 1990s and are au fait with secondaries processes, the secondaries market in Africa should develop much more quickly than it did in North America and Europe.

Despite private equity developing in Europe a number of years later than in North America, secondaries transactions in Europe do not lag behind those in North America in volume or sophistication. CS PFG believes the ratio between the volume of secondaries transactions, and the volume of African private equity fundraising, will converge with that seen in Europe and North America, and may even exceed it.

A small but significant number of secondaries processes have already been undertaken in Africa by the major institutional players that have the resources and facilities to perform effective due diligence on the underlying assets involved in secondaries transactions. In many cases, these investors have also had a head start by being existing investors in a fund or having close relationships with the more established GPs in the region.

Given the limited competition for assets in the market, there is an attractive opportunity for these major players to capture significant alpha, given that their pricing power is greater than in developed secondaries markets where smaller institutions and non-traditional buyers increase the competition for assets.

A first-mover advantage is evident here and with a large number of African private equity funds reaching the end of their terms over the next few years, investors with developed secondaries capabilities are likely to reap the rewards of increased dealflow and more openness to various types of liquidity solutions.

Mark McDonald is head of EMEA & Asia Secondary Advisory in Credit Suisse’s Private Fund Group and Henry Watson leads the group’s research activities.