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| Demand shifts on agriculture, investment rises |
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| private equity still on rise |
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| mining: Africa will top Asians' Wishlist |
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| renewable projects are on the rise |
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| oil and gas sectors will continue to be of strategic importance |
The robust economic growth, expanding market size and
various reforms have improved the attractiveness of the continent to investors;
Foreign direct Investment (FDI) inflow increased by 5% to US$50 –billion in
2012, even as global numbers fell, according to the 2013 World Investment
Outlook.
So, which trends can companies that are looking for growth
opportunities in Africa expect to see in 2014?
Trend 1
Private equity
Still
on the rise
The market for private equity and
venture capital investment in Africa is growing. 77 deals have so far been
made across a wide range of sectors in 2013. Fund-of-funds are bringing in new
investors from all corners of the globe, development finance institutions are
increasingly co-investing or making direct investments, and many new
Africa-focused funds are being launched.
With strong fundraising targets
already announced from firms such as Carlyle and DPI, we are definitely seeing
an increase in commercial capital finally coming into Africa. Bigger deal sizes
are projected because of the commercial capital uptick, although purchasing
prices may jump as the larger GPs compete in this space. However, this is yet
to be seen, before we can truly answer the question, Is Africa still
competitively priced?
Despite the obvious challenges
involved in executing transformation via investments in the small-to-medium
enterprise (SME) space – including significant management time commitments and
the difficulty of achieving scale – there is great importance attached to
supporting local entrepreneurs and building a pipeline of future deals for
growth equity. Start-ups are essential as the engine of Africa’s growth and can
provide much-needed jobs in countries with high population growth figures. We
foresee – based on the rise of technological hubs in West and East Africa, for
instance, Konza Technology City in Kenya, and the growth of companies like
Nigeria’s iROKO - that one day the continent will spur the creation of an
African Silicon Valley.
I would see more African entrepreneurs
taking steps to attract funding in 2014, for instance focusing on developing a
sound business plan, seeking out best practices in business governance (e.g.
audited financials), and networking with potential investors.
2014 will continue to be a period of
‘Africans doing it for themselves’. Almost every week we take part in or see
investment forums organised by different African countries that are
strengthening their own economies through greater transparency, better
governance, campaigns to fight corruption – all efforts to increase FDI flows.
However, in a continent with 54 countries it is unhelpful to generalise, but
broadly, there are many reforms that have been adopted to address these issues,
which are working effectively.
Perhaps in the coming year, investors will drop the old
narratives around what business means in Africa and acknowledge that it is
rapidly evolving.
Michelle
Kathryn Essomé
CEO
African
Venture Capital Association
Trend 2
Africa will top Asian investors’ wishlists
2013 was a tough year for the mining sector
in Africa. This was principally due to lower commodity prices, a drop in
investor confidence due to lower returns over the last commodity super-cycle,
and continued increases in operating costs. This was evidenced by a reduction
in transaction deals and project and exploration funding.
So what does this mean for 2014 and where are
we likely to see investment in Africa’s mining sector?
It is forecast that from 2010 to 2050, annual
steel, iron ore and coal consumption will increase by 59.4%, 47.1% and 129.9%,
respectively. With the continued expected growth in China’s demand for urbanisation,
Africa with its abundance of natural resources will be at the top of most Asian
investor wish lists.
African countries that will most likely benefit
from investment in 2014 are:
Gold: Burkina Faso, Ghana, Guinea, South Africa
Copper / Cobalt: DRC, Zambia
Iron Ore / Magnetite: Cameroon, Guinea, Mauritania, Mozambique,
Sierra Leone
Coal (Thermal and Coking) :Botswana (Thermal), Mozambique
(Coking), South Africa (Thermal)
Uranium: Namibia, South Africa
Steel and construction
sector: Demand
for acquisition opportunities in iron ore, copper, cobalt, hard coking coal and
manganese is primarily determined by China’s urbanisation and steel industry.
In addition, Africa’s infrastructure development will also drive steel demand.
Power generation sector: A key developmental
constraint for Africa is the lack of power security. Thermal coal could present
significant potential investment opportunities for Independent Power Producers
(IPP’s). South Africa’s coal industry is expected to experience large growth
in the near future motivated by Eskom’s demand for regional electricity
generation and thermal coal potentially being declared as a strategic
resource. On a global level, uranium demand is also expected to increase due
to a requirement for cleaner energy.
Investment sector: With gold currently
trading at around US$1200 per ounce and uncertainty around the US fiscal
crisis, gold mines in Africa could represent an attractive investment
opportunity. However, gold producers in Africa do have some of the highest
costs of production, which could represent excellent value where costs can be
significantly reduced.
Despite a tough 2013, a
number of opportunities may present themselves in the coming year as major
producers look to divest out of non-core and / or high cost assets. However,
finding a possible suitor for these assets will be directly linked to the
attractiveness of future returns of these assets. A number of African
countries, such as the Democratic Republic of Congo (DRC), have high yielding
deposits, but investors need to recognise that these potential high return
investments come with significant risks.
Werner Jacobs
Senior manager,
corporate finance and metals &
mining KPMG
Trend 3
Oil and
gas sectors will continue to be of strategic importance
Gas boom could
attract more junior companies
There are a few
licensing rounds set to close in Africa. The most exciting, in my opinion,
are in East Africa, in Kenya, Mozambique and Tanzania. The region has seen
multi-billion dollar M&A activity in recent years, which has brought
success for both small and large companies.
Chinese, Japanese and
Indian state-backed companies have been buying stakes from the bigger operators
in East Africa. However, the successes of two junior London-listed companies,
Cove Energy Plc and Ophir Energy prove it is not only the majors that can be
successful in Africa. Cove Energy was acquired for about US$2-billion by
Thailand’s PTT in 2012 after gas discovery in the Rovuma Basin, offshore
Mozambique, while Ophir Energy this month sold 20% stake in its Tanzania blocs
to Singapore-based Pavilion Energy for US$1.3-billion.
More of such deals
should be expected for two reasons. Firstly, East Africa’s geographic
proximity to Asia makes it a very appealing source of gas supply. Secondly,
holding stakes in the export industry itself could eventually translate into
Asian companies securing cheaper imports for their respective countries.
Even though it might
be many years before East Africa exports gas, assets in Mozambique and
Tanzania could well stay in demand as potential acquisitions for Asian
companies. The licensing rounds in Mozambique and Tanzania could therefore
still be a great opportunity for smaller players to get their foot in the door
and work towards a multi-billion acquisition by a major player.
Dr
Duncan Clarke African
oil expert and chairman Global Pacific Partners
Turning point in
Africa’s oil sector
The oil sector has
been one of strong upward movement in acreage opening, drilling exploration
success, oil and gas discoveries, net reserve additions, corporate and capital
inflows with rising oil and gas production and growing net exports. A few
independents have been able to raise easy capital for upstream ventures in the
last few years. Impending global monetary realignments soon to be expected,
along with worldwide game-changers in energy (shale gas/ oil, Mexico’s oil
reform, potential Iranian re-opening) could make fundraising more constrained.
The current “winter
of discontent” could potentially impact the oil sector for decades, if not
curbed. From the downside in North Africa, the unrest across the Sahel,
instability in Central and the horn of Africa to infrastructure challenges,
controversial law reforms and resource nationalism talks across East and
Southern Africa, all these factors present a riskier investment profile with
serious implications.
Africa’s
hydrocarbon future should be a stellar one, given its rich resource base and
putative corporate investment interest worldwide. I hope that these “turning
points” will be temporary, and not become tipping points for a continent for
which the unlocking of natural capital in oil and gas promises so much in the
21st century.
Mark Young
Trend 4
Renewables projects on the rise
The
biggest trends in renewable energy (RE) in South Africa will remain largely
unchanged from 2013. There is an ongoing annual allocation of 1000+ MWs under
the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP),
which will continue to attract the world’s RE investors, utilities and
pedigreed developers.
Onshore
wind and solar photovoltaic (PV) will remain dominant RE categories with a
steady churn of projects taking place using the other kind of solar power
(concentrated solar power or CSP).
There
will be relative increases (off a low base) in biomass, biogas and possibly
some small hydro schemes.
For the
rest of Africa, certain countries will continue to progress and dominate RE attention,
mostly in West and East Africa due to demand size. Due to energy security being
the key driver, there will remain a large number of IPPs procured on an
unsolicited basis, but many countries are now moving towards a more regulated
procurement regime. An example is Get-Fit in Uganda or auction processes that
are following the South African public procurement model.
The
broader African RE market will grow exponentially in 2014 off a relatively low
base. Competition will be intense.
Financing:
Financing trends will stabilise into 2014. In 2013, there was a fundamental
shift in the traditional leveraged project finance templates towards
captive-balance-sheet funding from large international utilities. The most
significant example of this was Enel Green Power, the large Italian company
with a global footprint. Enel Green Power, which won bids worth 513MW in South
Africa’s REIPPPP third window, will build four solar PV plants and two wind
projects. The market size in 2014 will dictate that leveraged project finance will
continue to play a dominant role in financing.
Wind is
now close to grid parity (some Round 3 projects are even priced below the Eskom
national average electricity price) and solar PV is not far away. As a result,
the publically dominated RE markets will see a trend towards private off-takers
entering the fray in 2014, albeit from a relatively low base.
Manufacturing:
Manufacturing for the renewable energy sector will rise in Africa, but only
marginally due to a lack of clear global competitiveness and the relatively
small size of the local and regional markets. A larger market is needed to
underpin manufacturing investment. Assembly plants will dominate for certain
wind and solar components, but there will not be full vertical integration of
manufacturing for some time.
Solar
advantages: Over the medium-term, solar PV will continue to hold the edge ahead
of the other RE categories. This is driven by the fact that it is solid-state
technology and consequently carries much lower risk and is more predictable. It
is achieving continued price reduction year-by-year, making its rate of
reduction in generation cost unparalleled. As storage technology improves,
more CSP could come onto the market as it can generate more of a baseline-type
profile. CSP also enjoys strong government support in South Africa. However,
more efficient and cheaper storage will also make solar PV much more
competitive.
Water
power: Political agreements have been reached on the huge Inga 2 project in the
Democratic Republic of the Congo. There is expected to be a flurry of activity
as private sector and local business interests capitalise on the political
agreements reached. It seems that Inga 2 will now happen but will remain
highly politicised. Some small hydro opportunities will present themselves. If
low-tech, off-grid options are to become viable in rural areas, they often
require soft or patient capital in the form of grants (or CSI funding) to roll
out, as they are not as economical as the larger grid-connected solutions.
Christopher Clarke
Founding partner, Inspired Evolution Investment
Management
Trend 5
Demand
shifts in agriculture, investment rises
Demand shifts:
Climate has a big effect on agricultural revenue. Equally, world and local economic
cycles have a profound impact on the revenue streams of agriculture. This is
especially true now that agriculture has been integrated in to the value chain,
and it is no longer just focused on primary production. In analysing GDP
growth above inflation, huge demand shifts have been predicted, with almost no
growth in demand expected in developed countries - and major growth potential
being shown in developing countries.
Production to
outstrip demand in short run: The agricultural sector will not be in a position
be to take advantage of the demand gap. This is because Latin America and Africa
have the potential to increase agricultural production by 300%. Growth in production
will therefore outstrip the growth in demand. This will keep commodity prices
in check and limit production margins.
To survive, farmers
will have to continue to become more productive through the adoption of new
technology and the utilisation of economies of scale. If they do this, they
can remain competitive. South Africa can also expect more competition from the
rest of Africa, as the growth in agricultural production will come from a variety
of countries.
Soft commodity prices
to soften and move sideways: Prices of soft commodities increased
substantially during the last decade. This was mainly the result of an increase
in demand in developing countries: good economic growth (above inflation) resulted
in consumers becoming richer; thus their spending on food and fibre increased.
Prices were further
supported by the creation of new markets for agricultural products in the
form of renewable energy. Higher commodity prices stimulated investment in the
agriculture sector, with a resulting increase in production. This, combined
with a slowdown in economic growth (demand) after the financial crisis led to
prices flattening and, in some instances, even declining.
Given the expected
growth in production, it is expected that soft commodity prices will move
sideways. The only potential counter to lower commodity prices is the creation
of new markets for agricultural produce like the biofuel market.
Agriculture
investment opportunity: At present, interest rates are at a 36-year low and are
expected to remain low over the next few years, creating the ideal opportunity
for capital investment to gain economies of scale and/or to improve productivity.
This explains the
continued acceleration in the consolidation of farming units as well as record
sales for tractors and implements. This is in spite of an increase in the cost
of capital, due to the financial crisis in 2009, as well as a decline in
investor confidence due to the downgrading of South Africa’s credit rating.
The predicted
continuation of the drought of the last two seasons may have a negative impact
on future investment, as this will impact negatively on the reparability of the
industry in the drought-stricken areas.
In general,
agriculture is doing well and still remains one of the few save havens for
investors looking for capital growth. Property prices are expected to continue
to grow by at least 10% per annum due to the profitability of the agricultural
industry, and due to external investment from lifestyle buyers. A third reason
to support the idea that property prices will continue to rise can be found in
the government programme of buying land for restitution and redistribution.
China, Brazil
and South Africa will continue to drive investment in Africa
Ernst
Janovsky
Head:
ABSA Agribusiness Centre of Excellence ABSA
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