Africa is continuing to receive a high level of interest as an investment destination from investors from across the globe including Africa, the US, the EU and the BRIC (Brazil, Russia, India and China)countries. Interest in Africa has widened with more countries being considered for investment and a wider range of industries being targeted in Africa. Investors, however, continue to face challenges in pricing assets in African markets as the lack of data and a formal market impact valuation methodology.
These are some of the highlights from PwC’s 2014/15 edition of its biennial Valuation Methodology Survey (seventh edition). The publication titled ‘Africa: A closer look at value reflects the views of 77 financial analysts and corporate financiers in the following regions: 35 in Southern Africa, 19 in East Africa, and 23 in West Africa (including Francophone Africa). The survey aims to provide investors with information to value opportunities across the African continent but also tests its respondents’ experiences in advising on investment in the continent.
Jan Groenewald, Valuation & Economics Leader for PwC Southern Africa, says: “Since our previous survey in 2012, interest in Africa as an investment destination has continued to grow, with the continent often viewed as an investment market with the potential for significant growth and superior returns. Assets on the continent remain difficult to value with large expectation gaps between buyers and sellers.
“In this survey, we wanted to test any change in dealmakers’ perspectives on investment in Africa since our last survey in 2012. Our focus was on testing the development of investor interest in Africa with a focus on the countries of choice and preferred industries. Specific questions addressed in this edition of the report relate to general deals activity in African markets; the countries and industries that have attracted the most investor interest in Africa; and the challenges faced in performing valuations in African markets. In addition, the survey provides an overview of the valuation methodologies, assumptions and adjustments used in Southern, East and West Africa. ”
Increase in level of deals activity in Africa
The results of the survey show an increase in deals activity across Africa. In 2012, around 12% of respondents had considered more than 10 transactions on the African continent. This number increased to 39% in 2014 and may also be a result of the general improvement in deal activity post the 2008 recession. The increase in deal activity from 2012 to 2014 is most pronounced in the Southern African market.
Respondents also reported a high level of activity in most major markets across East Africa, West Africa and Southern Africa. The survey shows that a wider range of countries are being considered and the level of activity by industry is much wider than before. “This may be an indication of the increase in investor interest as the profile of investors has also widened,” explains Groenewald.
Countries and industries of choice for investment in Africa
Ghana, Nigeria, Tanzania, Mauritius and Zambia are considered the top five countries of choice outside of potential investors’ home markets. Groenewald noted that the next tier of 10 countries recorded only marginally lower scores than the top 5 countries in the survey, demonstrating investor interest in a wide variety of countries across East, Southern and West Africa.
The financial services sector remains a key focus area for all markets. The healthcare sector was highlighted as a target industry by respondents in the East African and Southern African regions. A wide variety of industries enjoyed prominence for example in Southern Africa, the mining industry still enjoyed some focus, with hospitality in East Africa and retail and consumer goods in West Africa being key focus areas.
Factors motivating investor interest in Africa
The importance of growth as the primary driver of investor interest in Africa is again emphasised in the survey. Most respondents (82%) agree or strongly agree that growth is the primary driver of investor interest in African markets. Furthermore, there is a strong drive to diversify away from low-return markets (75%). On a secondary level, the improved risk profile of African markets, better quality information and improved financial reporting standards were not considered to be significant drivers of investor interest in African markets.
Valuations in Africa
Purpose for valuations in Africa
The survey results show the majority of transactions are still being performed for the analysis of potential investments. A significant number of valuations are also being carried out in respect of African targets for African investors in the same country. One change worth noting is an increase in interest from pan-African investors in African opportunities.
Common challenges in performing valuations in Africa
There are significant challenges in performing valuations across Africa. Analysts and corporate financiers cited the lack of data as the main difficulty - both in respect of finding comparable companies that could provide valuation benchmarks in a valuation analysis, as well as industry data to use for financial analysis. Groenewald says this is largely due to the absence of active formal markets. In some emerging markets, active secondary markets and exchanges are not present or those that are present are so limited that the valuer is unable to gain much use from them. Other challenges listed were the lack of local macroeconomic data available, and the quality of available financial information.
Methodologies used in performing valuations in Africa
The discounted cash flow model remains the most popular valuation methodology across the African continent with a multiple based approach commonly used as a secondary methodology.
Infrastructure was included as a new section in this edition of the survey. According to recent PwC research, worldwide infrastructure spending is expected to grow from $4 trillion per year in 2012 to more than $9 trillion per year by 2025. The amount and propensity of investment in capital projects in Africa both by the public and private sectors have made the valuation of infrastructure projects an area of growing importance. Infrastructure assets have a unique set of characteristics that set them apart from traditional equity or debt instruments, requiring special considerations. According to the survey, the majority of respondents (70%) value infrastructure investments using a discounted cash flow methodology.
Groenewald concludes: “ The current edition provides further information for investors to consider when valuing opportunities on the African continent. Deal activity in Africa continues to gain momentum. As formal markets mature investment analysis will become easier and this in turn is likely to spur continued growth in deal activity.”
Senior Manager, Media Relations, PwC South Africa
Tel: +27 (0) 11 797 4470