Photographer: Waldo Swiegers/Bloomberg

Carlyle Sees Currency ‘Dislocation’ Stalling African Buyouts

  • Private-equity transactions drop as firms sit on cash pile
  • Commodity price plunge has sellers clinging on for rebound

Volatile currencies and weaker commodity prices are keeping private equity investors focused on sub-Saharan Africa on the sidelines even though buyout firms have record amounts of cash to spend on acquisitions.

“There’s been a dislocation in the market,” Marlon Chigwende, manager of Carlyle Group LP’s $698 million African fund, said by phone from London. “The dollar has appreciated strongly against a lot of African currencies so it’s had the effect of slowing down deal activity.”

Private-equity companies amassed $4.3 billion for investment opportunities on the continent last year, the most since at least 2010, when the London-based African Private Equity and Venture Capital Association began compiling the data. Now though buyers are taking a wait-and-see approach from South Africa to Nigeria to avoid writing down assets should currencies devalue further.

At least 17 of 23 African currencies tracked by Bloomberg have weakened against the dollar over the past 12 months, with the exchange rates of Angola, Zambia, Mozambique, Nigeria and Malawi declining more than 25 percent. Sellers are holding on for better valuations in the hope commodity prices will rebound and growth accelerate.

‘Settle Down’

The number of announced private-equity deals in sub-Saharan Africa has dropped to 29 so far this quarter, with transactions worth $760 million, compared with 37 transactions worth $6.1 billion in the second-quarter of 2015, which marked the highest deal value on record, according to data compiled by Bloomberg.

“I don’t know how long it will take to pick up,” Chigwende said. “The market needs to settle down. We’re definitely seeing things improving slowly, but it will take a bit of time.”

Investor sentiment toward the world’s poorest continent has soured as a commodity-price rout and a drought slowed economic expansion. The International Monetary Fund in April lowered its 2016 growth forecast for sub-Saharan Africa by 1 percentage point to 3 percent, from 3.4 percent in 2015, which was the lowest level in 15 years.

In Nigeria, acquisitions in Africa’s largest oil producer have been hampered by crude prices that have slumped more than 50 percent over the past two years. 

Even so, Paul Boynton, head of Alternative Investments at Old Mutual Plc, sees opportunity in countries such as Rwanda and Kenya that have gained from low oil prices. “The African demographic of a rising middle class still underpins our views of investing in the continent,” he said.

‘Array of Challenges’

Nigeria’s central bank last week buckled to pressure and agreed to allow the naira to float freely, causing the currency to weaken as much as 30 percent to 284.50 per dollar on Monday, when trading opened. The devaluation will improve the ability of foreign companies to do business in the country, according to Peter Takaendesa, a portfolio manager at Cape Town-based Mergence Investment Managers (Pty) Ltd., which oversees 22 billion rand ($1.52 billion) of assets.

The interbank and black market rates on the naira may “converge” at around 300, John Ashbourne, the Africa economist at Capital Economics Ltd. in London, said in a note.

“The new system certainly does not mark the end of Nigeria’s economic problems,” he said. “The country faces a daunting array of challenges; including power shortages, governance issues, and disruptions to oil output. A weaker currency is, at best, a necessary but insufficient condition for an economic recovery.”

A parallel currency market in Angola and currency rules in Ethiopia also make it difficult to extract dollars and push these countries down the list of investment destinations, Natalie Kolbe, an investment principle at London-based Actis LLP, said by phone from Johannesburg.

‘Volatile Environment’

They are not the only ones struggling. Zimbabwe is suffering such a severe dollar shortage that it has had to introduce incentives to boost exports and exchange-control measures to retain inflows from imports. Mozambique last month missed a deadline to make an interest payment, while Zambia and Ghana have approached the IMF for assistance.

South Africa’s rand has dropped 17 percent against the dollar in the past year as the country faces the risk of a credit downgrade to junk by the end of the year.

“Trying to call when to bring your dollars in is quite difficult in a very volatile environment, like we are in South Africa,” Kolbe said. “So people will say, let’s just wait for it to settle down.”

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