The African Private Equity and Venture Capital Association (AVCA) has launched the inaugural edition of its special research reports, Volatility and Uncertainty: How private equity in Africa navigates through turbulent times. The report explores how the African private equity (PE) industry remains resilient amidst currency volatility and unpredictable political environments.
Investors typically cite concerns over political unrest and macroeconomic instability, such as forex volatility, as major factors deterring their investment in emerging markets generally, and Africa specifically. The report therefore examines the strategies adopted by fund managers (GP) active on the continent to address the risks and take advantage of the opportunities involved, despite the hurdles presented by challenging macroeconomic conditions.
According to the report, 63 per cent of GPs view currency and commodity price volatility as having been the most important macro factors in Africa over the past three years, while 45 per cent consider geopolitical risk to be the biggest macro risk over the next three years.
As a result, two-thirds of GPs will factor in political risk management when constructing their portfolios, combining diversification and the avoidance of risky locations to mitigate potential challenges. This is in the context of relatively low GP interest in purchasing political risk insurance. AVCA?s research also highlights that currency volatility can be addressed by investing in market-leaders in resilient sectors, such as Consumer Staples and Healthcare, and adopting expansionary strategies. These tactics contribute to the industry?s overall health and growing reputation as robust even when faced with sustained headwinds.
By showcasing case studies that illustrate the various ways in which GPs have planned for and reacted to currency volatility in Africa, the report further demonstrates that FX volatility can be weathered by focusing on the quality of business operations, expanding revenue streams, passing increased costs on to consumers, and reducing the need for hard currency by sourcing inputs locally.
Sitting alongside the Association?s other recent independent research, Volatility and Uncertainty chimes with the AVCA 2017 Annual Limited Partner (LP) Survey, which concluded that 69 per cent of LPs cite currency risk as the biggest challenge faced when investing in African PE, while 42 per cent cite political risk.
Nonetheless, overall, 88 per cent of LPs plan to increase or maintain their allocation to PE in Africa over the next three years.