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private equity and economic development

 "Private equity is not a new phenomenon in Africa but it is drawing increasing attention as a viable and innovative vehicle for private-sector development on the continent," the OECD said in a research note.

LONDON, May 13 (Reuters) - Private equity funds in Africa are soaring, the Organisation for Economic Co-Operation and Development (OECD) said on Tuesday, describing the development as the "African investment story to watch". As part of its 2008 African Economic Outlook, the OECD said funds raised for private equity in sub-Saharan Africa almost trebled in 2006 -- the last year for which it gave complete figures -- to $2.3 billion. That even massively outstripped growth in funds focusing on the oil-rich markets of North Africa and the Middle East, which grew 50 percent over the same period.

But it warned a global downturn could hit inflows.

"Private equity is not a new phenomenon in Africa but it is drawing increasing attention as a viable and innovative vehicle for private-sector development on the continent," the OECD said in a research note. "Improvements in the African investment environment and a series of spectacular African business successes ... have fuelled an unprecedented boom in the size and breadth of African private equity funds." The OECD picked out the $2.4 billion buyout of Africa's third-largest mobile operator Celtel as a particular example of African private equity success. Overall, a huge rise in mergers and acquisitions, especially in banking and telecoms, took foreign direct investment flows to $36 billion in 2006, double 2004 levels, it said. 

With Africa's stock markets relatively shallow, illiquid and underdeveloped, taking a stake in companies through private equity is one of the few ways investors can access some of Africa's emerging economies, including fast-growing oil states such as Angola. The OECD put sub-Saharan Africa's share of emerging private equity funds at 7 percent, well behind Asia's 58 percent but comparable to Latin America at 8 percent, the Middle East and North Africa at the same amount and Russia at 10 percent. It said sub-Saharan African private equity was dominated by South Africa -- the continent's largest economy saw a fivefold increase in managed funds to $1.6 billion in 2006. South African managed funds totalled some 80 percent of sub-Saharan private equity capital, followed by Nigeria on 10 percent, it said.

Overall, the developed economies, particularly the United States, remained the major source of capital, accounting for 50 percent of total funds raised in 2006. That raises worries a downturn in the U.S. could potentially hit investments, although emerging private equity deals have proved resilient.

The report said 40 African countries took steps to promote foreign investment in 2006. These included allowing foreign participation in the telecoms sector, reforming their banking sector, easing registration and tax constraints and establishing special investment zones. While much foreign investment in recent years has poured into Africa's commodities sector to benefit from a global price boom, the OECD said private equity has tended to back that trend, focusing on consumer-related and communications sectors. "Such investments have an arguably stronger impact on Africans' daily lives than the largest of extractive mega-projects, and bring private equity to stand out as a dynamic and diversified counterpoint to classic sources of foreign investment in Africa," the OECD said.

Private Equity Investments in Infrastructure

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Fundraising this week was dominated by infrastructure funds, with two firms raking in nearly $10 billion. Global Infrastructure Partners closed its first fund with $5.6 billion. Morgan Stanley closed its infrastructure fund with $4 billion locked up. The funds will focus on transportation, energy and utilities, social infrastructure and communications. Global Infrastructure Partners, just two years old, has already invested in the London City Airport, International Port Holdings and East India Petroleum.

The resilience of infrastructure businesses has attracted private-equity players to the category, despite slower growth than traditional private-equity investments. Other new infrastructure vehicles include Goldman Sachs' $7.5 billion fund, 3i's $1.2 billion India Infrastructure Fund and a $950 million fund for Credit Agricole Private Equity, as well as Citigroup's $5 billion infrastructure fund and Macquarie Capital Group Ltd. and State Bank of India's recently unveiled $2 billion infrastructure fund, both of which are yet to complete fundraising.

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