J.14 Attachment _SA Investor Mapping Report.pdf

USAID / INVESTMENT SUPPORT PROGRAM

South African Investor Mapping Investments into Rest of Africa

Final Report

20 April 2020

2 Showcase the macro-economic and investment trends that are present within SA and RoA for both investors and businesses

3 Conduct stakeholder interviews with select investors and businesses to add further insight to the desktop research

1 Test the hypothesis that South Africa (SA) is a platform for investment into the rest of sub-Saharan Africa (SSA)1 / Rest of Africa (RoA)2 and develop a fact base

Outline future support considerations for USAID Regional Economic Growth Office (REGO) in developing a 5-year plan

Objectives for the engagement

1 All abbreviations/ acronyms are written out when they’re first used and used as an abbreviation thereafter. They can be found in the glossary from page 79 2 To achieve brevity, this report will refer to Rest of Africa (RoA) throughout; in most cases, SA-based investors will focus on the rest of SSA although some did mention countries in the MENA region

Agenda

1. Database

2. Drivers

3. Analysis

4. REGO Support Considerations

Annex 1: Methodology & Definitions

Annex II: Glossary of Terms

Annex III: SA context

Please note that this report is not confidential, with the exception of the interview notes in the appendix, which should not be shared outside the direct REGO team

The database provides information on over 350 investors and businesses for reference and as a tool for potential future interventions

Database Analysis

• In the following section we have provided a ‘deep dive’ analysis on over 350 investors and businesses providing key insights into:

o Typical sectors, deal sizes, countries of interest and leading countries/ regions of investment flows for SA investors o Typical sizes of businesses, sectors, expansion approach, countries/ regions of expansion for SA businesses

• The supporting database for these insights shows only a selection of South African registered/ owned businesses and investors who are expanding into RoA and have publicly disclosed this in their annual statements, industry reports or company websites

• As these insights are drawn from a selection of investors and businesses, gathered over a 10 - week period, we understand that this will not be a comprehensive list; and we have bolstered our analysis through additional research on SA’s investment landscape within this section

• Beyond what is spotlighted in this report, the database also provides additional information on:

o The number of deals executed by select investors – enabling you to get a sense of which are rapidly increasing and/ or diversifying their portfolios across the continent o Net asset values of publicly listed businesses – allowing you to understand the scale of capital required for RoA expansion

Methodology

• We have included our methodology for developing this database in the annex section of this report, to ensure that there is continuation for the REGO team to build this out further internally

We examined 353 investor and business stakeholders to understand the appetite and environment for RoA investments and expansion

The database1 includes investors and businesses who (i) are formally registered in SA and operate through a physical or other presence and (ii) can reasonably be expected to be interested in expanding into RoA, if not already underway:

Investor

• There are 197 investors in the database. Of these, 87% are classified as institutions, 12% as intermediaries, and 1% as high-net-worth individuals

• In SA, institutional investors dominate the investment market. In 2019, institutional funds made up 63% of all local funds, while retail funds (those in which individuals can invest) made up the remaining 37%. SA’s “institutionalization of saving” through pension funds, life insurance businesses and mutual funds, for example, is a key reason for the institution-dominated investment market in SA

• While SA has ~1,000 ultra high-net-worth individuals (HNWIs) who generally act as individual investors, there are just 2 in the database. These actors have limited public data about their activities, and are reluctant to provide insights into their investment activities

Business

• The database contains 156 businesses. 74% of the businesses are publicly listed, 24% are private, and 2% are parastatals

• In SA, there are over 2.5 million (Mn) formally registered businesses. Of these, >300 are national/provincial parastatals and ~350 are publicly listed businesses

• Parastatals made up ~8.7% of gross domestic product (GDP) in 2015;

publicly listed and private businesses are the third largest source of government revenue in SA. In 2017/ 18, corporate taxes made up 20% of the US$91.7 billion (Bn) in taxes collected by national government

1 The database is not comprehensive; it doesn’t aim to include ALL but a strong longlist from which to draw learnings Source: SA Gov, State-Owned Enterprises, accessed 2020; 2019; SA Government, Public Finance Management Act, 2010; ASISA statistics, accessed Mar 2020; IOL, SA has over 1000 ultra high-net-worth individuals, 2020; StatsSA, A breakdown of the tax pie, 2019; Jackson, Etti & Edu, The Rise of Africa’s Institutional Investors, 2018 OFX, USD/ZAR exchange rate of 13.3 in 2019, accessed 2020; overall desk research and interviews.

Investor n = 197; Business n = 156

2%1%

Institutions

Individuals

Investor Business

Parastatal

Private Intermediaries

Publicly listed

Investor Type Business Type https://www.gov.za/about-government/contact-directory/soe-s http://www.treasury.gov.za/legislation/pfma/act.pdf https://www.asisa.org.za/statistics/ https://www.iol.co.za/business-report/economy/sa-has-over-1000-ultra-high-net-worth-individuals-44251355 http://www.statssa.gov.za/?p=12238 https://www.jacksonettiandedu.com/the-rise-of-africas-institutional-investors-making-indigenous-capital-work-for-africa/#_ftn2 https://www.jacksonettiandedu.com/the-rise-of-africas-institutional-investors-making-indigenous-capital-work-for-africa/#_ftn2 https://www.ofx.com/en-au/forex-news/historical-exchange-rates/yearly-average-rates/

Whereas most investors in the database are Private Equity (PE), by volume debt and listed equity markets are significant sources of funds

Organization type

• Most investors in the database, 53%, are in PE. Investors in venture capital (VC) make up 9% of the database while private investment funds make up 8% and DFIs and banks each make up 6%

• While PE actors dominate the SA landscape in terms of numbers, in terms of capital flows, they are not the primary source of investment capital. In 2018, US$533 Mn PE funds were raised. However, when compared with the total value of the local debt market (~US$1.4 Bn traded daily in tradeable bonds and an unknown total value of direct non-traded loans), PE players are lower in capital value contribution. PE firms remain a key actor in SA and RoA because these markets contribute up to two thirds of private capital invested on the continent, hence these actors dominate our database

• SA pension fund assets amount to US$500 Bn and they own approximately 40% of the assets on the Johannesburg Stock Exchange (JSE) but, being risk averse and not having a PE-focused mandate, they do not invest more than 1% of their capital in RoA

Instrument type

• In accordance with the significant representation of PE investors, 61% of the investors use equity as an investment instrument. 26% use a combination of debt and equity, and only 1% use debt as an instrument in our database

• Although debt may appear small in number in our database, this is a significant source of the capital by volume in SA. Th e JSE regulates the largest listed debt market in Africa, and each day, ~US$1.4 Bn is traded on the corporate bond market compared to ~US$900k on the stock market. While aggregate data on banks lending to businesses is less clear, this is also a significant pool of capital that is driving expansion of businesses into RoA

1 195 investors are considered in these analyses Source: SAVCA, Conference 2020 A journal of activity and trends in Southern Africa, 2020; JSE, Debt Market, 2020; SAVCA, Venture Capital Industry Survey, 2019; The EastAfrican, Why East Africa-focused PE funds are now shifting to long-term private debt, 2019; AVCA, Africa’s Private Debt Goes Digital; Business Day, Bond Market Reforms a long time coming, 2019; OFX, USD/ZAR exchange rate of 13.3 in 2018, accessed 2020; overall desk research, interviews and other analysis;

1%

Private Investment Funds

12%

Organization type

Mutual Funds Pension Funds

Banks

DFI

Venture Capitalists

Private Equity n/a (intermediaries)

Equity n/a (inter-mediaries)

1%

12%

Instrument type

Debt

Mixed

195Investor n = 1951

Investor Type Instrument https://savca.co.za/wp-content/uploads/2020/03/SAVCA-Conference-Journal-2020-Electronic.pdf https://www.jse.co.za/trade/debt-market https://savca.co.za/wp-content/uploads/2019/09/SAVCA-VC-Industry-Survey-2019_Electronic.pdf https://savca.co.za/wp-content/uploads/2019/09/SAVCA-VC-Industry-Survey-2019_Electronic.pdf https://www.theeastafrican.co.ke/business/East-Africa-focused-PE-funds-shifting-to-long-term-private-debt/2560-5178250-5v1gs8z/index.html https://www.avca-africa.org/newsroom/afri-spective-an-inside-look-at-private-equity-in-africa/2018/africa-s-private-debt-goes-digital/ https://www.avca-africa.org/newsroom/afri-spective-an-inside-look-at-private-equity-in-africa/2018/africa-s-private-debt-goes-digital/ https://www.businesslive.co.za/bd/opinion/editorials/2019-04-30-editorial-bond-market-reforms-a-long-time-coming/

Most investors in the database operate across ICT & telecoms, finance and insurance sectors, and look at deals that are above US$50 Mn

• Investor money flows to a range of sectors, and often investors intentionally target more than one sector. More than 40% of investors selected the ICT & telecoms and finance & insurance sectors

• This reflects growing investor interest in ICT & telecoms across RoA with market trends such as equity funding for African tech start-ups increasing by 74% from 2018 - 20191

• 40% of the investors in our database invest in deals with an average investment size of >US$50 Mn. The average deal size for RoA PE investors was US$3 Mn in 2019

• The least common investment size range – the amount investors deploy, on average – is US$0 - 1 Mn. This is likely to be attributable to the relatively high transaction costs which make such small deal sizes unattractive for investors

1. 195 investors are considered in these analyses as two investors would like their activities to remain strictly confidential; 2. “Deal size” refers to both debt and equity investments for investors in the database Source: Partech, 2019 African Tech Venture Capital Report, 2020; OFX, USD/ZAR exchange rate of 14.4 in 2019, accessed 2020; overall desk research, interviews and other analysis

US$ 5 - 20

Mn

4%

>US$50 Mn

US$ 1 - 5

Mn

6%

12%

US$ 0 - 1

MnUS$ 20 - 50 Mn

Not Available n/a (intermediary)

Real estate & business

Construction & infrastructure

ICT & telecommunications

26%

Finance & insurance

Agriculture

Manufacturing

Health & social work 29%

Utilities (Energy & Water)

Wholesale & retail Transport & logistics

Education Advisory services

Mining Accommodation & Food

Arts & recreation

46% 43%

19%

34% 33% 32%

29%

23%

18% 18% 17%

11% 9%

Investor n = 1951 Investor n = 195 Sector of investment Deal size range2 https://partechpartners.com/documents/12/2020.01_Partech_Africa_-_2019_Africa_Tech_VC_Report_FINAL.pdf

Roughly half the investors in the database operate in multiple countries with a wide geographical range including all parts of Africa and beyond

Regions and countries of investment

• Of the 195 SA-based investors in the database, 47% have only invested in SA, 31% have invested in the rest of Southern Africa, 28% in West and Central Africa, 27% in East Africa, and 39% in the Rest of the World (RoW). SA is unsurprisingly the most common country of investment, given the investor origins, but beyond that countries in East and West Africa prove more popular than other locations in Southern Africa

East Africa

• Of the investors in the database 24% have invested in

Kenya while 13% have invested in Tanzania and 12% have invested in Uganda respectively

West Africa

• Ghana and Nigeria attracted 19% and 18% of the investors in the database, respectively. In general, direct investments by SA businesses in Ghana between 2006 and 2017 were worth over US$770 Bn.1 Investment flows from SA to Nigeria reached US$1.07 Bn in 2019, making SA the third largest source of foreign investment for Nigeria2

1 195 investors are considered in these analyses as two investors would like their activities to remain strictly confidential Source: Partech, 2019 African Tech Venture Capital Report, 2020; WESGRO, Kenya, 2017; SAnews, SA, Ghana deepen trade relations, 2019; Nairametrics, South Africa, U.K and U.S Investors shipped US$11.4 billionRF into Nigeria in H1 2019, 2019; overall desk research, interviews and other analysis

South Africa only

West and Central Africa

Rest of World Southern Africa (excl.

only in SA)

East Africa

UgandaBotswana South Africa

GhanaKenya Nigeria TanzaniaNamibia

Investor n = 1951

Region of investment

Country of investment https://partechpartners.com/documents/12/2020.01_Partech_Africa_-_2019_Africa_Tech_VC_Report_FINAL.pdf https://www.wesgro.co.za/uploads/files/32.-Kenya_2017.pdf https://www.sanews.gov.za/south-africa/sa-ghana-deepen-trade-relations https://nairametrics.com/2019/09/09/south-africa-u-k-and-u-s-investors-shipped-11-4-billion-into-nigeria-in-h1-2019/

The majority of businesses in the database are domestic to SA, as opposed to multinationals, and large businesses dominate the database

Business structure

• The majority of businesses in the database are domestic, i.e. their headquarters are in SA while 19% are multinationals

• The database therefore provides a stronger perspective on the characteristics of South African businesses over foreign businesses

Business size1

• 90% of the businesses in the database are large. This is expected given the proportion of publicly listed businesses in the database. 9% are small and 1% are medium

• In SA, large businesses make up 2% of formal businesses. Their annual turnover is 62% of the national output generated by formal businesses1

• Small businesses form the bulk of the business population in SA. In 2018, it was estimated that small businesses made up 92% of formal businesses in SA and contributed 29% of the output generated by the formal business sector2

• Medium-sized businesses make up 6% of total businesses and contribute 10% of the national output generated by formal businesses. They are generally not publicly listed nor are they commonly known, which makes it challenging to identify and find information about them

• Medium-sized businesses make up just 1% of the database. This report relies on insights from ecosystem actors and reports to gain an understanding of their perceptions about and approaches to expanding to RoA

1See glossary for definitions of small, medium and large businesses Source: StatsSA, How large is the small business footprint?, 2019; SBI, The number of formal micro, small & medium businesses in South Africa, 2018;

overall desk research, interviews and other analysis

Business n = 156

Business structure Business size

Business structure

Domestic

Multinational Small

Business size

1% Medium

Larg e http://www.statssa.gov.za/?p=12264 https://www.smallbusinessinstitute.co.za/wp-content/uploads/2018/10/SBIbaselineAlert1final.pdf

• Businesses are spread across a wide range of sectors, across the value chain, with no one dominant sector of focus

• While 48% of the businesses in the database have used a mixed expansion approach, 20% have used an inorganic approach, and 19% have used an organic approach1

• This suggests almost half of businesses in the database are willing to expand using a variety of business approaches, as long as the new market presents profitable opportunities

Most businesses are spread across sectors; they use a mixed approach to expansion

1 See glossary of terms for definitions. The remaining 12% did not explicitly state an expansion approach they have or would use, either on their website or during interviews Source: Overall desk research, interviews and other analysis

Wholesale & retail

Agriculture

ICT & telecommunications

3%3% 3%

Finance & insurance

Utilities (Energy & Water)

Health & social work Accommodation & Food

Advisory services Transport & logistics

Construction & infrastructure

Real estate & business

Mining

Education

Manufacturing

Not explicitly stated

Mixed

Inorganic

Organic

Business n = 156 Sector of operation Expansion Approach Business n = 156

Regions and countries of expansion

• Of the 156 businesses in the database, 68% also have operations in East Africa and 66% in the Rest of the World. 65% of the businesses, are in Southern Africa while 35% are only operating in SA and have not yet expanded to RoA

• Southern African markets remain attractive for SA-based businesses. 36% of the businesses are also in Botswana and 34% are also in Namibia. The database does however indicate that businesses have a sizeable interest in East and West African markets

• 35% are only in SA, showing that there is a proportion of the database who remain hesitant to expand

East Africa

• The East African footprint of the businesses in the database is strong, with a footprint present for 56% in Kenya, 31% in Tanzania, and 26% in Uganda

West Africa

• In Nigeria and Ghana, the largest English-speaking markets in

West Africa, there is a strong presence. Of the businesses in the database 47% have operations in Nigeria and 33% have operations in Ghana

Most businesses operate beyond SA, with Kenya and Nigeria as the most common countries for expansion

SA

only

West & Central Africa

Rest of WorldEast Africa Southern Africa (excl.

only in SA)

Kenya NamibiaNigeria Botswana Ghana Tanzania Uganda

Business n = 156 Region of expansion

Country of expansion

2. Drivers

3. Analysis

4. REGO Support Considerations

Annex 1: Methodology & Definitions

Annex II: Glossary of Terms

For businesses, SA has…

• Developed business operations and regulatory practices

• Higher-end consumer base for increased profits

• Improved brand/ visibility as a business in emerging markets

• Safe testing ground for higher-end products

For investors, SA has…

• Access to advanced financial market systems

• Access to deep stock exchange

• Lower perceived levels of macro-economic risk relative to elsewhere in the continent

• Lower levels of corruption, expropriation risk and changing regulations motivated by political interests

SA continues to be a gateway into RoA for investors and businesses, but new competitive hub-economies are developing

Known ways of working, established relationships, legacy infrastructure, established financial systems, access to information and a skilled workforce have enabled SA to remain the primary hub for investors and businesses looking to establish themselves in sub-Saharan Africa

However, SA’s gateway role is being challenged increasingly particularly by Kenya, Ghana, Rwanda, and Mauritius which are being called out as new hub-economies, providing ideal investment climates and similar ease of doing business

For those actors that are looking to expand regionally, key drivers influence investor and business behavior in their decision making

D ri ve rs Pull factors outside of SA

Improved Economic Performance

Rising Commercial Opportunities

Increased Innovation Potential

Push factors within SA

Stagnant Domestic Economy

Dichotomous Commercial Opportunities

Limited Innovation Examples

Investors

Businesses

Different factors play a different role for each actor as is detailed in archetypes

Actors pulled into RoA are motivated by the potential opportunities and have made an intentional decision to expand to other markets

Actors pushed into RoA are more reluctant about expansion and hesitant about the market as they have been forced to explore the opportunities by circumstance

Source: Department Statistics South Africa website, accessed Feb 2020; World Economic Forum website, accessed Feb 2020; Brookings, Africa's market potential, 2018; New Times, Rwanda Innovation, 2018;. Overall desk research, interviews and other analysis

Push: SA Challenges drive both investors and businesses to more actively consider expansion

• SA has seen stagnation in some sectors due to the flatlining of the domestic economy, pushing business to look elsewhere for increased profits

• SA investors who may have been reluctant to explore further afield are following their customers abroad as the domestic market fails to show promising returns

• The dichotomous structure of the SA economy means that businesses serve either part of spectrum: many formal consumer businesses serve only high-income consumers and do not expand into low-income domestic brackets; they have no incentive to innovate as they deal with a well-established consumer base

• Yet, stagnation is forcing these businesses to think differently about the low-income market opportunities both domestically and in RoA – but they are behind the curve and often lack the wherewithal for expansion

Pull: Opportunities elsewhere on the continent attract investors and businesses to explore expansion to RoA

• Macro-economic performance and stability continues to improve on the continent presenting an attractive opportunity for businesses to expand

• RoA's population is growing rapidly and is expected to double by 2050.

This growing consumer base presents the potential for businesses to capture a burgeoning market

• On top of this overall growing population, wealth and purchasing power is increasing with a growing middle class in RoA. This presents opportunities for businesses to expand their customer base

• With growth comes improved market information and investor confidence, facilitating an expanding investor remit beyond the SA market

• Improved regional investment hubs are proactively working on attracting investment, reducing the need to channel investment through SA to the continent

• RoA, specifically SSA, is viewed as a region requiring business innovation for models and products, often targeting ‘base of the pyramid’

Push challenges drive actors out of SA, while pull opportunities draw actors to expand in RoA https://www.newtimes.co.rw/business/what-african-nations-can-learn-rwandas-growth-innovation-hub

Domestic stagnation is pushing businesses to look beyond the SA market for returns

The SA market has seen stagnation in some sectors due to declining economic growth

∙ In 2019, SA experienced an economic recess, estimated at -0.8% in the third quarter of 2019 and -1.4% in the fourth quarter1. The construction and agriculture sectors declined by 3.3% and 6.9% respectively, while the trade sector remained stagnant at 0%

∙ The SA middle class is long-established, with a well serviced market for goods and services. Yet it has low prospects for growth opportunities. In line with global trends, this segment of the population did not grow between 2017 and 2018. Furthermore, between 2003 - 2016, the incomes of 95% of the South African population were stagnant or showed slight growth for low income earners

∙ In addition, credit rating agencies do not look positively on the South African economy and its key players. SA’s long-term foreign-currency government bonds are rated BB+ by Fitch and BB by Standard & Poor’s (S&P) – classifying them as substantially risky and “junk status”. Following months of poor performance, Moody’s downgraded Sasol, the national chemical group to “junk status” in March 2020. Many parastatals are struggling significantly in performance – South African Airways is in business rescue and the credit rating of the national utility Eskom is at junk status

∙ SA investors who may have been reluctant to explore further afield are following their customers abroad as the domestic market fails to show promising returns. For example, commercial banks that expand internationally to continue serving their clients who are expanding internationally7

Government

Finance

Electricity

Personal services

Mining

Trade

Transport

Manufacturing

Construction

Agriculture

0.0

Source: Statistics South Africa, Statistical Release Gross domestic product Fourth quarter 2019, 2020; Allianz, Global Wealth Report 2019, 2019;

Business Live, Inequality: SA’s vanishing middle class; 2019; Trading Economics, South Africa – Credit Rating, n.d.; The Conversation, South Africa is close to junk status…., 2019; Business Live, Sasol shares lose 6%..., 2020; Overall desk research, interviews and other analysis

GDP growth by sector in SA %, 2019 http://www.statssa.gov.za/publications/P0441/P04414thQuarter2019.pdf https://www.allianz.com/content/dam/onemarketing/azcom/Allianz_com/economic-research/publications/specials/en/2019/AGWR_2019.pdf https://www.businesslive.co.za/fm/features/2019-08-22-inequality-sas-vanishing-middle-class/ https://tradingeconomics.com/south-africa/rating http://theconversation.com/south-africa-is-close-to-junk-status-from-all-three-rating-agencies-what-could-follow-121765 http://theconversation.com/south-africa-is-close-to-junk-status-from-all-three-rating-agencies-what-could-follow-121765 https://www.businesslive.co.za/bd/companies/industrials/2020-03-06-moodys-cuts-sasol-to-junk-due-to-lake-charles/

Strong growth is increasing the attractiveness of RoA markets, with Kenya, Ghana, and Rwanda noted as markets of particular interest

Macro-economic performance and stability continues to improve on the continent presenting an attractive opportunity for investments and business expansion

∙ In 2018, 6 of the10 fastest growing economies were in Africa.

In 2019, the World Bank cited Côte d’Ivoire, Ethiopia, Ghana, and Rwanda as four of the fastest growing economies in the world SA, however, is lagging far behind its RoA compatriots

∙ Although the SA economy contracted by 1.4% in Q4 2019 this does not carry through to the annual figures. The annual real GDP growth rate remained positive, falling from 0.8% in 2018 to 0.7% in 2019

∙ As RoA develops, South African and international businesses are expanding into countries ranked as some of the most attractive for investment. In Kenya, GE set up its RoA headquarters; in Rwanda, Volkswagen (VW) established an assembly plant; in Ghana, Growthpoint Investec African Properties (GIAP) is developing commercial property, and in Nigeria MTN continues to invest

∙ Nigeria continues to attract business and investor interest despite economic volatility, in part due to the large consumer potential and the pockets of wealth in this market

∙ Regardless, investors and businesses in general continue to shun politically volatile countries despite their growing populations and economies. As a result, even countries with positive GDP growth between 2014 - 2019 such as CAR (0.08% to 4.5%), Gambia (-1.41% to 6.5%), and Guinea-Bissau (0.97% to 4.6%), are regarded as some of the least attractive for investments in RoA

7.4

6.3 Ethiopia

3.4

6.2

8.0

6.0

8.0

6.1 6.3

7.7 Ghan a7.7 7.57.47.5

South Africa

Kenya

Rwanda

5.9

Côte d’Ivoire

Source: World Economic Forum, Six of the fastest growing economies are in Africa, 2019; World Bank, Africa Overview, 2019; International Monetary Fund, Real GDP growth data, 2020; RMB, Where to invest in Africa, 2020; World Bank, Nigeria Overview, 2019; Overall desk research, interviews and other analysis

Real GDP growth of selected countries Annual % change, 2014 - 2019 https://www.weforum.org/agenda/2019/08/afcfta-proof-that-africa-heading-for-substantial-growth/ https://www.worldbank.org/en/region/afr/overview https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/ZAF/GHA/KEN/ETH/CIV/RWA https://www.rmb.co.za/files/pdf/Where_to_Invest_in_Africa_2020.pdf https://www.worldbank.org/en/country/nigeria/overview

The rising population and growing middle class are presenting new opportunities for commercial growth

Source: World Bank, World’s population will continue to grow, 2019; Brookings, Africa's Consumer Market Potential, 2018; AfDB, Tracking Africa’s Progress in Figures, 2019; 4. World Bank data; 5. Overall desk research, interviews and other analysis

Growth is strong fueled by both a rising population and increased wealth in a growing middle class

∙ SSA's population is growing rapidly and is expected to double by 2050 and reach 2.2 Bn. This growing consumer base presents a market for businesses to capture

∙ Further, the rising middle class in RoA presents an opportunity for businesses to expand their consumer base, positioning brands as high-end and aspirational to capture the premium market, comprised of both current and future consumers

• In 2010, the middle-class accounted for roughly 34% of the region’s population and is expected to account for 42% of Africa’s predicted

1.1 Bn population in 2060

• Consumer expenditure on the continent grew at 3.9% compound annual growth rate (CAGR) from 2010 - 2015, reaching US$1.4 Trillion (Tn). Expenditure is expected to reach US$2.1 Tn by 2025, and US$2.5 Tn by 20301

• From 2015 - 2018, household consumption in high growth countries rose. In Kenya, by >US$20 Bn, Ghana by >US$12 Bn, Ethiopia by >US$9 Bn, Côte d’Ivoire by almost US$7 Bn, and Rwanda by >US$0.5 Bn

∙ Growth and stability in many markets in RoA has come with improved market information and investor confidence, facilitating an expanding investor remit beyond the SA market

Côte d’Ivoire

Ethiopia

Kenya

Ghan a

Rwanda

At US$72 Bn in 2018, Kenya’s consumption expenditure was one of the highest in Africa

Household consumption expenditure, RoA US$ Bn, 2014 - 2018 https://blogs.worldbank.org/opendata/worlds-population-will-continue-grow-and-will-reach-nearly-10-billion-2050 https://www.brookings.edu/research/africas-consumer-market-potential/ https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Tracking_Africa%E2%80%99s_Progress_in_Figures.pdf https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Tracking_Africa%E2%80%99s_Progress_in_Figures.pdf

Regional investment hubs and a reputation for innovation is continuing to drive growth in key markets in RoA

∙ Improved regional investment hubs are proactively working on attracting investment – they reduce the need to channel investment through SA to the continent, as investors are more commonly developing direct relationships and making direct deals in RoA markets

∙ Rwanda has made an ICT investment in the ‘Smart Rwanda 2020 Master Plan’, and a US$2 Bn ‘Kigali Innovation City’ designed to draw investors, with incentives already attracting Andela, VW and more

∙ Several countries have made strides in their economic environment, for example in reducing the number of days required to start a business

∙ RoA is viewed as a region requiring business innovation for models and products

∙ Whereas SA show the highest GDP per capita income, it also has the highest level of inequality of all countries shown here. In this dichotomous economic structure, many consumer-facing businesses target the higher-income earners

∙ Businesses that expand beyond SA need to adjust their product offering for a population with a lower spending power

∙ Rising investment hubs such as Ghana and Kenya have an average GDP per capita at around 1/3rd of the level in SA (see left). Innovation is often targeted at reaching lower income consumers and at the ‘base of the pyramid’

∙ While this does not represent an appealing opportunity for all businesses and investors, those focused on disruption and with access to such innovations, tend to find RoA an appealing opportunity

GhanaSouth Africa

Nigeria Kenya Côte d’Ivoire

Ethiopia Rwanda

NigeriaSouth Africa

Ethiopia Kenya Ghana Côte d’Ivoire

Rwanda

Days required to start a business, 2019

GDP per capita, Current US$, 2019

Source: IMF Data, 2019; World Bank Data; R. Dransfield, GCE AS Level Applied Business Double Award for OCR, 2005; BusinessTech, How much money you need to earn to be in the top 1 percent in South Africa, 2018; Overall desk research, interviews and other analysis

While GDP per capita is highest, SA has the highest level of inequality amongst these countries, meaning its median income is likely much lower https://www.imf.org/external/datamapper/NGDPDPC@WEO/OEMDC/ADVEC/WEOWORLD/NGA https://books.google.co.za/books?id=-rEqVZvAGz4C&pg=PP47&lpg=PP47&dq=unilever+offers+detergent+in+different+sizes&source=bl&ots=mVpPpbEVsr&sig=ACfU3U1pxTpToDxTiJRGe93m2Bll1P0muw&hl=en&sa=X&ved=2ahUKEwiyns-h_ZToAhWlBWMBHTZjDlwQ6AEwAHoECAUQAQ#v=onepage&q=unilever%20offers%20detergent%20in%20different%20sizes&f=false https://businesstech.co.za/news/wealth/278477/this-is-how-much-money-the-top-one-percenter-is-worth-in-south-africa/ https://businesstech.co.za/news/wealth/278477/this-is-how-much-money-the-top-one-percenter-is-worth-in-south-africa/

2. Drivers

3. Analysis

4. REGO Support Considerations

Annex 1: Methodology & Definitions

Annex II: Glossary of Terms

A. Investors make direct investments through businesses that are both o South African firms growing their business in RoA o Non-South African firms with an intention to grow their business in RoA

B. Investors can also invest indirectly into businesses – such as through funds, funds-of-funds etc

All are in-scope for this study from an investor perspective

A. Businesses function as investor targets for such investments, both o South African firms – in scope o Non-South African firms – not in scope for this study

B. SA Businesses also pursue their own growth expansion strategy in regard to RoA – this is also in-scope

Investors and businesses can play a number of different roles with regards to expansion in RoA

Investor Business

Our deep-dive analysis considers investor and business ‘archetypes’ who have common investment or expansion strategies

∙Categorization by archetype allows us to group actors who portray similar strategic traits driven by their reason for investing or expanding

∙Actors within the same archetype also face common challenges

∙Grouping by archetypes enables the more specific tailoring of support according to the drivers and challenges faced by actors, rather than simply the characteristics

The degree to which different drivers and challenges affects actors varies. This cannot be derived from the ‘descriptive’ information in the database (i.e., just because actors focus on the same geography or sector does not mean they take decisions in the same way). Therefore, we used interviews to gather insights on behaviors and have identified across ‘archetypes’ who exhibit common behaviors across investment or expansion strategies.

Investor Analysis

The following slides focus on the investor perspective – looking at South African investors only – both as:

• Direct investors into

• SA firms growing their business in RoA

• Non-SA firms with an intention to grow their business in RoA

• Indirect investors into RoA

Conservatives focus largely on primary sectors with minimal diversification, they tend to focus on SA and its neighboring countries but are beginning to explore further afield; targeting large businesses at a competitive deal size

Conservative

Contributors seek opportunities to scale proven business models with solid performance typically into more risk neutral geographies.

Investments range across multiple sectors; targeting medium size businesses at a competitive deal size

Challengers seek opportunities, often with a technology lens, that promise to disrupt. The disruption can be either by product or service or by geography so long as there is high-reward to justify the high-risk;

targeting businesses at a small deal size

ContributorChallenger

In ve st or

Conservatives tend to have a lower risk appetite overall yet will be attracted by customers and partners expanding to RoA

Challengers tend to have a higher risk appetite overall and are attracted by the potential for disruption in RoA

Three investor archetypes are identified: Challenger, Contributor and Conservative; each offering different perspectives on RoA investment

A detailed mapping confirms investors cannot be allocated to an archetype based on descriptive characteristics – there’s little to no correlation

Sectors Regions Type of Instrument

A rt s re cr ea tio n

D eb t

Archetypes characterize investors by their drivers and the rationale behind their expansion; they span across characteristics and cannot be determined by a simple ‘tick box’ exercise

Investors by archetype

C ha lle ng er C on se rv at iv e

C on tr ib ut or

IC

T t el e-co m m un ic at io ns

M an uf ac tu ri ng

Tr an sp or t lo gi st ic s

H ea lth so ci al w or k

A dv is or y se rv ic es

Ed uc at io n

W ho le sa le re ta il

A gr ic ul tu re

M in in g

A cc om m od at io n fo od

U til iti es

(E ne rg y

W at er

C on st ru ct io n in fr as tr uc tu re

Fi na nc e in su ra nc e

R ea l e st at e bu si ne ss

So ut h A fr ic a (O nl y)

So ut he rn

A fr ic a

Ea st

A fr ic a

W es t A fr ic a

R es t of t he

W or ld

Eq ui ty

Investor One xx x x x

Investor Three x xxx x x x x Investor Four xx x x x x Investor Five xxx x x x

Investor Sixteen x x x x

Investor Twenty x x x x x x x Investor Twenty-One xxx x x x x x

Investor Six x x x x x x x x x

Investor Ten xxx x x x x x x Investor Eleven xx x x xx x x x x x

Investor Thirteen xx x x x x x x

Investor Fifteen x xx x x x x x x

Investor Seventeen xx x x x x x x

Investor Eight xxx x x x x x

M ix ed

Investor Two xx xxx x x x x

Investor Eighteen xx x x x x x x

Investor Seven xx x xx x x x x x x x x x

Investor Twelve x xx x x x x

Investor Nine x x xxx x x x x x x

Investor Nineteen x x x x x x x x

Investor Fourteen xxx x x x

Challenges affect investor archetypes differently, but tend to fit across five cross-cutting themes

Low deal flow

High transaction costs

Limited execution capabilities

Shallow capital markets Structural volatility

A limited qualifying number of "investable” or “bankable" opportunities available

Deals in RoA tend to be smaller; the average

RoA investment is more expensive to execute

Skills in investment markets outside of SA remains low; deals take a longer time to close

It is difficult for investors to source financing and exit investment specifically in RoA

Currency volatility, forex control and lack of regulatory consistency create additional risks

Limited investment pipeline flowing from SME incubation hubs

Limited capabilities to support pre-deal activities (e.g. DD) and post-deal value add to investee companies

Limited access to co-investors with long-term investment horizons

Given fundraising challenges and forex-denominated return expectations, few deals meet expectations

Low commercial returns impact capital raising environment

Challenges identifying niche investment opportunities due to lack of RoA presence

Lack of capacity drives undeveloped deal origination and/or structuring of deals outside of SA

More risk averse to macro-economic instability in RoA

Challenger

Contributor

Conservative

Broad cross-cutting challenges affect each investor to some degree

Where boxes are grey, archetypes are still affected by the cross-cutting challenge, just not one uniquely specific to the archetype

The Challenger Investor is driven by RoA’s innovation potential, but faces a low deal flow, limited technical skills of investees and lack of patient capital

“We believe that in the African SME context, a little innovation goes a long way – and that is where our value-add becomes a multiplier. We leverage both financial and human capital resources to support context-specific innovation to ensure that adoption exceeds the burn rate.”

~ Challenger

• Low deal flow – while there are many small businesses across RoA, incubation hubs set up to attract the type of companies that Challengers might invest in, do not sufficiently provide the quality of potential investees

• Despite ambition and interest in expansion, few of the challengers we spoke to had yet sourced deals or made investments in RoA

• Most hubs do not incubate entrepreneurs that Challengers could invest in; they instead focus on ‘survivalist enterprises’ with little commercial viability

• Limited execution capability – Pre-deal, Challengers need partners who can assist them to identify small businesses that meet their investment criteria (as it relates to assessing for commercial viability, and/or preparing potential investee companies for investment readiness). Post-deal, start ups have limited strategic/technical capabilities, so investors are having to offer support to ensure their investment yields target returns

• The skilled pool of talent to draw on remains limited. Demand outstrips supply for

63% of finance roles, 60% of operations roles and 43% of investor relations roles in RoA

• One Challenger has an ‘operations-first approach’, working day-to-day with SMEs for 9 months as part of their investment to ensure high ROI

• Shallow capital markets – Challengers typically invest for the long term and rely on their own balance sheets to finance investments. They require access to local/ regional capital that understands their investment thesis/strategy in order to execute more deals

Increased potential for innovation

• Challengers view RoA as a region with unique challenges that can only be solved by ‘doing things differently’

• One Challenger is particularly interested in the rise of

‘digital and industry’ in RoA, and how growing urban areas in Africa show potential for ‘disruptive consumption’

• Challengers pay attention to the long-term potential of innovation in new markets, or products to yield high returns

• One Challenger said that they do not have a defined exit timeline; and instead, they look to invest in a business when their growth equity can fuel revenue and profitability growth for long term returns

• They are also driven by a desire to prove that new investment approaches are required in RoA financial markets

• One Challenger is looking at new local partnerships to expand their market reach, and established a debt guarantee facility to support the exploration of RoA investments

ChallengesDrivers

“We invest with a view to support our partners over the long term: we have no standard definitions around exit horizons, operating with an evolutionary, founder-centric mindset.“

~ Challenger

Source: EMPEA, Private Equity Talent Management in Emerging Markets Survey, 2013; Overall desk research and interviews 27 https://www.empea.org/app/uploads/2017/03/EMPEA_PrivateEquityTalentManagement-4.pdf

The Challenger Investor invests in disruptive innovations based in SA with products/services that can reach RoA

Actors and instruments

• Most Challengers prefer to invest in small-size businesses while revenues and enterprise valuations are low

Deal behavior

• Challengers tend to invest off their own balance sheets (or from start-up capital investors) in small deals (<US$2 Mn) over an undefined investment horizon

• They look for investee management teams based in SA so they can provide post-deal value add in close proximity, despite their portfolio of products targeting RoA/ global markets – few have managed to make the leap to RoA investments

Sectors and reach

• They invest across sectors such as technology, mobility, e-commerce where disruptive technologies are coming up. Some play in traditional sectors (i.e. agriculture and retail) if the SMEs are introducing new business models or establishing themselves in a niche market opportunity

Behavior and characteristics

“We think we've found a model to (cost-effectively) do the value add for deals lower than US$ 1 Mn, and in so doing increase our pipeline. This allows us to get super valuations (at exit) while accelerate more SME growth and job creation into the space.“

~ Challenger

“I only invest in one business a year, typically taking a 10 – 40% stake in the business. It’s a lot of risk because I do not earn carry or have an exit timeline. (Instead) I work with the business for almost 2 - years to ensure that we achieve double or triple ROE and that is where I get my reward initially.”

~ Challenger

The Contributor Investor is motivated by rising commercial opportunities in RoA, but high transaction costs and limited exit options stall deal activity Drivers Challenges

• High transaction costs – given the deal sizes and sectors they work in, Contributors are particularly exposed to foreign exchange volatility, difficulties in hedging, and geopolitical uncertainties. This contributes towards the higher cost of financing, which increases the bar for deal viability

• Low deal flow – there are a limited number of "investable” or “bankable" opportunities available to Contributors

• Africa’s PE returns (4% - 5% IRR in US$ terms) are low and there are too few control positions suited to PE available. This makes the region less attractive for global capital raising

• Shallow capital markets & structural volatility – viable deals are overlooked due to limited exit options

• Few established domestic stock exchanges make it difficult for investors to exit investments in RoA, particularly for PE players in the Contributor archetype

• The recent credit rating downgrade of SA is likely to lead to a contraction of the SA bond market with high global capital outflows as fund managers with investment grade mandates are forced to sell. As a result, bond yields are likely to rise to cover for their deteriorating position, raising interest rates and making it more challenging to execute leveraged buy-outs (LBOs) which are a primary exit option for most equity investors

Rising commercial opportunities

• Contributors see long term value in RoA due to the growing, young, interconnected urban population offering a strong consumer market (projected to US$2.1 Tn by 2025)

• One Contributor mentioned how the statistics behind RoA’s commercial growth are positive “there is likely to be a >600 Mn population growth by 2035, coupled with a consumer economy that will be worth US$30 Tn by 2035” making the region very attractive for them as an investor

• They are also attracted to countries increasing their infrastructure investment; this is often correlated with future commercial/economic growth

• One Contributor mentioned that the rapid urbanization of cities with 40% of Africans living in cities – even higher than India – is creating a need for increased infrastructure investment (>US$600 Bn in the next 10 years), which in itself is an investment opportunity

“Leveraged buyouts are big in Namibia, because there aren't many opportunities to exit via listing."

~ Contributor

“We are dealing with an increasingly connected population, a young large workforce which is rapidly urbanizing, and rising consumer spending expected to reach US$2.1 Tn by 2025.

That’s why we are investing in [confidential] in Africa.”

~ Contributor

Source: Bloomberg Terminal; AVCA, 2018 Annual African Private Equity Data Tracker, 2018; Overall desk research, interviews and other analysis 29 https://www.avca-africa.org/research-publications/data-reports/?cat=Data%20Tracker

The Contributor Investor invests in medium-size businesses through a mixed approach, driving high commercial returns as an active investor

Actors and instruments

• Contributors often partner with medium-sized businesses local to RoA markets, nurturing their high potential for growth across the region; while SA businesses are of interest, it is more difficult to source SA businesses at the medium-size

• There is a mix of direct and indirect investment approaches in this archetype, in addition to a mix of debt, mezzanine and equity according to the requirements of the deals

Deal behavior

• Contributors originate their own deals across the continent and have been investing in RoA (and SADC) for >5 years. They look at deals worth >US$50 Mn so that they can cover US$250 k – US$600 k of due diligence costs

• Most of these investors play an active investor role with their portfolios applying varied strategies (growth equity, management buy-outs, or value investing). In some cases they opt for a complete management takeover to turn a medium-sized, low-growth business into an expansion opportunity. They drive high commercial returns (>20% ROI’s) over a 5 to 7 year horizon

• They often exit through M&A’s and strategic buyouts to global multi-nationals who have an interest in RoA; sell to larger PE players or list on regional stock exchanges

Sectors and reach

• Contributors are increasingly setting up operations (i.e., fund management) and developing investment mandates that vary across sub-regions (i.e., Kenya as an entry for East Africa, Ghana as the entry for West Africa, and Egypt for North Africa)

Behavior and characteristics

“With a 5 to 7 - year lifecycle... it's difficult to build, scale and exit in that timeframe if it’s something new”

~ Contributor

“We are seeing value in growing organically in East Africa, where we will originate, execute and monitor our own investments in the region.”

~ Contributor

30Source: Overall desk research, interviews and other analysis

The Conservative Investor is risk averse, and looks beyond SA due to the economic situation; they lack local expertise and deal flow Drivers Challenges

• Limited execution capability – most Conservative investors’ fund management is centralized in SA, with few regional partners having an RoA presence; most presences focus on deal origination, not execution

• One Conservative mentioned the lack of data on local markets as a major challenge to expanding their portfolio beyond SA

• The skills gap in investment execution in RoA results in investors waiting a longer time to secure deal closure in RoA

• Low deal flow – Conservatives are aware of the larger viable deals in

RoA but there are many players vying for those. As they are not ‘on-the-ground’ they struggle to identify the niche investment opportunities

• Structural volatility – because Conservatives do not have local presence in RoA, they heavily rely on macro-economic data to support any investment decisions. As a result, they are heavily limited in the markets they can operate in which provide sufficient access to this information

Domestic stagnation

• For most investors, the flight of global institutional investors out of SA is driving them to look at more options in order to retain customers – they are pushed out, not pulled by opportunity

• One Conservative mentioned that they only step beyond SA when ‘pushed’ by partners…