Tag Archives: Private Equity

Managing Expectations in African Private Equity

The African oil and gas industry is increasingly turning to private equity for financing. What kind of investor is looking at African energy, and how can they best unlock value in the sector?

At last month’s Africa Oil & Power conference in Cape Town, an overwhelming theme was the role of private equity investment in the African oil and power sectors. Most questions were centered around the quality of private equity investor appetite for opportunities in African oil and gas against a background of the so-called “Africa Rising” narrative. The narrative assumes the continent, given its abundant potential, is on an upswing, potentially attracting significant investment dollars across many sectors, and is buoyed by its youthful population and increasingly solid institutional, regulatory and democratic frameworks. Unfortunately, this is an exaggerated expectation of some African leaders and their commitments to speedy political and economic reforms. And following the collapse in oil prices, slow growth in the US, Europe, and an economic slowdown in China and to some extent India, Africa’s rise began to look a little less stellar.

According to panelists on the Private Equity panel session, many opportunities do exist in the oil and gas sectors. However, investors with an African focus, particularly in oil and gas, will need to have a nuanced approach. Each country has its own regulations, and is at its own individual level of development of its petroleum resources. Most governments are inclined to promote an existing state monopoly or locally established producers. Investments in the oil and power sectors tend to be politically sensitive, capital intensive and labour intensive, making the barriers to entry very high. This gives existing companies a serious advantage over new entrants. The resultant minimal competition does, in fact, create opportunities for those private equity firms with deep pockets, open-ended investment structures and those who are comfortable with long term annuity income expectations.

To invest successfully, companies have to navigate between the portfolio investment expectations and the reality on the ground. In most Sub-Saharan African countries, oil companies that are in need of expansion or growth capital are primarily on-shore local producers, and are oftentimes owned by family-led business owners. There is a tendency for these businesses to have a very wary attitude towards private equity-type funding, and its various expectations — such as seats on the board, line of sight to monthly management accounts, etc. This is due primarily to insufficient exposure to capital market realities and the variety of available funding sources.  Most of these companies have tended to rely on traditional bank financing. In situations where the opportunity to invest is clear, closing a transaction has required a lot of “hand-holding” throughout the negotiations.

Notwithstanding that there is a present surplus of oil production in the market keeping prices at $50 per barrel and less, the demand for oil and gas is not going away anytime soon. While alternative and renewable energy is growing, the world today still depends on oil and gas, and that is not slowing down.

Additionally, the issues African focused oil and gas investors face are not dissimilar from those of other investment categories. Clearly, on a risk adjusted basis the African oil and gas opportunities should make sense for the sort of investor who is comfortable with a particular risk profile with potentially high returns. These investors also should not have a ‘one size fits all’ style of de-risking strategy. To potentially unlock value, investors will have to closely shadow their investments through improving corporate strategy and governance.

There is increasingly a larger presence of Africa-originated funding in the African oil and power space, including private equity, in the form of African-owned family offices and development finance institutions like the African Development Bank and African Export-Import Bank. The involvement of development institutions can also encourage private equity firms to seriously consider investment opportunities, as their role oftentimes helps mitigate issues of sovereign risk guarantees.

After a disruptive year, what next?

With a year of political upheavals in the US and Europe behind us, but predictions of further disruption ahead, what is the outlook for companies in the African energy space?

It’s a new year, 2017, following Brexit, the US elections and gyrations in the oil and gas sector, among other sources of turmoil. Despite uncertainty, it’s time for African oil and gas firms to look forward.

Political disruption in the US and Europe

Clearly, the election result in the United States was a case of an American version of ethnic nationalism triumphing over hope, inclusiveness and liberal progressiveness. It was also a statement of the impact of new technology and globalization on labour markets, and a testament to the political power of social media. We now have a new US president with a pedestrian knowledge of Africa. What does it mean for the continent and what should we expect?

It’s also that time of year again – the season for planning the way forward through the coming 12 months. 2016 was a turbulent year politically, business-wise, and even socially. Europe and the USA, once beacons of stability, became poster children for political and economic risk. Previously fringe right wing groups are now moving to occupy the political centre in most of Europe. The implications are not yet clear.

African energy in uncharted waters

In the African energy space, 2016 was a disruptive year for big and small independent oil and gas operators due to collapsed oil prices and fallen revenue streams. 2017 is going to present most oil and gas companies with new challenges as the industry moves further into uncharted waters. Given the impact of last year’s overall performances in the sector, most African oil companies, from juniors to large corporations, will have to optimise their operations, rationalizing costs due to the need to realize value while contemplating new business opportunities.

“The markets are in for a rough phase as we move ahead, and lack of clarity in the regulatory environment governing the oil and gas sector will lead to more uncertainty.”

Most businesses will have to refine their business models, and start using progressive financial funding models based on efficient service delivery. Perhaps we will see increasing use of smart technologies, such as drones, which can be used to collect and assess data from problematic land assets or offshore rigs. There are certainly ways to reduce some of the prevailing high human and material costs entailed in oil and gas exploration.

Change has got to come

As per funding options going forward, rising oil prices will give investors some comfort. However, potential targets will be those companies that have used the downturn to rework their business models, fine-tuning operational efficiency, managing costs downwards, and embracing new technology like cloud computing.

Cloud-based infrastructure, aside from its low cost of entry, will also enhance value if utilized efficiently. However, given that the energy sector is highly sensitive in terms of information, politics and capital, the jury is still out in the African space on the speed with which cloud technology can be embraced.

During the recent West Africa Energy Assembly conference (January 17, 2017) in Lagos, Nigeria, the prevailing theme was regulatory environment and the impact of the new US president. According to most participants, the markets are in for a rough phase as we move ahead, and lack of clarity in the regulatory environment governing the oil and gas sector will lead to more uncertainty. Donald Trump’s policies will no doubt have an impact on supply and demand in the global oil industry. On the impact of the new president on Africa and its oil and gas sector, we’ll need a lot more information before making predictions. The business of oil and gas production in Africa is no way coming to an end; however, some dated modes of operating will have to change.