This special report presents an exploration of the effects of currency volatility and political uncertainty on the African private equity industry, and provides insights into the strategies adopted by fund managers active on the continent to address the risks and capture the opportunities involved. It features views and experiences collected through a survey and interviews conducted with industry practitioners.
Our political risk survey highlights that 63% of GPs view currency and commodity price volatility as having been the most important macro factors in Africa over the past three years. 45% of GPs consider geopolitical risk to be the biggest macro risk over the next three years, while sector-level political risk involving regulatory change is of greatest concern to 52% of respondents.
Most GPs (67%) consider political risk management when constructing their portfolios. GPs favoured diversification (55%) and the avoidance of risky locations (33%) as the main ways of managing political risk.
Our political risk case studies show that macro-level risks can be weathered by investing in market-leaders in resilient sectors and by adopting expansionary strategies.
While our survey respondents do not favour purchasing political risk insurance, it provides an alternative option for GPs. Providers such as MIGA, OPIC and ATI can insure against a wide variety of risks, and may offer dispute resolution services between investors and governments, which is useful for mitigating sector or company-level risk.
Our currency risk survey highlights that most respondents (90%) perceive currency risk as being either important or very important. 78% of GPs claim that currency risk has increased in Africa, and 75% claim that it has had a detrimental impact on their realised investments.
73% of GPs see investing in resilient businesses as the most important strategy for countering currency risk. GPs consider Consumer Staples (55%), Healthcare (43%) and Energy (38%) to be the most defensive sectors in this regard.
Finally, our currency risk case studies show 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.
While traditional derivatives are unsuited to hedging multi-year investments, organisations such as TCX and some commercial banks can provide risk hedging solutions for investors at critical points of the investment cycle.