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Private equity investments are becoming more popular and more common in Africa but just what is private equity and how does it differ from other forms of investment? Richard Walker takes you past the often-bewildering initials to the heart of what PE is and why Africa is so attractive to fund managers.
Private equity investment is one of the fastest-growing areas of African finance. Private equity firms are queuing up to find attractive companies to buy into directly, and private equity investors have stumped up a record $2bn in investment commitments for African funds in the year up to September 2013 according to Prequin, a provider of data on 'alternative investments'. So what is private equity, and why is it proving so very popular among investors interested in Africa?
Private equity is an 'alternative investment' approach. It is usually grouped along with hedge funds, venture capital, and specialist funds like infrastructure and real estate investment funds - all ways of aggregating capital and investing it in specialist areas of the economy. But unlike hedge funds or sector specialists, private equity does not usually invest in publicly traded shares or corporate debt.
Traditional investment approaches are based on public equity. Public equity means the shares that are traded on stock exchanges - exchanges which usually require businesses to publish detailed, audited accounts that make it relatively easy for investors to see what they are buying.
Private equity - or PE as it is usually known - is very different. Private equity investors take large stakes in companies that are usually not listed on stock exchanges, quite often familyowned businesses that are in need of finance, or technology, or management expertise.
Since the private equity stake is relatively large, it gives the PE investor the kind of influence over the way the business is run that public investors are unlikely to have. PE investors are more like owner-managers of the business, and they act like them, often dictating how the business should be run, and even who should...