SPECIAL REPORT: The Mergers & Acquisitions Market in Africa’s Alternative Finance Sector

Headlines in the M&A market in Africa in recent years seem to have been dominated by the to-ing and fro-ing of Anglo-South African giants such as Barclays Africa/ABSA and Old Mutual. However, financial institutions in the middle market perhaps have been more active. The M&A market in the alternative finance sector (non-bank or “specialty” lenders) has seen at least 30 transactions (excluding minority stakes) completed over the last five years, and activity levels have remained robust over the last 18 months notwithstanding the slow-down of the M&A market overall.

The alternative finance sector covers a range of credit institutions that are not part of the traditional banking sector, for example, micro (enterprise) finance, consumer finance, leasing or invoice discounting, vehicle lending, housing finance, student finance, fintech, and specialist banks. Awareness of this sector recently has become much more nuanced: in the past, all these types of institutions might have been lumped under the microfinance umbrella.

We have seen a number of critical drivers in play in the consolidation of alternative finance recently. Specialist private equity funds that target the sector are growing in size and number, including several managed by groups that are now on their second or third funds. Many of the limited partner commitments for these funds have been sourced from development finance institutions, and many are targeting measurable social impact in addition to financial return. As well as bidding for new assets (we had eight private equity funds in due diligence for a recent transaction in the sector), many of these funds are now in “exit mode,” looking to sell their stakes in portfolio companies. In some cases, we have seen private equity shareholders act as catalysts for their portfolio companies to sell non-core subsidiaries or even to sell the entire company outright.

Cross-border consolidation by regional leaders is another important factor. Many of the largest players have been active acquirers. For example, Letshego, which is listed on the Botswana Stock Exchange and reports USD 710 million in total assets from operations in 11 countries, has bought two businesses in West Africa. The larger of these is afb Ghana, which Letshego bought from JUMO World in a transaction managed by Verdant Capital as advisor to JUMO. Pan-African fintech lender MyBucks recently acquired those subsidiaries of Opportunity Bank, a traditional bricks-and-mortar microenterprise lender, that operate in six African countries.

To date, the leading South African consumer lender – and now full-fledged bank – Capitec has not elected to expand outside its home country. Although opportunities represented by single-country operators in the continent generally benefit from lower levels of public indebtedness, their scale is much more limited.

Horizontal consolidation also is an important factor, as specialist lenders look to broaden their product mix. Often the motivation is acquiring deposit-taking licences or capacity, which is seen as a source of cheaper local-currency funding. In 2014, Namibia’s JSE-listed financial services conglomerate Trustco Group Holdings acquired FIDES Bank, thereby bringing a deposit-taking licence into the group, as well as adding SME lending and mortgages to a product mix including student loans, life insurance and short-term insurance. In Zambia in 2012, the Pan African Building Society, which is owned by the Mukwa Fund, merged with the Industrial Credit Company, thereby combining a deposit-taking mortgage lender with a leasing and SME-lending portfolio largely funded by development finance institutions. We see the trend of domestic consolidation continuing and perhaps accelerating. At least half the bids for the single-country operators we have sold came from other domestic lenders.

Finally, financial services technology has become a happy hunting ground for deal makers in the region. Providers of development equity in the sector have included tech funds and specialist fintech funds, both from Africa as well as the West Coast of the US. Traditional private equity funds also have participated in fintech investments; however, many have been scared off by the very high valuations attributed even to relatively early-stage companies in the sector.

This sponsored content was written by Ed Higenbottam, the Managing Director of Verdant Capital, a corporate finance firm with offices in Johannesburg, Mauritius and Accra that specializes in advisory services and capital raising for mid-market financial institutions across Africa.

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