UN official bets on Africa-owned PE funds to reduce capital flight

Promotion of Africa-owned private equity funds and regional stock exchanges can help stem capital flight from the continent, UN Economic Commission for Africa (Uneca) executive secretary Carlos Lopes has said.

Local financiers and markets, he said, can help raise domestic capital for development.

“Capital flight represents a direct loss of domestic capital and highlights effects of the country’s policy distortions on investment. Factors that fuel it, such as real exchange rate overvaluation, have to be central in the discussion,” Mr Lopes said during a seminar on capital flight and tax havens in Africa.

Private equity has been rising in Africa but the continent still attracts a small share of global equity funds, mostly concentrated in South Africa, at 53 per cent; Egypt, Mauritius and Morocco; at eight per cent each, and Nigeria at five per cent.

Business services, information technology, industrial products and telecom, media and communications are the leading sectors in attracting investable funds.

According to Uneca, unreported financial outflows from developing nations, referred to as illicit capital flight, amounts to as much as 10 times of the annual global aid flows and two times the debt service the countries pay each year.

READ: Kenya leads Africa in private equity firms’ investments

Deepening local bond markets would help keep capital at home, going by oversubscription for infrastructure bonds in Kenya, Ethiopia, Zambia, Nigeria and South Africa.

“These bonds could perform better with superior returns, low borrowing costs, appropriate fiscal incentives, and credit guarantee facilities to protect against default,” added Mr Lopes.

The private equity industry in Africa is valued at $30 billion (Sh2.6 trillion). According to the 2014 East Africa Private Equity Confidence Survey by consulting firm Deloitte and Africa Assets, PE investments in east Africa last year were concentrated on agriculture, health and financial services.

The trend is expected to change however, with attention mainly moving to the SMEs, oil, gas and mineral sectors.

“Going forward, deals are expected to concentrate on SMEs in the consumer-driven sectors where an expanding middle class is seen as a key driver of future revenues,” said the survey.

Uneca says that the public-private partnership financing model should be explored to entice capital inflows into high return sectors.

Kenya’s legislation on PPP has seen investors become more active in transport, energy, water and ICT project financing.

The government’s 5000 Megawatt electricity plan has attracted several international firms to set up wind power farms.