The investment by UK-based private equity firm Permira into one of sub-Saharan Africa’s biggest data centre companies, Teraco Data Environments, is another marker that private equity players in Europe and the US are taking investing in South African and Africa more seriously.
This is Permira’s first investment in Africa and is part of a surge that has seen a sharp rise in the number of private equity deals closed on the continent. The value of private equity transactions for example accelerated from US$2,1bn in 2012 to in $8,1bn in 2014, according to the African Private Equity and Venture Capital Association (Avca) and research group African Assets said the number of deals grew from 56 in 2012 to 86 in 2013.
Permira’s investment follows the Carlyle Group setting up a $700m sub-Saharan African fund and the largest asset management company in the world, BlackRock opening an office in South Africa.
Teraco CEO Lex Van Wyk declined to reveal the scale of the investment or even the size of the stake, saying only that Permira and management would become the sole shareholders, replacing the 18 angel investors who have funded the group since its inception in 2008.
Van Wyk said bringing in Permira as an investor grew out of the request by some of its shareholders to consider an offshore investor because they thought they could get a better valuation if they could get foreign institutions to consider investing.
According to Van Wyk, about R600m was raised prior to Permira to set up its three data centres in the country’s major cities, including its soon to be developed second facility in Johannesburg.
To facilitate this expansion, Teraco received a R400m credit facility from Barclays Africa last year. The funds provided by Permira would be used to fund the exit of its initial shareholders.
In a sense, Teraco’s success runs against the tide. When it was formed, there was talk there could be an overinvestment in data centres as several technology groups, including telecommunications operators, were creating their own facilities.
However, Teraco was able to find a niche by offering a “carrier neutral” service, says Van Wyk. Operators feared rivals would carry their traffic at a slower speed when going through their competitors’ data centres. By literally offering neutral ground where operators could transmit data, Teraco allowed them to send traffic without fear they would be discriminated against.
The model has worked well and now the group, with Permira’s backing, has ambitions to expand across the continent. Van Wyk said the group would probably expand across the border by taking a holding in existing data centre operators.
For its part, Permira thinks it’s onto a winner with Teraco. “We are pleased to be announcing our funds’ first investment in Africa with this exciting opportunity, which is another example of our technology strategy of backing strong market leaders in fast growing markets,” said Richard Sanders, technology team head at Permira.
Permira’s investment is expected to be one of many private equity deals that will be closed this year. “A number of large private equity funds are likely to close in 2015, resulting in a bumper year of fundraising, even with prospects for subdued economic growth in China and Europe and the knock-on effect of lower oil prices on oil-exporting countries,” said Avca.
- This article was republished from Moneyweb with permission
- See also: Private equity player swoops on Teraco