Opportunities for private equity (PE) investments beyond South Africa’s borders were starting to attract more interest from investors, Ernst & Young’s (E&Y’s) ‘Global private equity watch – a return to entrepreneurship 2012’ report said on Tuesday.

South Africa remained the sub-Saharan Africa region’s largest PE market, having attracted the most PE investment over the last two years.

“Sub-Saharan Africa is one of the ‘frontier markets’ with the most potential. In the last few years, Africa, as a whole, had experienced a broad range of reforms, with improvements in infrastructure aimed at regional integration, meaning that the continent is now ready for investments and a number of funds have already established themselves there,” E&Y global private equity leader Jeffrey Bunder said.

Gross domestic product (GDP) growth across Africa was expected to average 5% over the next ten years, with Ghana, Ethiopia and Uganda expected to exceed 7% GDP growth a year. But with PE penetration in the sub-Saharan region low at 0.11%, there was less competition for deals and investment opportunity.

“The range of deals available to PE investors is also expanding as the region’s economies diversify away from their reliance on extractive industries. Financial services, technology, telecoms, agriculture, consumer products and infrastructure investments all figure prominently in the sectors attractive to PE in Africa today,” Bunder said.

The report expected that by 2030, half of Africa’s people were expected to be living in cities, as compared with today’s one-third. The number of young people was also growing, as was a highly aspirational middle class. In the sub-Saharan region, around 34% of the population is categorised as middle class, a percentage that will grow to 42% by 2060.

By 2020, Africa’s middle class is expected to spend more than $2.2-trillion a year, which is about 34% of the global total.

“The growing interest in Africa shown by PE firms was being driven by a combination of high growth rates and ongoing political and economic reforms. Powerful demographic trends, constituting a rising middle class and increasingly urbanised population, are expected to drive increasing PE investment levels,” E&Y African PE leader Graham Stokoe said.

Meanwhile, PE activity in the Americas remained broadly stable through 2011 in terms of deal value, while the Asia Pacific region saw a modest increase in value. By contrast, Europe saw a drop-off in activity, largely driven by the European debt crisis.

PE-backed M&A exits reached $20.4-billion in the first two months of this year, up nearly 15% from last September and October’s market lows. PE-backed initial public offerings (IPOs), while still challenged by tentative capital markets, raised more than $1.5-bilion in the first two months of the year, up from a low of $600-million in September and October last year.

While deal activity remained positive at the start of this year, overall value was down on the same period last year, with $32.7-billion in M&A exits and $7.3-billion in IPO exits.

Bunder said that over the last few years, PE has extended well beyond its traditional markets into fast-growth economies such as India, China and Brazil in an attempt to capitalise on the emerging middleclass dynamic in those geographies.

“In the future, it is those PE firms with the vision to tap into the world’s so-called ‘frontier markets’, such as Colombia, Chile, Indonesia, Vietnam, the Czech Republic and Turkey that would reap above-average returns. These markets share similar trends to the Brazil, Russia, India, China and South Africa-countries, but valuations tended to be more reasonable and competition more limited,” Bunder said.

He pointed out that entrepreneurial spirit is the key to PE’s staying power. The report found that PE firms have demonstrated their entrepreneurial ability to respond to severe economic volatility, a consequence of the global recession.

“These behaviours were critical to overcoming the economic challenges and enabled value creation on behalf their investors. This entrepreneurial approach is a key element to the industry’s future success,” Bunder said.