Economy
Africa: Resilience in the Private Equity Market
By Angela Simpson and Lydia Shadrach-Razzino
Private markets in sub-Saharan Africa (SSA) have seen a continuous rise in activity since the COVID-19 pandemic. The latest AVCA Private Capital Activity Report 2022 revealed that $7.6 billion of private capital was invested in 2022, resulting in a 3% growth in deal value across the continent last year after a similarly upbeat 2021. According to the report, 37% of the deal volume came from multi-region investments.
Challenges, risks and resilience
This resilience is despite the impact of numerous crises over the last couple of years, especially the looming global recession, supply chain disruptions and soaring energy prices. These factors have led to fears that we could be entering an extended period of high inflation and poor economic growth, but for private equity investors, challenging periods can also provide opportunities for access to value. While not immune to market challenges, the private equity market has the resilience to survive and thrive.
On the positive side, the high amounts of available capital mean that fund managers have more to deploy in a better value environment. The private sector has a remarkable capacity to adapt to changing economic conditions and capitalize on new opportunities. This is boosted by the fact that, to a large extent, risk management has already been factored in. According to Deloitte’s Private Equity Review 2022, 41% of PE firms in South Africa have prioritized risk management in portfolio companies, and 14% of private equity firms in the country said they would focus on bolt-on and tuck-in acquisitions to augment their portfolio companies.
Exits
The general consensus is that exits in the African market might take a little longer going forward, and the fund life of a typical vehicle might need to be extended as managers hold assets a little longer to turn the time and growth into a premium. We have not seen many IPOs recently, and the cyclical nature of the market impacts this. The recent AVCA report details how private capital investors achieved 82 full exits in 2022, the highest number ever recorded in a single year on the continent. Another recent AVCA survey showed that LPs see opportunism in the PE market in Africa for the medium- to long-term, and more than 90 per cent are hopeful that returns in Africa over the next few years will be similar to those in other emerging markets.
Take-privates
Take-privates are also expected to increase in popularity in 2023. There have been some delistings from the Johannesburg Stock Exchange in the past 18 months, and this trend will likely continue. According to the AmaranthCX database of South African company listings and delistings, South Africa has been averaging about 25 delistings a year. This, however, also presents a good opportunity for PE companies as they can take over and delist struggling companies. Taking a longer-term view, PE sponsors can work with the management team of a delisted company to transform it, using innovative methods to create a stronger and more resilient company, removing the burden of reporting requirements and the market spotlight.
Adaptability in financing
Increasing inflation and rising rates have also resulted in a decrease in the availability of cheap debt financing. Fund managers have to generate organic growth and are looking at driving a real improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA). Add-on and buy-and-build strategies are also proving popular because they are helping to mitigate the higher valuations that may have been paid for the acquisition.
There has also been an increase in direct lending, with investors seeking to partner with lenders that can provide deal certainty for acquisitions. However, direct lending hold sizes have been reduced, which has required that financing structures be adapted to facilitate longer-term deals. Other innovative financing methods include permanent capital vehicles, which result in a longer fund life and enable PE firms to hold assets for longer, something that aligns well with the longer holding period often seen in African portfolio companies.
Blended finance is another fundraising avenue that has risen in popularity, and it means that investors can use catalytic funding, such as grants to mobilize private sector investment. According to Convergence, SSA has been the most targeted region for blended finance transactions to date, representing 33 per cent of blended finance transactions launched in 2017–2019 and 43 per cent of the market historically.
Another factor that has mitigated the pandemic’s impact on PE activity in Africa is the composition of the limited partner base of firms operating on the continent, where development finance institutions (DFIs) continue to play a significant role. We have also seen increasing interest in and appetite for start-ups among DFIs, with some pretty edgy new ventures attracting their attention.
DFIs also continue to be the main providers of long-term infrastructure finance in Africa. Local and regional banks, specialist infrastructure funds, and private equity and debt firms are stepping in to collaborate with DFIs and access returns. DFIs can shoulder political risk, access government protections in a way that others can’t, enter markets others can’t, and are uniquely capable of facilitating long-term lending. Multi-finance and blended solutions are therefore expected to grow in popularity as a way to de-risk deals and support a broader ecosystem of lenders.
Resilience in sustainability
In terms of preparing for future market resilience, there is a growing focus among PE investors on the green, low-carbon, and sustainable initiatives in Africa. Environmental, social, and governance (ESG) have been incorporated into PE funds’ general investment considerations for several years now, but it’s fair to say that these are no longer nice-to-haves. Energy efficiency, community healthcare, staff training and qualifications, greenhouse gas emissions, the highest standards of governance and best business practices, inclusion and diversity, social impact, and litigation risks are some factors they have been considering. Alongside the increased focus of equity investors on ESG, some lenders are also prescribing particular ESG principles that a company must meet to receive funding.
It appears that the PE sector is shining in Africa as we head into the second half of 2023, and investments in the sector are playing a catalytic role in sustainable growth and investment on the continent. The Deal Leaders International report was optimistic about the M&A market in SSA, saying that foreign direct investment would increase in the next few years, despite the global economic recession. However, current economic challenges have required resilience, adaptability and agility from the PE market, leading to changes in the structure and length of deals, the implementation of new financing methods, effective risk management, and an increasing focus on ESG.
Angela Simpson and Lydia Shadrach-Razzino are Partners and co-heads of the Corporate/M&A Practice, Baker McKenzie Johannesburg
By Adedapo Adesanya
The price of the crude oil benchmarks moderated by about 3 per cent on Thursday on investor hopes for an end to the United States-Israeli war with Iran that could reopen the Strait of Hormuz, following a ceasefire deal between Israel and Lebanon.
Brent futures lost $2.78 or 2.84 per cent to trade at $95.03 per barrel, while the US West Texas Intermediate (WTI) crude declined by $2.98 or 3.1 per cent to close at $93.04 per barrel.
Israel and Lebanon said they have agreed to implement a ceasefire on Wednesday, raising hopes for a deal between the US and Iran. Iran has made any agreement conditional in part on an end to fighting between Israel and Hezbollah, an Iran-aligned group in Lebanon. However, Israeli strikes in southern Lebanon continued on Thursday.
Iran signalled that there has been “no tangible progress” in the talks with the Americans on a potential deal, while the Israel-Lebanon ceasefire announced by the United States overnight appears shaky.
“No tangible progress has been achieved in the negotiation process,” Iran’s Foreign Minister Abbas Araghchi was quoted as saying by the semi-official Iranian news agency Tasnim.
The US and Iran have been exchanging messages on a framework proposal for a potential agreement for weeks. The oil market has reacted to each signal or hint of a breakthrough with sell-offs that sent Brent Crude prices to below $100 per barrel last week.
Despite the market hopes, the positions of the two sides appear to remain very distant, and a re-opening of the Strait of Hormuz is not imminent.
Earlier this week, Iran targeted civilian infrastructure in Kuwait and Bahrain, and alarms were raised at US military bases in Saudi Arabia, as Iran responded to the Israeli offensive in Lebanon.
The Republican-led US House of Representatives approved a resolution to block President Donald Trump from continuing the war against Iran. To take effect, the resolution would need Senate approval and a two-thirds majority in both chambers to override an almost certain Trump veto.
The Organisation of the Petroleum Exporting Countries (OPEC) expects robust oil demand growth and is not changing its estimate, according to its Secretary General, Haitham Al Ghais, on Thursday.
By Adedapo Adesanya
Dangote Petroleum Refinery & Petrochemicals has increased its crude oil processing capacity to 700,000 barrels per day, exceeding its nameplate capacity of 650,000 barrels per day, reinforcing its position as the world’s largest single-train petroleum refinery.
The milestone was achieved during a performance test conducted by the refinery’s process licensors, highlighting the facility’s operational efficiency and ability to process additional feedstock while optimising output across its production units.
Vice President, Oil and Gas, Dangote Industries Limited, Mr Devakumar Edwin, said the increase forms part of a broader expansion strategy aimed at raising the refinery’s capacity to 1.4 million barrels per day within the next 30 months.
According to him, the planned expansion is expected to strengthen Nigeria’s energy security, eliminate dependence on imported refined petroleum products and position the country as a major regional export hub.
Mr Edwin noted that the refinery’s growth trajectory reflects ambitions that extend beyond meeting domestic demand, with a focus on establishing continental and global refining leadership.
The refinery, owned by billionaire Aliko Dangote, began fuel production in 2024 and has since scaled up output of petrol, diesel and jet fuel.
It supplies domestic markets and exports to African countries and Europe, including the United Kingdom, France and the Netherlands, while also shipping products to the United States and Saudi Arabia.
The refinery has also supplied petrol (called gasoline) to the United States and jet fuel to Saudi Arabia, further expanding its global footprint.
Dangote Refinery’s growing output has strengthened its role in stabilising fuel supply across Africa, particularly amid disruptions linked to geopolitical tensions in the Middle East. Industry observers say the facility has increasingly become a key source of energy security for several African nations.
Recall that Dangote Petroleum Refinery emerged as the world’s largest exporter of jet fuel in April, according to S&P Global Commodities.
The refinery has also contributed to reducing Nigeria’s dependence on imported fuel, easing pressure on foreign exchange reserves and supporting broader efforts to maximise value from the country’s crude oil resources.
Growing production levels have attracted interest from global crude suppliers and commodity trading firms, with the refinery sourcing feedstock from both domestic and international producers to sustain rising output.
Looking ahead, Dangote has outlined plans to transform the facility into the world’s largest refinery by 2028, with a targeted processing capacity of 1.4 million barrels per day.
The expansion is expected to generate significant economic benefits through increased industrial activity, job creation, export earnings and improved trade balances.
Beyond fuels, the refinery is also expected to strengthen downstream manufacturing through the supply of liquefied petroleum gas (LPG), polypropylene and other industrial feedstocks used in the production of packaging materials, consumer goods and detergents. Future plans also include the production of Linear Alkylbenzene (LAB), a key raw material in detergent manufacturing.
Most traders evaluate a strategy by looking at its historical performance.
Common metrics such as total return, win rate, profit factor, maximum drawdown, and Sharpe ratio provide valuable information about how a strategy performed in the past.
The problem is that historical performance tells only one story.
Financial markets are inherently uncertain. Even a strategy with an impressive backtest can experience very different outcomes once it encounters changing market conditions, unexpected volatility, or an unfavorable sequence of trades.
This is why professional traders, quantitative researchers, and portfolio managers increasingly rely on Monte Carlo simulation as part of their risk assessment process.
Rather than focusing on a single historical outcome, Monte Carlo analysis explores thousands of possible scenarios, helping traders understand what could happen—not just what already happened.
Why Historical Performance Is Only Part Of The Picture
Backtesting remains one of the most important tools in strategy development.
Platforms such as MetaTrader 5 provide sophisticated testing environments that allow traders to evaluate Expert Advisors and trading systems using historical market data.
A typical backtest may show:
| Metric | Result |
|---|---|
| Net Profit | 35% |
| Win Rate | 54% |
| Maximum Drawdown | 12% |
At first glance, these numbers appear encouraging.
However, every backtest contains one important limitation:
History occurred only once.
The strategy followed a specific sequence of winning and losing trades. If those same trades had occurred in a different order, the overall experience could have looked very different.
This is where Monte Carlo analysis becomes valuable.
Understanding Sequence Risk
One of the most important concepts in Monte Carlo simulation is sequence risk.
Consider a simple series of trades:
| Trade | Result |
|---|---|
| 1 | +3% |
| 2 | +2% |
| 3 | -1% |
| 4 | +4% |
| 5 | -2% |
The overall result is positive.
However, if those same trades occurred in a different order:
| Trade | Result |
|---|---|
| 1 | -2% |
| 2 | -1% |
| 3 | +2% |
| 4 | +3% |
| 5 | +4% |
the final return may remain similar while the path becomes significantly more difficult.
The trader may experience:
- Larger drawdowns
- Longer recovery periods
- Increased psychological pressure
- Greater capital requirements
The strategy itself has not changed.
Only the sequence has changed.
Monte Carlo simulation explores thousands of these alternative scenarios to estimate how different trade sequences may influence future performance.
Exploring Thousands Of Possible Outcomes
Monte Carlo analysis works by generating large numbers of alternative outcomes based on historical strategy behavior.
A simplified process looks like this:
Historical Trade Results
↓
Randomization
↓
Simulation
↓
Repeat Thousands of Times
↓
Risk Analysis
Each simulation represents a plausible alternative version of history.
By repeating this process thousands of times, traders can estimate:
- Potential drawdowns
- Losing streak probabilities
- Capital requirements
- Performance variability
- Confidence intervals
The objective is not to predict the future.
The objective is to understand uncertainty.
Looking Beyond Average Returns
Many traders focus heavily on expected returns.
Risk professionals often focus on worst-case outcomes.
Consider two strategies:
| Metric | Strategy A | Strategy B |
|---|---|---|
| Average Return | 20% | 20% |
| Historical Drawdown | 10% | 10% |
At first glance, they appear nearly identical.
Monte Carlo analysis may reveal a different story:
| Risk Metric | Strategy A | Strategy B |
|---|---|---|
| Worst Simulated Drawdown | 18% | 35% |
| Probability of 20% Drawdown | 5% | 27% |
Although historical results appear similar, future risk characteristics may differ significantly.
This is one reason why institutional investors rarely rely solely on traditional backtest statistics.
The Reality Of Losing Streaks
One of the most underestimated aspects of trading is the impact of consecutive losses.
Even profitable strategies can experience difficult periods.
For example:
| Consecutive Trades |
|---|
| Loss |
| Loss |
| Loss |
| Loss |
| Loss |
| Loss |
Such sequences are completely normal.
However, they often create emotional pressure and lead traders to abandon otherwise profitable systems.
Monte Carlo analysis helps estimate:
- Expected losing streak lengths
- Worst-case losing streaks
- Probability of extended downturns
- Recovery requirements
Understanding these possibilities allows traders to set more realistic expectations before real capital is exposed.
Position Sizing And Capital Preservation
Position sizing is one of the most important applications of Monte Carlo analysis.
Even profitable strategies can fail if risk per trade is too aggressive.
Monte Carlo simulations help answer questions such as:
- How much capital is required?
- What position size is sustainable?
- What drawdown level is acceptable?
- What is the probability of account depletion?
For example, a strategy may appear relatively safe at 1% risk per trade.
The same strategy may exhibit a significant probability of severe drawdowns when risk increases to 5% per trade.
Understanding these relationships often leads to better risk-management decisions.
Portfolio Risk And Diversification
Monte Carlo simulation is not limited to individual strategies.
Portfolio managers frequently use it to evaluate:
- Multi-strategy portfolios
- Multi-asset portfolios
- Diversification effects
- Correlation risks
A portfolio may appear well diversified based on historical data.
However, asset relationships can change unexpectedly during periods of market stress.
Monte Carlo analysis helps traders evaluate how portfolios may behave under alternative scenarios rather than relying solely on historical observations.
Randomness Plays A Bigger Role Than Most Traders Realize
One of the most important lessons of Monte Carlo analysis is that randomness influences results more than many traders expect.
A profitable strategy can experience:
- Unfavorable timing
- Extended drawdowns
- Long losing streaks
- Temporary underperformance
without any deterioration in the underlying strategy.
Understanding this distinction helps traders separate:
| Normal Statistical Variation | Genuine Strategy Problems |
|---|---|
| Temporary drawdowns | Structural performance decline |
| Random losing streaks | Broken trading logic |
| Short-term underperformance | Changing market assumptions |
This perspective is essential for long-term strategy management.
Monte Carlo As Part Of A Complete Validation Process
Monte Carlo analysis works best when combined with other research methods.
Many professional workflows follow a process similar to:
| Step | Process |
|---|---|
| 1 | Strategy Development |
| 2 | Historical Backtesting |
| 3 | Optimization |
| 4 | Monte Carlo Analysis |
| 5 | Forward Testing |
| 6 | Deployment |
| 7 | Ongoing Monitoring |
The broader MetaTrader ecosystem supports many stages of this workflow through strategy testing, optimization, algorithmic development, and performance analysis tools.
The objective is not simply to find profitable strategies.
The objective is to understand how those strategies may behave when market conditions become less favorable.
Why Professional Firms Use Monte Carlo Analysis
Institutional investment firms focus on risk as much as return.
Their goal is not only to identify profitable opportunities but also to understand:
- Capital requirements
- Worst-case scenarios
- Portfolio resilience
- Survival probabilities
These considerations become increasingly important as capital allocations grow larger.
The same principles can benefit independent traders.
A strategy with slightly lower returns but substantially lower risk may ultimately prove more sustainable over the long term.
Understanding Risk Beyond The Backtest
Historical performance provides valuable information, but it tells only part of the story.
Monte Carlo simulation helps traders explore the uncertainty that exists beyond a single backtest result. By generating thousands of alternative scenarios, the technique provides insight into drawdowns, losing streaks, capital requirements, and portfolio resilience.
As algorithmic trading becomes increasingly sophisticated, risk assessment is becoming just as important as strategy development itself.
The most successful traders are often not those who find the highest returns.
They are those who understand the risks behind those returns and prepare for outcomes that may never appear in a traditional backtest.
In modern quantitative trading, understanding uncertainty can be just as valuable as identifying opportunity.
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