The international market is betting on Africa’s growth. Major international players, including Kohlberg Kravis Roberts and Carlyle, have entered the African market, and others such as Blackstone have expressed interest in doing so in the near future.

The 2014 edition of Mergermarket’s Deal Drivers Africa report shows that Africa, like the Middle East, is home to increased deal-making.More than half of the survey respondents expect this trend to continue and deal-making to increase significantly in the next 12 months. The volume of deals increased 7% year-on-year (YoY) in the first nine months of 2014, and M&A activity between African countries quadrupled.

Natural resources no longer leading the charge

The news is not all positive. Several West African countries were hit by Ebola, leading to a downturn in M&A activity. Also, deals in 2014 were smaller than in 2013. he lower deal value can be attributed partly to the fact that investors focused on deals outside of South Africa, which is the country in which deal values are largest. Also, valuations in the natural resource sector are down as compared to the prosperous mid-2000s, when Chinese companies led the way into the African commodity market.

The lack of interest from China corresponds with a decline in both volume (25% YoY) and value (79% YoY) of deals in the natural resource sector. Zambia and Nigeria were both negatively impacted by this trend. Nigeria was also unable to export crude oil to the United States due to the shale boom.

New developments

And yet, Nigeria is emerging as a new hub of activity, as it surpassed South Africa as the continent’s largest economy in 2014. Together, activity in the two countries made up almost 60% of total domestic deal value. On a regional level, East Africa is developing a reputation for hosting fair value targets with the potential for regional expansion.

In terms of sectors, inbound deal value in the financial and telecommunications, media, and technology sectors surpassed energy, mining, and utilities. Telecommunications, media, and technology activity jumped 53%, and value increased an impressive 471%. Private equity activity was also on the rise in 2014, albeit at a slower rate: buyout volume rose 11% and value grew 7%.

When asked to predict which sectors would see the greatest increase over the next 12 months, 26% of the respondents to Mergermarket’s survey picked energy, mining, and utilities. The report concluded that opportunities in Africa’s power generation sector are emerging quickly because electrification remains a large obstacle in many promising markets.

Challenges and opportunities

Concerns over transparency and changes in the regulatory environment continue to threaten deal-making on the continent. Many countries remain challenging environments for doing business, and investors face issues such as opaque tax regulations, complications for repatriating profits, and difficulty in extracting value from investments in an acceptable timeframe.

However, the prospects are improving. It is crucial to keep in mind the diversity across the continent because the investment landscape varies significantly between countries, not just regions. For example, countries such as Uganda, Kenya, and South Africa are attempting to promote institutional investment through regulatory reform. Another promising market is Mozambique, which will likely offer new opportunities because of its government’s commitment to developing its large natural gas reserves.

Many deal-makers are already capitalizing on these opportunities, creating a positive trend for M&A in Africa.