Concerns on the scale of the Ebola crisis, current levels of political unrest and plunging commodity prices would have sent investors rushing out of Africa not long ago. But deal-making in the sub-Saharan region is buoyant as most investors set aside short-term worries and bet big on the continent’s growth prospects.

“Africa is on the radar,” says Miguel Azevedo, head of sub-Saharan Africa investment banking at Citigroup in London. “Companies are developing strategies to go into the region, and M&A is naturally following up.”

In the past week a host of multinationals announced almost $8bn in deals across several sectors, demonstrating the appetite that exists to tap the region’s growing consumer markets.

Recent deals include debut investments by private equity giant Carlyle in Nigeria and South Africa; an alliance between brewer SABMiller and Coca-Cola; the entry of French insurer Axa in Nigeria; and a large merger in the retail sector in South Africa.

“You spend some time in Lagos and you see 170m people wanting a better life, a Coca-Cola at the end of the day and whatever else,” says Philip Lindop, head of investment banking for Africa at Barclays in Johannesburg. “It’s just fabulously exciting.”

So far this year the sub-Saharan region has seen 631 merger and acquisition deals, the highest number for a comparable period since at least 1995 and up nearly 10 per cent from last year, according to financial data provider Dealogic. If M&A continues to flow, say industry experts, this year could surpass the record set in 2012 with 656 deals.

The International Monetary Fund has forecast that Africa will be the second fastest-growing region next year, expanding 5.75 per cent, behind the developing Asia region that includes India and China. By contrast Latin America will expand 2.2 per cent. And although a rout in oil and other commodity prices would damp growth in 2015, optimism still prevails.

Joseph Rohm, portfolio manager at Investec in Cape Town, says an important trend is the renewed interest of the Middle East. This year Dubai Investment Corporation poured $200m into Dangote Cement, a company owned by Africa’s richest man, while Qatar National Bank paid $500m for a big stake in pan-African lender Ecobank.

African Mergers and acquisitions activity

Another driver is the arrival of global private equity groups including Carlyle, KKR and Blackstone, joining smaller Africa-focused buyout groups such as Brait, Abraaj, Helios, Development Partners International and AfricInvest. “Private equity activity, both exits and entries, is driving M&A at the moment,” says Mr Rohm.

Bankers say the interest of South African companies, which face lacklustre domestic economic growth, is fuelling deals. Woolworths, the Cape Town-based retailer, announced plans this year to acquire David Jones, an Australian department store, in a deal valued at A$2.14bn.

“The deal size is relatively small, but people are paying significant multiples to secure toeholds built on existing franchises”

– Martin Kingston, Rothschild South Africa CEO

The record number of deals clearly supports the “Africa rising” narrative, of a virtuous circle of healthy growth in the continent’s economies – supported by historically high commodity prices and cheap Chinese loans – and improved governance. For a decade African economic growth has been robust to an extent not seen since the decolonisation cycle of the 1960s and 1970s.

Colin Coleman, head of investment banking at Goldman Sachs in Johannesburg, says Africa is outperforming other regions. “There is a great enthusiasm about Africa – particularly as other emerging markets’ economic growth disappoints.”

Nonetheless, there are signs of caution. Although the number of deals has reached a record, they are smaller than during the same period last year.

Since January companies have announced M&A transactions worth $34bn, down from $35bn in the same period in 2013 and almost $49bn for the whole of 2007, before the global financial crisis.

Company executives and investment bankers say the drop in values reflects two trends unrelated to the health of the sector. First, investors are focusing most on M&A outside South Africa, particularly Nigeria, where deals are smaller. And second, valuations in the natural resources sector are down from the boom days of 2005-07 when Chinese companies led the investment charge into African commodities.

African Mergers and acquisitions activity

In banking, retail and food sectors valuations are higher than five years ago. Martin Kingston, chief executive of Rothschild South Africa, says there is huge competition and limited opportunity for deals.

“The deal size is relatively small but people are paying significant multiples to secure toeholds built on existing franchises,” he says.

Nigeria, which this year surpassed South Africa as Africa’s largest economy, is a case in point. Carlyle, which has raised $700m for its maiden sub-Saharan fund, is looking for more investment targets in Nigeria after its deal to buy nearly 20 per cent in local lender Diamond Bank.

Genevieve Sangudi, head of west Africa at the buyout group, says it has a “strong pipeline” of potential deals in Nigeria. “The trajectory and the outlook over the long term remain positive,” she says.

Will it last? The industry consensus is a categorical yes. But with mounting economic headwinds and the impact of presidential elections in Nigeria in early 2015 – some investors are bracing for an M&A slowdown next year.

Region’s fees still more ‘promise than reality’

The African mergers & acquisitions business is booming and investment bankers are rejoicing.

But the fees won so far this year by banks including Citigroup, Goldman Sachs, Barclays, JPMorgan and Deutsche Bank are unlikely to trigger a major celebration, bankers and analysts say. Despite the surge in dealmaking so far this year, Africa remains all but a small niche of the investment banking industry.

“You are lucky if you win one or two big mandates outside of South Africa every year,” says a senior banker. “It is booming, but from a very low base.”

Another senior banker adds that while M&A advisory in the region “is profitable”, Africa remains more a “promise than a reality” in terms of meaningful fees.

One problem is the equity and capital markets subsector is offering little revenue. Bond fees cover costs at best, while equity raising this year has been lacklustre. As such, M&A is the only significant revenue maker. The problem is that in spite of a significant increase in the number of transactions, deal value remains significantly below the levels of other emerging market regions.

At the same time, costs are increasing as investment banks need to locate bankers outside Johannesburg, for years the only M&A hub in Africa. Banks are establishing dealmaking teams in Lagos and Nairobi, and also in more exotic locations such as Maputo, the capital of gas-rich Mozambique. But bankers say the increase in cost will eventually be repaid by an expected rise in M&A activity outside South Africa.