Private equity (PE) and venture capital (VC) are proving to be vital funding sources for businesses in Africa, offering capital to support their growth and expansion when commercial debt is unavailable or too expensive. Private equity firms typically invest in established businesses with a track record of generating revenue and profits, while venture capital investors will take early stage risk and support startups. These alternative sources of capital have become increasingly important, particularly during the COVID-19 pandemic and its aftermath, which has impacted traditional lending institutions and created a financing gap.
PE and VC continue to evolve , leading to increased activity, diversification of investments, the emergence of local fund managers, and a focus on impact investing contributing to developing a more mature investment ecosystem in Africa. – Dominic Rebelo, Partner, Anjarwalla & Khanna (ALN firm in Kenya)
According to the African Private Capital Association (AVCA), 2022 remained a record-breaking year for venture capital in Africa by deal volume, maintaining a three-year accelerated record-breaking growth curve by deal volume. The total amount raised remained relatively stable, maintaining the previous year’s record, including venture debt. Venture inflows to Africa reached USD 6.5 billion across 853 recorded deals in 2022. In West Africa, Nigeria emerged as the most active country in the region and on the Continent. The Financial sector received the majority of funding, representing 31 percent of deal volume and 42 percent of deal value.
These recent developments reflect the increasing investments by private equity and venture capital firms in Africa. As the continent’s economy continues to grow, new opportunities will continue to be created for businesses, however, to ensure continued growth in the sector, certain factors should be adopted:
- More incubation for emerging fund managers
Fund managers play a crucial role in the private equity and venture capital space globally and in Africa. Targeting a more diverse range of general partners (GP) and fund managers is necessary to fill gaps in the target market and maximise the industry’s potential. For instance, efforts should be made to address the significant disparity in funding between female and male-founded firms. A 2021 World Bank study found that only 3% of early-stage funding since 2013 went to all-female founding teams, compared to 76% for all-male teams during the same period. This shows that significant efforts need to be placed into targeting female fund managers as well to improve increase and balance the numbers, ultimately maximising the industry’s full potential. - Deploying more local institutional capital into funds alongside the international capital
Involving local institutions in funding can reduce risk and contribute to long-term sustainability. According to the European Investment Bank, Africa is now the most profitable region globally despite capital funds being underutilised. The bank also states that most capital flows going into Africa are private and international, with the majority coming from the US. This shows that increasing the deployment of domestic institutional capital and leveraging in-house expertise is particularly important for supporting startups and fostering long-term growth. - Access, inclusion and affordability
Establishing structures that enable access and inclusion for diverse demographics in Africa is essential for attracting the best deals. Balancing these factors will lead to improved access to business funds, including greater women and youth involvement. - Creating a catalytic effect
Private equity and venture capital investments can have a broader impact on the economy. By investing in small and medium-sized enterprises (SMEs), these firms contribute to developing Africa’s financial infrastructure and entrepreneurial ecosystem. This, in turn, attracts more investment, promotes economic growth, and fosters innovation.The PE and VC sector continues to catalyse growth, innovation, and economic transformation in Africa. They [PE and VC] provide capital, expertise, and support to African businesses, sector diversification, and sustainable development. – Safia Fissi Fihri, Partner, ADNA (ALN firm in Algeria, Côte d’Ivoire, Guinea, and Morocco)
- Casting a wider net
Too many private equity investors are pursuing the same targets with the same deal structure. According to a BCG publication, Why Africa Remains Ripe for Private Equity, the private equity industry needs to consider more-flexible African investment strategies and expand its offerings to the continent’s companies. Funds should consider such options as investing in majority stakes and strategic partnerships. They should also consider offering evergreen funds rather than funds with timing constraints for divestiture. Many startups are building innovative, disruptive business models and leveraging digital technologies leading to dynamic small and midsize companies emerging as national leaders.
Conclusion
Private equity and venture capital firms have overcome challenges such as underdeveloped capital markets and limited access to reliable data to make successful investments in Africa. These investments have supported various industries and positively impacted job creation, infrastructure improvement, and economic development. As Africa continues to grow, private equity and venture capital will play an increasingly important role in supporting economic growth while also contributing professional expertise, best practices, and strong corporate governance standards to the businesses they invest in. The growth of Africa’s venture ecosystem is evidence of the fortitude of the industry, the commitment of investors active on the continent, and the unique resilience of African businesses that don’t require capital rich environments to succeed.
Private equity and venture capital are powerful drivers of economic development in Africa. As Africa, we must also see the importance of ensuring that investments are aligned with local needs and priorities and address social and environmental challenges while promoting inclusivity. This requires collaboration among investors, governments, and local stakeholders to ensure that the benefits of these investments are widely shared and contribute to long-term, sustainable growth. – Bhavna Ramsurun, Partner, BLC Robert & Associates (ALN firm in Mauritius)
AVCA | BCG, Why Africa Remains Ripe for Private Equity | European Investment Bank | How We Made It in Africa |
World Bank | 2022 AVCA Venture Capital in Africa Report
_______________
Summary of Key Findings: 2022 AVCA Venture Capital in Africa Report
- By region, West Africa maintained the top spot for the second consecutive year, with Nigeria as the most active country both in the region and on the continent.
- Dealmaking was concentrated in the financial sector, which assumed 31% of deal volume and 42% of deal value.
- The 2022 median deal size across all investment stages was USD 2.0 million, a 43% increase from the 2021 full-year median of USD 1.4 million.
- 15 super-sized deals in companies raising both venture capital and venture debt took place in 2022, with a combined value of USD 2.2 billion.
- 1,000+ investors were active in Africa’s venture ecosystem in 2022.
- Startups raising their first round of venture financing only accounted for 37% of VC deal volume in 2022.
- The path to parity gained momentum – startups with a gender-diverse founding team raised a cumulative total close to USD 950 million.
