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 African businesses are Attracting More Private Equity Deals


Commodity prices and currency volatility is droping in many African countries today, which are are reflected in the private equity (PE) sector. African PE deals fell to USD 2.5 billion in 2015, compared with USD 8.1 billion in 2014. The total value of PE deals in Africa during the first half of 2016 was just USD 0.9 billion.

With  decreasing  commodity  prices,  technology,  financial  services,  FinTech  and infrastructure  became  more  prominent  in  2016,  a  trend  that  is  expected  to  continue in 2017. The Chan Zuckerberg Initiative, a foundation founded by Mark Zuckerberg and his  wife,  invested  USD  24  million  in  Andela,  a  company  that  trains  African  software developers  in  Kenya  and  Nigeria

The  Commonwealth  Development  Corporation invested  USD  55  million  in  Jumia,  Africa’s  leading  e-commerce  platform  that  operates in 23 countries, and Interswitch, a digital payments and e-commerce company, acquired VANSO, a Nigerian mobile money company .

DFIs play a crucial role in driving the economic development of emerging markets, including in Africa. The UK’s CDC Group, for example, is the largest single investor in private equity funds in Africa—having supported the growth of over 58 funds. But, DFIs are not maximising their potential, citing an excess of capital and a dearth of projects vetted for investment. While the appetite for private investors focused on Africa continues to grow, mobilisation of DFI capital remains slow.

Many of the larger DFIs maintain a complex investment process that begins with the outbound identification of suitable projects and is punctuated by up to a dozen subsequent steps that involve manual diligence and deliberations. The efficient allocation and deployment of capital in frontier markets will require more tools at DFI disposal. This is because it remains cost prohibitive to be present in 54 countries across Africa, let alone in all emerging markets. The IFC has 22 offices in Africa, and both OPIC and Norfund have three each. This lack of physical capacity has led to a paucity of in-country personnel to source and screen potential investment opportunities. Neither is it feasible to expect DFI presence in every market. Therefore, to sustain and increase the stream of patient capital while transforming growing businesses without access to capital – all while enticing private sector participation – DFIs will need to leverage existing and new technologies.

Tech-enabled deal origination platforms, such as those employed by Private Equity firms, would facilitate an efficient and cost-effective origination process, drastically reducing the number of man-hours it takes to manually source and screen potential deals. To put it simply, digitisation will enable DFI funds to increase their impact.  The challenge is that many of the established digital deal sourcing players do not adequately cover frontier markets, particularly Africa. This infers that the US$50bn+ of Africa-focused capital is deployed through traditional means in conjunction with the frictions inherent in such investment processes.

DFIs should employ an end-to-end technological approach suited for frontier markets to capture the new efficiencies needed for increased investment. For example, Fintech could expose the potential of more creatively structured deals, such as those that embrace sector-specific inefficiencies, matching funds, or other new sources of private capital. Targeted deal sourcing platforms can be leveraged by DFIs to streamline research and enable more informed investment decision-making.

To be sure, the limited partners, such as pension fund managers, who invest in private equity funds are still keen on Africa—total PE fundraising for Africa-focused funds was up to $2.7 billion from $2.4 billion in 2017. But these numbers are down from recent highs of $3.4 billion (2016) and $4.5 billion (2015).

The growth trajectory of PE investment in Africa has been inconsistent. Last year the number of deals rose to 186 from 171 deals from 12 months earlier, but the total value of those deals fell for a third  year to $3.5 billion, from $3.9 billion in 2017.

The 2018 data from the African Private Equity and Venture Capital Association (AVCA), shows that, the median PE transaction size across its key African sub-regions was $6 million to $8 million still quite modest in global private equity deal terms.

Despite the Sustainable Development Goals’ (SDGs) emphasis on African development, a US$2.5 tn development investment gap remains. DFIs have pointed to a lack of bankable projects in reference to their investment patterns, rather than a dearth of capital. But the upward trajectory of private investment in Africa over the past decade tells a different story. 

With a stronger approach to innovation, the DFIs could embrace a lower cost investment origination and sourcing model, which will mean higher rates of capital deployment in the region. This in turn leads to more robust economies and other positive externalities. From the Silicon Lagoon to Silicon Savannah, African innovators have embraced technological advancement with open arms, even at rates surpassing more developed regions. Development Finance Institutions have a responsibility to meet that enthusiasm and adopt a more tech-driven approach to investment.

Despite the slowdown in activity, the number of significant deals indicates that PE funds continue to invest in African companies with long-term growth potential. Notable examples include the USD 115 million deal struck by Helios Investment Partners with Oando Gas and Power in Nigeria. Kenya – one of the most resilient African economies in  2016  –  also  experienced  substantial  activity,  with  Apis  Partners  investing  in  Direct Pay  Online  (a  FinTech  company)  and  LeapFrog  Investments  making  a  USD  22  million investment in Goodlife Pharmacy.

The majority of investors expect PE activity to continue its positive trend in the medium term, albeit at a slower pace. Investors foresee new opportunities in rapidly expanding markets, including Côte d’Ivoire, Ethiopia and Tanzania, which should replace more traditionally favoured destinations such as Kenya, Nigeria and South Africa.



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