Navigating the African Investment Landscape: Opportunities, Trends, and Strategies

Held under the theme “Navigating the African Investment Landscape: Opportunities, Trends, and Strategies,” our panel discussion sparked thought-provoking discussions and valuable exchanges on shaping the future of private equity in the region. 

Among the most pressing issues identified by speakers were exits, fundraising, regulatory approvals, value creation, ESG/DEI, and talent development. As the African private equity landscape evolves, investors increasingly focus on flexibility, strategic partnerships, and impact investing.

The white paper below expands on the issues and key takeaways raised at the event, while also providing context around the importance of private equity within the Sub-Saharan African context, where its future lies, and what opportunities for growth there might be.

1. Introduction: The African private equity landscape

After years of growth, private equity investments in Sub-Saharan Africa experienced their first decline since 2012 in 2023. Driven by rising interest rates, economic uncertainty, inflation, and other headwinds, the volume of deals in 2023 fell 28% compared with 2022, with the value of deals falling 22%, per figures from the African Private Capital Association (AVCA)^[1]. It is worth noting, however, that the 450 deals completed in 2023 were still the second highest in the region’s history since 2012 and the total value of deals (US$5.9 billion), was the second highest.

Africa's declines were broadly consistent with those in other regions. In North America, for example, deal volume decreased by 44% and deal value fell by 21%. In Europe, meanwhile, deal volume fell by almost a quarter (24%) and value fell by 28%.

It is, however, worth bearing in mind that Africa comes off a much lower base than many other regions in the world. The US$5.9 billion worth of deals that the region saw in 2023, accounts for a small fraction of the US$474.14 billion in global private equity deals that year^[2].

While that means that Africa has a lot of catching up to do when it comes to building a more mature private equity industry, it also shows how much room for growth there is. This potential is further underlined by the fact that, in 2023, African private equity deals were dominated by venture capital (VC) for the fourth year in a row. With VC making up 68% of all deals, it’s clear that Africa’s innovative ecosystem is becoming increasingly important. That also goes a long way to explaining why information technology was the most resilient sector in the region.

Regarding the location of deals in Sub-Saharan Africa, the vast majority took place in Western and Southern Africa (at 26% each), while Southern Africa accounted for 44% of all deal value in 2023. That last value is, however, the result of one major deal in the second half of 2023. That deal also accounts for the slight uptick in the region’s total deal value in the second half of 2023.     

It is perhaps unsurprising then that an anticipated recovery has not materialised in the first half of 2024. According to AVCA’s Q2 Private Capital in Africa Report, there were 182 deals in the first half of 2024, representing a 17% year-on-year decline in deal volume. Deal value fell even more precipitously, declining 66% year-on-year. Average deal size has declined too, with 88% of the value of investments in Africa being funnelled into deals below US$50 million. This marks the first time since 2018 that more than 50% of deals in the region have been below this mark. Deals above the US$100 million threshold all but disappeared, meanwhile, declining 91% year on year^[3].

One area where there is some positivity is in exits. According to AVCA, “the volume of exits in H1 2024 managed to surpass that of the same period in 2023.” If that holds true for the rest of the year, then 2024 will end with more exits than there were in 2023.

It is clear then that private equity in Sub-Saharan Africa faces considerable challenges. Addressing those challenges will be key to the long-term prospects of a sector, which is essential to the region’s business and economic prospects.    

2. Significant challenges

Several significant challenges facing the sector at present were identified. These challenges range from exits and fundraising to value creation, regulatory approval and ESG/DEI. 

Exits 

While exits have largely stayed consistent over the past year, it is beneficial to the ecosystem to have more and bigger exits. That is because exit strategies are the lifeblood of the private equity sector. Not only do they allow investors to achieve returns on their investments and ensure that funds remain sustainable, but they also encourage market liquidity and economic growth.

Preferred exit strategies: While sales to management are less favoured, trade sales and strategic exits are more common. Recapitalisations, they pointed out, have become prevalent due to assets being held for more than seven years. 

Buyer synergies: Identifying synergies with potential buyers is crucial to successful exits. Investors should therefore collaborate with those lacking a platform in Africa to understand their needs and match them with portfolio companies accordingly. Here, educating buyers on local market conditions is also critical.

Strong management teams: A robust management team is another crucial factor in successful exits. The leadership in any firm must be capable of guiding the company through the kind of sustained growth required for a successful exit. From time to time, it may fall to the investor to help bolster existing management teams with strong candidates.

Successful secondaries: There have been notable successes in secondary sales, particularly in smaller deals that are easier to execute. These kinds of deals, which involve selling to another investor mid-cycle come with other advantages too. For sellers, they provide liquidity and allow for portfolios to be more easily rebalanced. For buyers, meanwhile, secondary sales provide risk mitigation, allowing them to diversify their portfolios and potentially acquire high-quality assets at a discount. 

Quality over scale: While scale matters when driving a company towards a successful exit, the quality of the business is paramount. Investors should therefore focus on enhancing the intrinsic value of their assets.

Fundraising

The global economic challenges outlined in the introduction to this white paper have impacted the ability of private equity investors to raise the funds they need to make investments too. While Africa-focused fund managers raised approximately US$1 billion in closed funds in the first half of the year, most of that went to venture capital and buyout funds^[4]. Interim funding, meanwhile, secured just US$0.3 billion in commitments which represented an 80% year on year decline. First-time fund managers also failed to secure a final closing in the first half of 2024.

Nonetheless, the consensus was that there are still significant fundraising opportunities in private equity, with the right strategies in place. 

Challenging market cycle: Despite the challenges of the current market cycle, fundraising is achievable with a strong track record and positive LP relationships.

Role of DFIs: They additionally noted that development finance institutions (DFIs) play a significant role, accounting for approximately 80% of funding. Their sector-focused teams also improve general partner (GP) interactions.

African pension funds: Another fundraising strategy highlighted is to target African pension funds. These funds are increasingly interested in private equity, emphasising the need for investments that benefit local communities.

Tailored fundraising: While novel techniques can be important in fundraising, the fundamentals are still important. As such, customising pitches to the audience and maintaining transparency with LPs are essential strategies.

Co-investment opportunities: Offering co-investment opportunities to LPs has proven beneficial. Among the potential benefits of such arrangements beyond improved fundraising are enhanced alignment, increased deal flow, enhanced reputation, and risk mitigation. Another strategy involves raising funds around a key asset. Examples of key assets include real estate, intellectual property, natural resources such as mineral deposits and timber, and equipment or machinery. By leveraging these key assets, private equity firms can demonstrate to their investors that portfolio companies have tangible value and that risks have been properly mitigated.  

Value creation

Value creation is at the heart of private equity investing. It is, after all, in the best interests of the private equity firm to increase the value of a company through strategic interventions and operational improvements. Without creating value, they cannot generate the significant returns their investors require. The factors below were highlighted as crucial when it comes to value creation.   

Control and alignment: Achieving value creation requires alignment with management and proactive decision-making on the part of private equity investors.

Impactful investments: Private equity investors should also consider the impact they can bring to businesses, including empowering leadership teams and retaining talent through employee stock ownership plans (ESOPs).

Courageous conversations: Open dialogues and alignment with management should occur early in the investment process. This will allow private equity investors to get a much clearer sense of where they can and cannot make an impact.

Regulatory approval

Sub-Saharan Africa is home to 46 countries and several trade blocs, all with their own sets of investment regulations. It has always been critical, therefore, that private equity investors be familiar with the regulations of the home country of any company they choose to invest in, as well as those in which that company operates.

However, the regulatory environment across the region is evolving all the time. Private equity investors must therefore be prepared to evolve with them. 

Changing regulatory environment: Private equity investors must stay informed about shifting regulatory landscapes affected by economic and technological forces.

ESG/DEI

When the term ESG ( “Environmental, Social and Governance”) was introduced by the United Nations in 2004^[5], it helped solidify the idea that companies can make a profit while doing good. Similarly, diversity, equity, and inclusion (DEI) initiatives have been shown to help companies achieve greater levels of innovation and improved finances, among other things^[6]. But where do these two concepts stand today within the sub-Saharan African context? 

Diversity and inclusion: GPs have made progress in improving gender balance and diversity. There is, however, still a significant amount of work to be done before true equity is achieved. Take gender equality, for example. According to a 2022 report by AVCA, just 12% of senior general partners in Sub-Saharan Africa are women.^[7]

ESG’s evolution: ESG considerations have evolved from mere box-ticking to a practical, common-sense approach.

3.Talent

Despite high unemployment rates across the region, talent and skills shortages remain a significant issue across a broad swathe of industries in sub-Saharan Africa. These shortages impact private equity too. In outlining the gravest of these challenges, they also provide a possible solution. 

Succession challenges: Succession planning remains a challenge and talent in the African PE/VC community is scarce.

Empowering junior team members: A successful strategy for solving this challenge involves empowering junior team members, trusting them, and providing growth opportunities. For this strategy to be successful, they added, change management and talent management are critical.

4. The importance of private equity in Africa

Addressing these challenges will be important because the private equity sector is vital to growing businesses across sub-Saharan Africa. With unemployment high in many countries across the region, entrepreneurship is a key to job creation and lifting people out of poverty. As things stand, small and medium-sized enterprises (SMEs) account for 95% of all registered businesses and 50% of sub-Saharan Africa’s GDP^[8].

Encouraging the growth of those businesses requires investment. Private equity is best poised to provide at least some of that investment, particularly in instances where businesses might not be able to access more traditional forms of funding, such as bank loans. Whether a business uses an investment in it for expansion, research and development, acquisitions, or to support working capital needs, it can make a massive difference to its ability to thrive and grow.

While there is, of course, a higher degree of risk involved with investing in such companies, they are also often the businesses that accelerate innovation.  By supporting entrepreneurs and fostering a culture of innovation, private equity can help to drive economic transformation and create new industries.  

Such investments, in turn, drive further job creation. By investing in sectors such as technology, healthcare, and manufacturing, private equity firms can contribute to the development of a more diversified and resilient African economy.

Of course, private equity provides more than just investment. A good private equity investor can also offer operational expertise. More particularly, they can provide guidance on areas such as management, strategy, and governance. This expertise can be invaluable to African businesses, particularly those that may lack the resources or experience to navigate complex challenges.

Private equity investment firms can also help guide businesses to a profitable exit, whether that is to another, larger company or through an initial public offering (IPO). By providing a liquidity event, private equity can help to create value for entrepreneurs and attract additional investment to the African market.

By providing capital, expertise, and support, private equity firms are helping to nurture local businesses, create jobs, and foster innovation. As the African continent continues to grow and evolve, the role of private equity is likely to become even more important.     

5. The future of private equity in Africa

Knowing why private equity has been and continues to be so important within the sub-Saharan African context, it is worth examining what the sector’s future in the region might look like. In doing so, it is important not to project forward from past performance and trends. Social, geopolitical, and global economic conditions will all play a role too.

From a macroeconomic perspective, several major economies (most notably, the US) have started cutting interest rates. A number of African countries, including South Africa, Botswana, Mauritius, and Namibia have subsequently followed suit. This will ease pressure on consumer pockets, potentially resulting in a boost for businesses that sell directly to consumers, with retail likely one of the biggest beneficiaries.

Interest rate cuts have other impacts too. The interest rate cut announced by the US Federal Reserve in September has already weakened the dollar. As private equity investors seek out yield, they will likely put more money into fast-growing emerging market economies, including those in sub-Saharan Africa. While such markets contain more risk, they also tend to offer higher returns. Should interest rates continue to fall, there will likely be increased capital flows into such markets.     

That does not, however, mean that African countries will not have to work hard to create an investment-friendly economic environment. Unfortunately, numerous countries are struggling on that front. There have, for example, been seven coups in African nation-states over the past three years. As Control Risks points out, while those coups have largely been confined to smaller economies, they do affect confidence in the entire region^[9]. Should a major regional economy fall to a coup, there would be serious investment consequences.

It is also worth noting that several economies which experienced high levels of economic growth just a few years ago, including Ethiopia and Kenya, are now struggling with strained public finances and growing debt. Should they default, they will have to balance restructuring their debt obligations with their ability to deliver vital services to their people. That will, in turn, impact the investment environment for private companies.

There are bright spots too. Zambia has, for example, created a much more welcoming business environment following the election of Hakainde Hichilema in 2021^[10]. The formation of a government of national unity (GNU) in South Africa following its election earlier this year has also helped increase investor confidence in the region’s largest economy^[11]. 

It is also important that private equity investors remember that there are opportunities for growth and returns even in challenging markets. In other words, identifying the right company can be more important than identifying the right market.    

6. Room for opportunities and growth

Given the prevailing conditions in the region, it is worth interrogating where the opportunities for growth lie.

According to AVCA, financials, information technology, and industrials all made up a greater proportion of deals in the first half of 2024 than they did between 2017 and 2023. By contrast, deals in the consumer discretionary and utility sectors have fallen over the same period^[12]. That does not mean that there are no opportunities in those sectors, but it does show where investors are currently focused.

It is worth noting, however, that just because a sector is not attracting a lot of investment right now, does not mean it will not in the future. It is therefore worth looking at what sectors are seeing the highest levels of growth at present. According to McKinsey, these include sectors such as agriculture, banking, consumer goods, infrastructure, mining, and telecommunications^[13].

Another significant growth area is renewable energy. According to the South African Institute of International Affairs (SAIIA), Africa has significant wind resources that can produce about 180 000 Terawatt hours (TWh) per annum. It has also been estimated that Africa could produce 30–60 million tonnes per annum (mtpa) of green hydrogen by 2050^[14]. Beyond the equipment and infrastructure required to unleash this renewable energy potential, there will be a need for service, maintenance, and repair businesses in the sector, providing further investment opportunities. 

7. Conclusion

The African private equity landscape, while facing challenges, remains a dynamic and promising market. Despite a decline in deal volume and value in 2023, the region's potential for growth is evident. Key factors driving this optimism include the increasing focus on innovation, the emergence of new sectors, and the growing interest from global investors.

To navigate this evolving landscape successfully, investors must:

•  Adopt a long-term perspective: The African market requires patience and a focus on sustainable value creation.
• Prioritise local partnerships: Collaborating with African businesses and partners can provide invaluable insights and access to opportunities.
• Embrace technological advancements: Leveraging digital tools and technologies can enhance efficiency and risk management.
• Consider impact investing: Aligning investments with sustainable development goals can generate both financial and social returns.
• Stay informed about regulatory changes: Understanding the evolving regulatory landscape is crucial for compliance and risk mitigation.

By addressing these key considerations, investors can capitalise on the abundant opportunities that the African continent presents and contribute to its economic growth and development.

^[1] 2023 Private Capital Activity in Africa (AVCA): https://www.avca.africa/data-intelligence/research-publications/2023-african-private-captial-activity-report/

^[2] Global private equity deal activity plunges in 2023 (S&P): https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/global-private-equity-deal-activity-plunges-in-2023-80032940#:~:text=Global%20private%20equity%20and%20venture,S%26P%20Global%20Market%20Intelligence%20data.

^[3] Private Capital Activity in Africa Q2 2024 (AVCA): https://www.avca.africa/media/i1cjek11/avca24-06-apca-q2_5-new.pdf

^[4] Private Capital Activity in Africa Q2 2024 (AVCA): https://www.avca.africa/media/i1cjek11/avca24-06-apca-q2_5-new.pdf

^[5] "Who Cares Wins – The Global Compact Connecting Financial Markets to a Changing World" (PDF). UN Environment Programme: https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf

^[6] It’s Time to Highlight the Business Opportunity of DEI Initiatives (BCG): https://www.bcg.com/publications/2024/highlighting-the-business-opportunity-of-dei-initiatives#:~:text=DEI%20raises%20standards%20for%20everyone,Attracting%20talent.

^[7] Raising the Bar: Executive Representation and Fundraising Disparities in African Private Equity and Venture Capital (AVCA)

^[8] Why Africa’s SMEs need more than money to ensure their growth (WEF): https://www.weforum.org/agenda/2023/07/why-priming-africa-s-smes-for-growth-is-about-more-than-money/#:~:text=Although%20small%20and%20medium%20businesses,traditional%20barrier%20of%20acquiring%20finance.

^[9] African private equity in 2024: risks and opportunities (Control Risks): https://www.controlrisks.com/our-thinking/insights/african-private-equity-in-2024-risks-and-opportunities

^[10] Risk and reform: Zambia's strategic approach to modern governance (World Bank): https://blogs.worldbank.org/en/nasikiliza/risk-and-reform-zambias-strategic-approach-to-modern-governance-afe-0524

^[11] GNU has ‘rekindled hope’ that South Africa can prosper, says ISS (Mail & Guardian): https://mg.co.za/politics/2024-09-17-gnu-has-rekindled-hope-that-south-africa-can-prosper-says-iss/

^[12] Private Capital Activity in Africa Q2 2024 (AVCA): https://www.avca.africa/media/i1cjek11/avca24-06-apca-q2_5-new.pdf 

^[13] Africa’s path to growth: Sector by sector (McKinsey): https://www.mckinsey.com/~/media/McKinsey/Featured%20Insights/Middle%20East%20and%20Africa/Africas%20path%20to%20growth%20Sector%20by%20sector/Africas%20path%20to%20growth%20Sector%20by%20sector.pdf

^[14] Renewable Energy Technologies in the Global South: Insights from Africa (SAIIA): https://saiia.org.za/research/renewable-energy-technologies-in-the-global-south-insights-from-africa/