Private equity & venture capital investments in Africa growing fast – Will we see a quick shift towards SMEs?

New released data indicate that private equity investments in Africa are increasing fast, and that the share of Venture Capital investments in Small and Medium Enterprises (SMEs) will continue to grow too. Will we see a quick shift towards SMEs?

In the past five years the number of private equity firms has increased significantly in Africa, just as the number of new funds raised, finds Ernst & Young’s new “Private Equity Roundup Africa” report. According to the report this rise also holds for capital needed to support the growth of SMEs in Africa. Also the new McKinsey article “Uncovering hidden investment opportunities in Africa” mentions the rapid growth of private equity investments in Africa, and indicates rapidly growing but underfinanced opportunities in the segment of small and medium investments in East, West, and Southern Africa. 

Ernst & Young’s Private Equity Roundup Africa report posts that the African Private Equity (PE) landscape is quickly evolving: “Ten years ago, the PE landscape was dominated by a handful of players from South Africa, and pan-African PE firms largely managed out of the US and the UK. Between 2006 and 2012, 81 PE funds that were solely or predominantly focused on Africa closed, and through the end of 2012, 45 Africa-focused funds were on the road targeting approximately US$12b. Despite a difficult 2012, the long-term outlook for fund-raising for the region remains strong”.

Total value of deals in Africa

According to data from the African Private Equity and Venture Capital Association (AVCA), the aggregate value of African deals recorded in 2013 was US$ 3.2 bilion, up from US$ 1.6 billion recorded in 2012. It is important to note here that both values primarily consist of a small number of very big deals. In 2013 two big deals account for around half of the total aggregate value, one being a US$1.035 billion investment in IHS Mauritius, the other a US$600 million investment in Delonex Energy. The number and aggregate value of venture capital investments in SME companies remains unknown, just as the number and aggregate value of deals not reported.


The AVCA data includes 53 transactions in 2013, with an average size of US$60 million. This deal size already halves to US$30 million when the two biggest deals are excluded. But since many smaller PE deals are not announced and hence not included in the data, the average deal size of all PE deals is likely to be much lower.

As the biggest network of SME companies across Africa, Venture Capital for Africa (VC4Africa) recently reached out to its online community to get more data on investments in small and medium enterprises, leading to VC4Africa’s first “SME Performance Index”. From a survey sent to 800 VC4Africa listed entrepreneurs, 160 ventures participated, out of which 92 were successful in securing around USD 12 million in funding. We found that the startups registered with VC4Africa secured on average USD $80,000 in funding, versus expansion companies that secured on average USD $237,000.

Funding gap

Although access to capital has improved over the last few years, there are still significant capital needs to support the growth of SMEs in Africa. The Ernst & Young report argues that a large number of SMEs, coupled with undeveloped financial markets, should help to drive the growth of PE investments in Africa. According to the Ernst & Young authors, PE investors can act as key enablers, bridging the funding gap that is crucial for a growing private sector and broad-based economic growth across the continent.

While Africa has a large number of private companies, many of which require growth capital funding, the continent is significantly underpenetrated in terms of bank credit. The limited availability of capital from banks and public markets in most African countries means that private companies find it challenging to obtain the necessary capital to grow. PE has yet to achieve significant penetration into the Sub-Saharan region relative to developed economies and other emerging markets, the Ernst & Young authors show.

Growth potential

The Ernst & Young report argues that low credit access ratios in a fast-growth GDP environment generally result in those ratios rising quite quickly, and references the high economic growth rates of African countries in recent years, well in excess of those in developed economies and above those in many emerging markets. Angola for example has seen the bank-credit-to-private-sector ratio rise from about 0.15 to 0.30 in the space of four years, demonstrating the huge growth potential for banking and capital markets as a PE investment focus.

With increasing confidence in African markets, PE firms are diversifying their geographical focus outside the more advanced economy of South Africa and increasingly Nigeria to other African countries. Countries such as Ghana, Kenya, Ethiopia, Uganda, Tanzania, Zambia and Angola have fairly sizable economies that are less penetrated by PE and are therefore becoming increasingly attractive, Ernst & Young finds.

Investment opportunities in SMEs

But what about investments in SMEs? The new McKinsey article “Uncovering hidden investment opportunities in Africa” notes that the Africa-wide demand for capital should increase by 8 percent a year between now and 2018, making a total investment figure of US$50 billion possible over the next decade. The authors continue to compare different segments within the various private equity investment types in Africa, revealing a mismatch between the growing demand and the supply of capital, with the supply biased towards larger investments. The segment of small and medium investments (in East, West, and Southern Africa) is characterised by rapidly growing opportunities that remain underfinanced. The McKinsey authors, cautious to take too firm stands, note that the mismatch between supply and demand for financing “could point to investment opportunities”.

Infographic from McKinsey article Uncovering hidden investment opportunities in Africa
Source: “Uncovering hidden investment opportunities in Africa”, McKinsey, 2014

The data shared above indicate a shift in private equity towards investments in small and medium enterprises (SMEs), but the question remains how quick this shift will come.

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