Private equity and venture capital investments in Africa taking off

Last week the African Private Equity and Venture Capital Association (AVCA) held its twelfth annual conference in London, UK. AVCA‘s CEO Michelle Essomé has some interesting reflections on Africa’s private investments space trends.

AVCA is a pan-African industry body promoting and facilitating private investment in Africa, its members include private equity and venture capital firms, institutional investors, foundations and endowments, pension funds, international development finance institutions, professional service firms, academia, and other associations. Last week a few hundred delegates came together to discuss current opportunities and issues in Africa’s private equity and venture capital industries. Thomas van Halen represented the VC4Africa team at the AVCA Conference.

Since 2013 AVCA has held annual conferences in Cameroon, Morocco, Kenya, Senegal, Botswana, Egypt, Ghana, South Africa and most recently Nigeria.

We had a chance to catch up with AVCA’s CEO Michelle Essomé. She stressed that more and more investors see Africa as an attractive place to invest, and she also sees increasing opportunities for SMEs to find financing from local and international players.

What are the main new insights from the research AVCA presented at the Conference?

“In partnership with EY, AVCA conducted research examining the exit environment in Africa. The results revealed a record year for PE exits in 2014 with 40 exits concluded. This represented a 38% increase from 29 exits in 2013, and the largest total since 2007, when there were 34 exits. The study also showed a broadening of exit routes over the past year with increasing options available for investors to realize value. The continued momentum emphasizes the enormous potential of African private equity, and with increased intra-African investment, we expect this is unlikely to slow down in coming years.

Our second annual LP survey revealed that investors remain bullish about Private Equity (PE) in Africa. The survey, examining the views of 68 Limited Partners (LPs) across the globe, shows that 50% of LPs find Africa more attractive for PE investment than other emerging and frontier markets. Furthermore, 50% of LPs plan to increase their exposure over the next three years. Investors also remain confident about realizing value from their investments in Africa with 52% of surveyed LPs expecting African PE returns to exceed those in other emerging or frontier markets.

We also released the first ever African PE & VC Index and Performance Benchmark in association with Cambridge Associates. It showed that African PE and VC performance has been on par with US VC, and is only slightly lagging the other emerging markets. On a positive note, the benchmarking study revealed that realised Africa private equity funds outperform funds in other emerging markets. However, it is important to note that that benchmarking study was conducted on a relatively small sample size but as the industry develops and more managers submit performance data, this benchmark report will become increasingly important in assessing African private equity and venture capital performance.”

PE in Africa
AVCA African Private Equity Data Tracker

How do you see Africa’s venture capital SME investment segments develop in relation to the total private equity investments in Africa?

“Venture capital SME investment is still quite rare within Africa. However, SMEs are benefitting from the influx of capital from a range of direct investors and family offices alongside the continuous growth in private equity investments.

Investment in the SME sector is still very much dominated by Development Finance Institutions who invest in funds focused on small and medium sized businesses. Nevertheless, we see an increasing number of international fund of funds on the horizon and African pension funds, for example, are becoming interested.

Whilst there is increasingly less hesitation to allocate to funds that primarily invest in SMEs than previously, we firmly believe that further education on the sector, facilitated by increased availability of data and analysis, would help to build local LPs’ confidence in the asset class.”

What are the main trends you see of which we can expect more next year?

“As knowledgeable advocates of Africa, we appreciate that it is still an emerging market in terms of deal size, but the opportunities for investment are tremendous.

Perceived risks of investing in Africa are falling and our research shows that more and more investors see Africa as an attractive place to invest. Firms already investing in Africa are expected to expand their operations and increase investments in key sectors and we envisage more firms entering the market contributing to growth.

Due to increased interest, we expect PE in Africa to become increasingly competitive as more firms enter the market looking at the same small number of available deals. Hence, there will be more opportunities for SMEs to find financing from local and international players seeking to realise significant returns.

We expect that inward investment will continue to focus on the consumer driven sectors, such as financial services, agribusiness, retail and consumer goods. Other sectors such as utilities, infrastructure, oil and gas will also attract investment as privatisation and regulatory changes gather pace across the continent.”

Anything else you’d like to share?

“We think it is important for the continent to realise the potential of private investment coming into Africa. Private capital in Africa is supporting hundreds of local businesses looking to build to their potential. As an asset class, if you think about private equity in its simplest form, it’s an investment in a company which allows it grow, so that more people can get hired strengthening and developing communities through economic progress. It puts more money into circulation and that means more tax revenue for local governments. It improves the skills of the workforce and transfers knowledge from investors to local entrepreneurs and employees. This may sound simplistic, but it is really about developing economies.

Private capital is a crucial provider of financing to the small-to-medium enterprise (SME) sector, the engine of economic growth the world over. Much needed capital injection into SMEs creates jobs, and generates wealth. By using the private equity model, private capital can be recycled within the community, creating jobs locally and forming a sustainable cycle of wealth creation. With Africa’s population set double to 2 billion by 2050, this is an important consideration.

What is more, within private equity there is also a focus on corporate social, governance, and environmental responsibility, and therefore a strong culture of transparency and accountability. Private equity fund managers play a key role in helping management to establish governance structures and growth plans, leading to more sustainable businesses.”

Interested in more research on SMEs? The VC4Africa 2015 Venture Finance in Africa report shows an increasing number of African businesses successfully growing their operations over time.

Looking for a way to get Africa’s best startup entrepreneurs to apply to your program, competition or fund? Check out how to leverage the VC4Africa platform to make your next campaign a success.