In 2012, rockstar-turned-activist Sir Bob Geldof addressed the SuperReturn conference in Berlin, urging the US and European PE industry to turn its attention to Africa. He highlighted the opportunities to generate returns while leaving behind “firms, farms and factories” essential for the continent’s development. Eight years later and many PE sponsors have been drawn by Africa’s expanding economic growth and its youthful and rapidly growing population. Fundraising for the continent reached $3.8bn in 2019 according to the AVCA, the best year since 2015, and the number of PE deals successfully executed has risen consistently.
Analysis & Strategy
The “narrative” around Financial Technology (fintech) in Africa is changing. Five years ago, discussion around fintech focused on the ecosystems; supporting start-ups in Cape Town, Nairobi and Lagos and elsewhere; the tech incubators; the number of fintechs (perhaps 500 by one count), and the number of African fintechs admitted to the prestigious Y-Combinator (or Y-C). Key players were a range of early-stage investors focusing on Seed rounds or Series A, including 12-J funds in South Africa, and a dozen or so VC-funds across the continent supported by development banks and some private, capital.
COVID-19 turned 2020 in a tough year for most investors – especially those in emerging markets like Africa. Not only is Sub-Saharan Africa’s economy expected to post its first recession in 25 years, the World Bank also warns between 13 and 50 million people in the region could fall into extreme poverty due to the pandemic.
Despite the projected 3% contraction in Africa’s GDP in 2020 (IMF) followed by modest recovery next year, there remain unmatched investment returns on the continent. However, many investors continue to struggle with finding the “ideal deal” despite the significant foreign direct investment into Africa over the past few years, which saw inflows to the continent rising to $46bn in 2018 followed by an 11% increase in 2019 (UNCTAD’s World Investment Report 2019).
Technology as an essential ingredient in investment management success is no longer in question. Running on a differentiating investment strategy and some Excel spreadsheets simply isn’t viable. Fast-paced global markets, asset diversification and complexity, data volumes, investor servicing demands and intense competition mean advanced system capabilities are a must-have.
All around the world, Covid-19 has had a tremendous effect on education, closing schools for millions of students. In Africa, in particular, the school closures caused by the pandemic have exacerbated previously existing inequalities, and the children already most at risk of being excluded from a quality education have been the worst affected.
The first half of 2020 has been a roller coaster of emotions for the continent. There has been a drop in funding of $115.5m (24%) in H1 2020 that raised $370.5m across 149 rounds compared to $486m across 193 deals of H1 2019. On a positive note, February recorded the highest number in deal count (34 deals) that valued $124.7m for the period, which is 226.4% more than $38.2m raised across 22 deals in February 2019. The effects of the Covid-19 pandemic which has caused a drop is funding for startups on the continent as fundraising plans continue to be re-evaluated and business models tested. Most investors are cautious and continue to fund existing portfolio companies and or sectors that are seeing upside from Covid-19 effects. Funding to women led or women co-founded startups remains low at 13% of all funding raised. From the stage of funding rounds, Africa remains broadly a nascent to evolving startup ecosystem.
As the UK’s departure from the EU draws nearer, its government is increasingly seeking closer trading relationships with the countries of Africa. In its sights are Nigeria, South Africa and Kenya—the three largest sub-Saharan economies—and already, British Prime Minister Boris Johnson and Kenyan President Uhuru Kenyatta have agreed to begin negotiations on a post-Brexit trade agreement.
In the context of the social and economic realities that we are all witnessing as a result of the Covid-19 pandemic, it is our belief that technology led cloud-based businesses, solving real world problems with the ability to scale and adapt quickly, are best placed to weather this storm, and to even thrive therefrom.
Healthcare Technology (HealthTech) was already a sector of increasing interest among Venture Capital investors in Africa, but, as a result of COVID-19 more alternative assets professionals are looking for investment opportunities.
In a world in which the government and central bank have several means available to stimulate the economy, infrastructure spend is a powerful anti-recessionary fiscal policy tool.
When investors start out, most say to themselves “I have a long-term plan”. But just as often, our thinking about what is long term changes as soon as we experience the first market dip. Faced with volatility and uncertainty, our first impulse is to flee to safety.
The scale of the impact of Covid-19 on the global private equity market is uncertain. December 2019 ended a very strong decade for private equity encapsulated as a period of remarkable growth with overwhelming fundraising figures and outperformance of public markets. There was a bright path ahead - yes, private equity had seen its spike in growth, but now was a time for real consolidation, a time to focus on operating models, ESG and diversity, growth of the secondaries market to bring liquidity into private equity and increase capital flow to new jurisdictions. – all in all, an exciting decade ahead of sustained and sophisticated growth.
There is no doubt that global capital flows will be impacted by COVID-19. Emerging markets in particular are facing a severe slowdown in economic activity from lockdown implementation measures, as well as navigating to avoid a potential health crisis resulting from the outbreak of coronavirus.