Cautious year for private equity, ventures
Global geopolitical challenges, currency volatility and soaring inflation led private equity (PE) and venture capital (VC) investors to be cautious in 2023, prompting safer investment choices.
Mega deals saw a decline across all asset classes. According to the African Private Equity and Venture Capital Association (Avca), private equity investment in sub-Saharan Africa (SSA) saw local and international private equity firms invest $1.2bn in SSA companies by the third quarter of 2023. This was 16% lower than the same timeframe in 2022.
The number of PE transactions reached 91, also a decrease compared to the same period in 2022, with 34% less volume in PE deals overall. Avca’s third quarter 2023 Venture Capital Activity in Africa report also revealed that Africa’s venture capital ecosystem recorded a 28% increase in capital raised by venture capitalists during Q3 2023 compared to the same period last year.
While the quarter fared well, the total raised for the first nine months of the year was $2.95bn, down from $4.3bn raised in the first nine months of 2022, with the VC industry attracting just 69% of the capital raised in the region in 2022. The pending fourth quarter results might even out comparative amounts over the two years.
Despite a decrease in the volume of transactions, certain sectors exhibited resilience, with collaboration in the sector leading to investor synergy in project that focus on innovation and sustainability, notably in the technology, media and telecommunications (TMT); consumer goods and retail (CG&R); and financial sectors. According to Avca, the TMT, CG&R and financial sectors accounted for about two-thirds of all venture capital raised in the first nine months of 2023, with financial, IT and ecommerce start-ups proving the most successful.
In the TMT sector, the impending rollout of 5G will accelerate Africa’s transformation through innovation such as the enhanced capabilities of asset tracking and logistics, connected shopping, energy monitoring and the promise of smart cities. For this to happen, it will be essential that policy and legal frameworks facilitate the development of the necessary infrastructure to support access to the required broadband spectrum.
Financial sector innovation has led to the development of mobile payment systems and digital trading platforms. For example, enhanced digital payment systems are helping to facilitate trade across the continent and opening up opportunities to invest in products and services that are traded across the African Continental Free Trade Area (AfCFTA).
Investors have taken note, andmore global PE funds are expected to collaborate on initiatives that benefit from AfCFTA in the future.
Consumers are also enjoying the benefits of digital developments, especially those that support financial inclusion and online retail platforms. More than half of the world’s mobile money customers are now based in Africa and innovative financial service offerings are opening up to mobile money users.
Fintech accounted for 25% of all venture capital rounds in SSA in the past few years. Bringing the unbanked into the financial mainstream has created further openings for innovative financial solutions and the user markets are huge, with plenty of room for more growth and synergy in segments such as alternative lending, digital investment and neo-banking.
The online consumer goods and retail sector has been experiencing exponential growth, with a corresponding shift in consumer attitudes regarding the sustainability of products and services they consume, as well as a demand for more transparency throughout the supply chain. One of the ways digitalisation is addressing challenges in the CG&R sector is through the use of artificial intelligence (AI) in every aspect of a product life cycle, from research and development solutions, manufacturing robotics, supply chain analysis, demand forecasting and inventory management through to customer engagement, targeted marketing and sale and post-sale interactions, and in the data collation of ESG initiatives.
While online retailers in Africa have struggled due to current economic headwinds and impact of inflation, they are adapting by sourcing different supply chains and securing better prices. The online retail market has grown substantially and multinational retailers are entering the market through key gateway countries such as SA.
An increased focus on sustainability is also directing the strategy of private equity and venture capital investors, with ESG considerations creating synergy in the way investors view and select targets. Sustainability-driven investments have seen significant returns, with lower costs, higher employee engagements and stronger sales leading to superior valuations.
Private equity and VC investors are also looking to collaborate on projects that incorporate energy transition principles, with small-scale renewable energy projects being especially attractive. For example, cleantech (technology companies that aim to improve environmental sustainability), renewable energy and energy storage initiatives have been attracting investor interest.
There is also increasing synergy in inclusion and diversity projects, most notably in youth and womenled projects.