In pandemic-flogged 2020, one of the major scares in African business was how the global healthcare fiasco would throw African private equity funding off balance.
The prophesied 63 percent drop worrisomely set last year to be the worst for PE deals in continent since 2015.
The “worriedness” the newsflash stirred was profound because private equity funding is a major fabric of the African economic landscape.
Eventually, the dip came to pass.
But that isn’t the point.
Today, homegrown, international—and even Silicon Valley—VCs bet big on seemingly scalable African ventures. PE firms are not only following suit, but also providing some VCs with the ticket power to back these companies.
Obviously, some early-bird VCs in the African tech startup soil have been smiled upon with high-profile exits. Even accelerators have also reaped the spoils of deals like Fluterwave’s USD 170 Mn raise (and unicorn status) and Paystack’s USD 200 Mn acquisition by Stripe.
However, much remains unknown and underreported regarding the exit performance of private equity investments in Africa.
For fact, exits are real in the African PE space, regardless of the hurdles associated with backing companies on the continent with such a pocket culture.
The African Private Equity and Venture Capital Association (AVCA) is the pan-African industry body which promotes, enables and researches into private investments in Africa. WeeTracker’s exclusive interview with AVCA’s Research Manager, Alexia Alexandropoulou, looks into the exit reality in African PE funding.
Courtesy: AVCA
Are exits really happening in the African private equity investment space?
Historically, the volume of exits along with the quality of exit routes available in Africa have been one of the key concerns for investors looking to access African PE.
The majority of LPs and GPs in AVCA’s 2021 African Private Equity Industry Survey (76 percent and 67 percent respectively) cited limited exit opportunities as a key challenge for private equity fund managers in Africa over the next three years.
In AVCA’s report, Volatility and Uncertainty: How Private Equity in Africa Navigates Through Turbulent Times, we found that approximately half of respondents had to amend their exit plans because of political or currency risks in their investment geographies.
However, data shows that exits are taking place in Africa: there were 270 exits recorded between 2015 and 2020 on the continent.
Although the number of exits has shown growth since 2015, with 2017 reaching a record high of 52 exits, the volume of exits reported in Africa dropped to 45 in 2018—due to a fall in the number of exits recorded in South Africa given a backdrop of heightened macroeconomic uncertainty in the country—and to 44 in 2019.
In 2020, the number of exits reported on the continent decreased significantly to 33, reflecting the economic implications of the COVID-19 pandemic and the fact that GPs prioritised portfolio management to protect their investments.
In terms of exit routes, trades sales have been the most popular exit route of those exits reported in Africa between 2015 and 2020, but exits to PE and other financial buyers have also developed into another significant exit route.
IPOs and stock sales represent the least popular exit route on the continent, mainly because of the illiquidity that characterises stock exchanges in Africa. In 2020, exits to trade buyers was the most common exit route (46 percent), whereas exits to PE and other financial buyers came second, representing 33 percent of the total number of exits.
Some notable exits in 2020 include Adenia Partners’ exit from Mauvilac, the Mauritian paint manufacturer, to the Dutch multinational company AkzoNobel. Another is African Infrastructure Investment Managers’ exit of Cookhouse Wind Farm and REISA to AIIM’s IDEAS managed Fund, one of the largest equity investors in South African renewables.
Why are they happening, and what do they symbolize?
As mentioned previously, exits to PE and other financial buyers are rising in Africa, which showcases the maturity of the industry as more fund managers come onto the scene. Although a healthy secondary market is emerging, it is still at a nascent stage of development.
With the increasing maturity of the industry, more secondary transactions are likely to take place and secondary-focused PE firms are likely to enter Africa. For example, in 2020 exits to PE and other financial buyers was the second most common exit route following Trade Buyers, representing 33 percent of the total exits (up from 25 percent in 2019).
Trade Buyers represented the highest volume of exits routes from 2015 to 2020, with only a slight drop in 2017 and 2018. In 2020, Trade Buyers represented 46 percent of the total exits, up from 41 percent in 2019.
Exits to trade buyers is a long-favoured exit route as companies sought to take advantage of Africa’s growth opportunities. We envisage strategic sales will continue to prove a powerful source of exits to investors in the near term.
IPOs and stock sales represent the least popular exit route on the continent, due to the underdeveloped nature of African capital markets which remain narrow and illiquid.
As a result, we have seen that many Africa-focused companies opt to list away from their primary market. For example, Jumia Technologies listed on the NYSE in April 2019, and Helios Towers listed on the LSE in October 2019.
However, encouraging large Africa-focused companies to adopt a bi-focal approach by dual listing on both foreign and local stock exchanges will not only increase the traffic on African stock exchanges, but will also benefit the listing companies themselves by exposing them to multiple viable markets.
Overall, despite the perception of a weak exit environment in Africa and the further disruptive impact of COVID-19, AVCA’s 2021 African Private Equity Industry Survey shows that GPs are optimistic about major aspects of the exit environment.
95 percent of survey respondents expect exits to trade buyers to increase in the next three-to-five years, while a further 81 percent expect exits to PE or other financial buyers to increase in the same timeframe.
Overall, Africa remains an attractive PE and VC investment destination relative to other markets: 91 percent of LPs believe returns in Africa will be similar to or better than those in other emerging markets over the next decade.
Looking at how much investments they’ve secured, what’s the potential like for PE-backed African startups?
There has been a discernible shift in the investment stage focus of PE-firms on the continent, particularly in the last five years as the momentum of investments in early-stage companies in Africa has grown.
Several PE firms that previously mainly targeted investment opportunities in African SMEs have started to consider emerging opportunities in the VC space as well.
Simultaneously, we have also seen African fund managers that traditionally focused on PE investments on the continent shift gears to start raising VC funds. An example is AfricInvest, a Tunisia-based PE fund, which partnered with Cathay Innovation to launch a USD 168 Mn fund targeting startups in Africa.
Although Africa was comparatively less affected by the COVID-19 pandemic than other parts of the world, the economic implications of the pandemic led more PE firms to consider investing in industries that proved resilient or immune to the pandemic: particularly in technology enabled companies.
Examples include LeapFrog’s investment in Jumo, a disruptive FinTech company building and operating inclusive digital marketplaces in sub-Saharan Africa, which raised USD 55 Mn in 2020.
Another noteworthy example is cross-border payment provider Thunes which attracted USD 60 Mn of Series B funding from Africa-focused Helios Investment Partners in 2020.
What are the hurdles experienced in PE investments in African start-ups?
Firstly, the nature of private equity is different from venture capital. While VC firms target early-stage companies, PE firms pursue deals with mature, later stage companies.
This can make it challenging for PE firms entering the VC scene and looking to invest in African startups, as this process involves adopting new investment strategies that come with their own unique challenges and opportunities.
Furthermore, fund managers have to find strong businesses that fit their investment strategy. Although many businesses may be identified as potential investments, it can be difficult to gauge if they are ‘’investment-ready” businesses that could pass due diligence processes.
This concern was amplified with the onset of Covid-19 and associated containment measures, which constrained on-site visits and abruptly halted due diligence processes. This created an extra layer of operational difficulty for PE fund managers trying to identify new opportunities in both Africa’s PE & VC landscapes.
Additionally, startups are not always the ideal investment-type for PE firms looking for more stable companies with proven business models in need of additional financing.
Fund managers thus contend with a difficult environment when considering investing in early-stage businesses, and the resulting lack of an investable pipeline of portfolio companies slows down the capital deployment process and reduces investor confidence.
Furthermore, PE funds usually have a 10-year life cycle that dictates their funding and exit plans. During this period, firms are expected to take over a company, restructure it and make a profitable exit. This would be challenging with early-stage businesses due to their riskier and sometimes unproven business models.
Does AVCA see PE-backed African startups becoming unicorns or gazelles?
The term “unicorn” was coined in the United States referring to startups that achieved a USD 1 Bn valuation within 10 years of operation. In March 2021, Nigerian FinTech company Flutterwave became the continent’s fourth “unicorn” following their USD 170 Mn Series-C venture financing round.
Flutterwave joins the ranks of Fawry (an Egyptian e-payment platform) Interswitch (a Nigerian digital payments company) and Jumia (a pan-African e-commerce platform) which are all Africa-focused startups that reached a USD 1 Bn valuation.
Speaking at the 2021 Annual AVCA Conference held virtually on the 20th – 23rd April, Flutterwave’s CEO Olugbenga Agboola was optimistic about the future of capital-raising opportunities in Africa.
Mr. Agboola maintained that “Africa is coming of age” and is of the opinion that “Africa can really deliver amazing companies who are on the path to profitability as well as scale at a massive level”.
We can certainly expect to see more African startups reaching “unicorn” status in the future, particularly as various national governments across the continent are beginning to introduce supportive public policy to incentivise foreign direct investment and foster a supportive environment for startups.
While “unicorns” remain a rare breed in Africa’s nascent startup ecosystem, these efforts to create a better local environment for innovation and entrepreneurship make it possible for more gazelles (companies with a USD 100 Mn+ valuation and USD 15 Mn to USD 50 Mn in revenue) to emerge and thrive in Africa.
Is there a typical kind of African Startup PE firms like to back?
There is no ‘typical’ startup in Africa. The continent’s PE and VC industry has shown exponential growth in the last two decades, fuelled by the emergence of startups and SMEs that are developing innovative and disruptive solutions to everyday problems within this diverse, emerging ecosystem.
There are, however, certain metrics or selection criteria that PE and VC firms generally look out for when evaluating startup investment in Africa. The skills and expertise of a startup’s management team is a crucial determiner of their likelihood to secure financing.
PE and VC investors are more likely to back startups with seasoned managers and experienced executives that they perceive can execute their business plan and can navigate the fragile early stages of growth.
Additionally, startups that are not only innovative but can also demonstrate scalability to meet the demands of Africa’s ever-changing market dynamics are more likely to secure early-stage financing.
In addition to these selection criteria, there are also key sectors that capital allocators view as particularly attractive. AVCA’s 2020 Private Equity Data Tracker found that Financials was the most active sector in 2020, attracting 21 percent of the total deal volume, followed by Information Technology and Consumer Discretionary at 13 percent each.
Businesses operating within the Financial, Utilities, Health and Education sectors, which were deemed critical during the pandemic, successfully raised capital in 2020.
Accordingly, startups emerging within these sectors that proved to be resilient despite the challenges of the COVID-19 pandemic are more likely to receive financial backing from PE and VC firms.
Which countries is much of the PE funding going to in the continent?
There is significant cross-regional variation in the distribution of PE funding across the continent. For example, results from AVCA’s 2020 Private Equity Data Tracker indicates that Southern Africa recorded the largest number of PE deals in Africa between 2015 and 2020, at 26 percent.
However, by deal value, multi-region deals (investments in companies operating in multiple African countries) accounted for the largest share at 34 percent, followed by West Africa which received 21 percent of PE funding in Africa between 2015 and 2020.
From a country specific lens, Nigeria accounted for 58 percent of the total PE volume and 54 percent of the total value of PE funding allocated to West Africa between 2015 and 2020, followed by Ghana with 17 percent (volume) and 26 percent (value).
Both Senegal and Côte d’Ivoire have witnessed increasing PE activity and been recipients of growing interest from international investors. Kenya leads in East Africa, having received 61 percent of the total volume and 58 percent of the total value of PE deals in the region between 2015 and 2020.
However, following sustained economic growth averaging 9.4 percent annually between 2010-2019, Ethiopia is also gaining momentum for PE investment in East Africa.
In North Africa, Egypt has gradually established itself as a rising innovation hub, attracting more than half (58 percent) of the total number of PE deals reported in North Africa between 2015 and 2019. Morocco follows in close second, receiving close to a third of both PE deal volume and value in North Africa.
Finally, in a longstanding trend, South Africa continues to receive a significant majority of PE funding in Southern Africa, accounting for 69 percent of the total volume and 64 percent of the total value of PE deals in the region between 2015 and 2020.
Could those exits be coming from there?
The geographic distribution of exits across the continent displayed less regional heterogeneity than the distribution of PE funding. Five countries within Africa (South Africa, Nigeria, Egypt, Morocco, Kenya) have accounted for 67 percent of the total number of exits reported on the continent from 2015 to 2020.
Although the number of exits decreased in 2020 owing to the macroeconomic instability caused by the Covid-19 pandemic, there were several notable exits across Africa in 2020.
For example, in North Africa, AfricInvest exited their long-term investment in Tunisian Hydrosol Fondations with a 30 percent IRR. In East Africa, Criterion Africa Partners exited their 5-year investment in Global Woods (a Ugandan sustainable Agro-forestry company), securing 1.8x returns for investors.
In Southern Africa, Adenia delivered a 3x Cash-on-Cash return with their exit from Mauvilac, a Mauritian paint-manufacturer. Finally, in West Africa, Actis exited GHL Bank, a full-scale commercial bank in Ghana, to First National Bank Ghana. PE exits in 2020 were thus fairly uniform and evenly distributed across the continent.
What has AVCA personally noticed in the African PE space?
There is no doubt that the COVID-19 pandemic and the subsequent lockdown restrictions showcased the viability of some sectors and presented new investment opportunities within Africa’s PE and VC space.
Digital innovation and the accelerated adoption of new technologies serving people’s need for online services were some of the new opportunities that emerged last year on the continent.
According to AVCA’s 2020 African Private Equity Data Tracker, Financials was the most active sector and attracted the largest share of deals at 21 percent, followed by deals in Information Technology at 13 percent.
Within Financials, financial technology accounted for 70 percent of the total number of deals, while deals in technology and technology-enabled companies accounted for more than half (55 percent) of the total deal volume recorded in 2020.
HealthTech, FinTech, EdTech, CleanTech and AgriTech were amongst the top picks for investors. Notable African deal examples in 2020 include Actis and Convergence Partners’ investment in Nigerian data centre Rack Centre, as well as African Capital Alliance’s investment in Global Accelerex, the leading provider of electronic payment and business management solutions in Nigeria.
Overall, technology has developed into one of the highest-interest emerging sectors for private investment in Africa and has also disrupted and transformed the development of other sectors. We expect this trend to remain prevalent in Africa’s PE and VC space over the next years.
Healthcare is another sector that has experienced growing interest from both PE and VC investors, and we anticipate this interest to continue – especially considering there is an estimated health financing gap of USD 66 Bn per annum in Africa which further necessitates private investment in Africa’s healthcare sector.
Investors are responding to this critical need: Healthcare & Life Sciences was identified by the highest proportion of LPs and GPs alike as an attractive sector for PE investment in Africa over the next three years.
Recent Healthcare deals include Mediterrania Capital Partners’ investment in MetaMed, the largest platform of diagnostic imaging centres in Egypt, Jordan and Saudi Arabia, as well as the establishment of Zanzibar Pharma, a USD 250 Mn biopharmaceutical platform by the CDC along with other investors.
Are PE deals the reason LPs (limited partners) are now focusing on Africa?
According to AVCA’s 2021 African Private Equity Industry Survey, 86 percent of surveyed LPs plan to increase or maintain their exposure to PE in Africa over the next three years. LPs identified Impact as the main factor driving their plans to increase or maintain their African PE allocation.
The early involvement and the significant role that Development Finance Institutions (DFIs) have played in catalysing the development of Africa’s PE industry, has undoubtedly placed impact and sustainability at the core of fund managers’ investment approach in Africa.
Overall, LPs that are involved in PE in Africa usually seek to achieve both financial returns and impact, and in this framework, they tend to view Africa as a long-term game.
LPs investing in Africa are not only focused on PE deals. Africa’s VC landscape has gradually evolved over the last few years to become a recognised and definable investment theme that attracts international investment and encourages the development of local venture firms.
VC activity in Africa has experienced significant growth in terms of VC deal making and has also seen some notable final closes of VC funds that are exclusively focused on VC investments on the continent.
An example is TLcom’s TIDE Africa Fund which raised USD 71 Mn in 2020 to make investments in early-stage businesses that leverage technology across key sectors.
Additionally, according to AVCA’s Venture Capital in Africa report, published in June 2020, the majority of VC deals (62 percent) reported in Africa from 2014 to 2019 had at least one VC fund manager involved in the deal.
This showcases that LPs participate in VC deals in Africa both directly through investing in early-stage companies on the continent and indirectly through supporting funds that invest in Africa’s VC space.
Are the PE-funded companies showing signs of growth?
PE firms in Africa add value to their portfolio companies by utilising a wide range of tools and sources. According to AVCA/EY’s How Private Equity Investors Create Value report, fund managers in Africa have diversified their approaches to creating value with organic revenue growth, cost reduction and M&As being important value creation levers.
Also, findings from the above-mentioned study show that the geographic expansion of portfolio companies, along with new management teams that supplement the skill sets of family owners and entrepreneurs, and the access to PE firms’ networks have been important components to value creation in Africa.
Additionally, PE firms in Africa adopt a sustainability conscious approach to enable growth with their portfolio companies. According to AVCA’s 2017 Africa Sustainability Study: ESG, Job Creation and Job Quality, 231 PE backed portfolio companies that provided job creation data created a net increase in jobs of 20,806, with the total number of jobs growing by 17 percent overall.
Also, AVCA’s 2018 Africa Sustainability Study: Creating Value Through Corporate Governance found that improvements in corporate governance are critical to value creation.
Specifically, in 85 percent of PE-backed portfolio companies, fund managers reported that improvements made by the implementation of corporate governance initiatives have led to value creation within the portfolio company.
Following these practises and being committed to creating value for their portfolio companies, PE & VC fund managers in Africa are simultaneously targeting the growth of their investee companies and are significantly contributing to the broader economic growth of the societies in which they operate.
