Venture capital firms have been getting most of the investor headlines in Africa over the last decade. The idea Africa’s business hubs could replicate or even do a slightly ersatz version of Silicon Valley and launch the African Facebook or Google has also been too compelling a narrative to ignore for all stakeholders in the ecosystem.
But private equity investors have had a longer run in Africa working across a range of industry sectors beyond tech, though you could argue their attitude and strategy on the continent has tended to be closer to that of VCs in more developed markets.
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Outside of major energy and mining deals, most merger and acquisition transactions have often much smaller in African markets than in more developed countries, as you might expect. Looking at 2018 data from the African Private Equity and Venture Capital Association (AVCA), the median PE transaction size across its key African sub-regions was $6 million to $8 million still quite modest in global private equity deal terms.
The growth trajectory of PE investment in Africa has been inconsistent. Last year the number of deals rose to 186 from 171 deals from 12 months earlier, but the total value of those deals fell for a third year to $3.5 billion, from $3.9 billion in 2017.
To be sure, the limited partners, such as pension fund managers, who invest in private equity funds are still keen on Africa—total PE fundraising for Africa-focused funds was up to $2.7 billion from $2.4 billion in 2017. But these numbers are down from recent highs of $3.4 billion (2016) and $4.5 billion (2015).
PE is more focused on established and mature businesses in developed markets. While there is a good deal of that in African markets, there’s also an important role in helping to build markets or to “develop pipelines” as one Lagos-based investor explained recently, “there aren’t enough investable deals for private equity.”
In fact, there’s growing demand for business consultants working on getting the internal processes and finances of local privately-owned businesses into shape for potential investor interest. People in the economic development world sometimes call this “developing capacity” when they work with governments. But even when these private companies meet due diligence standards, many are still too small for large PE players.
Another approach is one with blue chip PE fund TPG Growth, which has backed a smaller specialist investment firm called Kupanda Capital. Kupanda, which is focused on the African market, has made a venture investment in a consumer data startup called Fraym but also a high-profile PE-style investment in Nigeria’s leading independent label, Maven, owned by Afrobeats star producer, Don Jazzy.
Expect to see many more adaptations and models as global investors seek new ways to deploy capital in fast-growing African markets.