Why Firms Are Struggling to Raise Fresh Capital in Africa

SUNDAY APRIL 07 2024

Private capital covers funds raised through instruments that are not publicly traded, including private equity (PE) and venture capital (VC). PHOTO | SHUTTERSTOCK

By JAMES ANYANZWA

The amount of private capital companies in Africa raised declined by nine percent to $1.9 billion in 2023, the second-lowest fundraising for final closed funds in 11 years, highlighting the difficulties that businesses are facing in raising fresh capital for growth and expansion on the continent.

This is as a result of the volatile macroeconomic conditions hurting the operations of companies, including rising interest rates, soaring inflation, depreciating currencies and dwindling forex reserves, according to a new report.

Latest Africa Private Capital Activity Report (2023) by the African Private Capital Association (AVCA), a Pan-African industry body championing private investment into the continent, indicates that a difficult operating environment on the continent seemed to have prompted foreign investors to retain capital within their local markets, thereby discouraging many from making commitments elsewhere including Africa.

Private capital covers funds raised through instruments that are not publicly traded, including private equity (PE) and venture capital (VC).

The report reveals that in cases where investments were made, fund managers refrained from making large investments except in a few instances where they preferred to issue smaller ticket sizes.

As a result, private capital deals on the continent declined by 22 percent to $5.9 billion while private capital exits fell by 48 percent to 43, the highest year-on-year decline in private capital exits in a decade.

The decline in exits had indirect implications on the fundraising environment, as investors struggled with limited liquidity, according to the report dated March 2024.

“The state of economic affairs globally and in Africa had far-reaching consequences on private capital activity on the continent.Heightened economic uncertainty compelled fund managers to exercise caution in their investment strategies and retreat from initiating exits, resulting in a lower number of investments and exits to that observed in 2022,” says report.

“In a continent where foreign capital has traditionally played a pivotal role, this aspect served as another reason for the declining value of final closed funds in 2023, continuing a trend that first started in 2022.”

Private capital fundraising on the continent in the previous year (2022) stood at $2 billion.

The years 2015 and 2021 reported the highest private capital fundraising on the continent at $4.5 billion and $4.4 billion respectively, while the lowest was $1.1 billion in 2020 on the Covid-19 pandemic sting.

The year 2023 experienced a sharp decrease in private capital deal count, which plummeted by 28 percent, the continent’s steepest year-over-year decline in volume in 12 years, as well as a 22 percent drop in deal values.

The significant year-over-year downturn in Africa was driven by a slump in venture capital investments.

Despite remaining the preferred investment asset class in Africa attracting 68 percent of deal volumes and 38 percent of deal values, after years of frenzied deal making, venture capital investing contracted by 34 percent in 2023.

The slowdown in venture capital had far-reaching consequences across Africa, affecting sectors such as financials and regions such as West Africa that have been the bedrock of the asset class.

The Financials remained the most preferred investment sector in Africa, however, the decline in venture capital investments resulted in a significant 47 percent and 43 percent year-on-year drop in volume and value in that order.

While all regions experienced a decline in activity, West Africa suffered the greatest decline in both deal volume (40 percent) and value (63 percent) as venture capital investments in the region took a dip.

The subdued performance of venture capital in Africa mirrored global trends, where the asset class bore the brunt of the macroeconomic challenges which posed significant challenges for private capital activity.

In addition to the macro challenges, investors within the venture capital space grappled with a decline in start-up valuations and the closures of high-profile startups, which prompted them to scale back investments.

The downturn in private capital investment activity in Africa in 2023 affected all sectors, even though some sectors such as Information Technology (IT), materials and energy bucked the trend by recording annual increases in investment volume.

Overall, the Financials, IT and consumer discretionary sectors emerged as the top three most active sectors by volume, collectively constituting 54 percent of the total number of private capital deals on the continent.

Utilities emerged as the top recipient of investment value, accounting for a substantial 35 percent of the total investment value for the year.

Investments in financial technology, a major driver of the sector’s growth in recent years, did badly in 2023.

Across all asset classes, financial technology investments decreased to 76 deals, totalling $1.3billion, marking annual declines of 52 percent in volume and 27 percent in value.