2024 Perspectives: Private Capital

Introduction

Over the preceding year, the African Private Capital industry has closely mirrored global macroeconomic trends, grappling with multiple challenges that have collectively shaped its performance. A comprehensive analysis reveals a confluence of factors, including depressed GDP rates, elevated inflation, high interest rates, and the depreciation of local currencies against foreign exchange. These challenges have collectively contributed to a lacklustre performance in African private capital markets.

Examining the specific metrics of the industry during H1 2023 provides a nuanced understanding of the prevailing conditions. The persistence of inflation, averaging 15.5% during this period, underscores the resilience required of investors navigating the economic landscape. The impact on deal volumes and values is pronounced, with a significant 44% decrease in the former and a substantial 52% decrease in the latter compared to H1 2022. African-focused fund managers, while still active, generated a reduced deal value of USD 2.2 billion.

A closer look at Q3 reveals a shift in the dynamics, with venture capital playing a dominant role in driving down investment values. The absence of large private debt deals (those exceeding USD 100 million) during this period contributed to this shift. Despite a decline in the number of private deals – reaching its lowest point since Q1 2023 – the demand for private debt demonstrated surprising stability.

Amidst these challenges, a standout feature emerges in H1 2023, characterised by the second-highest deal volume and the third-highest investment values recorded over the last 7 years. This resilience showcases the adaptive capacity of the Private Capital industry in Africa, defying the downward trends to deliver a noteworthy performance. The ability to navigate adverse conditions and still achieve substantial deal volumes and values signify a robust foundation and strategic acumen within the industry, positioning it to rebound in the face of economic headwinds.

In this article, we explore the key themes that permeated the Private Capital industry in 2023. We then take a bird’s eye perspective into 2024 highlighting the opportunities for industry players within the African continent.  

Suppressed Venture Capital Deal Activity Amidst Resilient Private Debt Fundraising

The downturn observed in 2023 was primarily fueled by a decrease in strategic venture capital transactions, notwithstanding its sustained dominance as the leading asset class by market share on the continent. Investors directed a reduction in capital and engaged in fewer ventures within the VC sphere, leading to a substantial drop of over 40% in both volume and value as compared to the figures from 2022.

Throughout 2023, fund managers grappled with the challenging macroeconomic conditions prevailing on the continent. Notwithstanding these trends, Investors pledged commitments to various funds, and in the first half of the year, fund managers successfully raised a total of USD 1 billion, mirroring the achievement of the previous year in 2022. Additionally, interim closes secured another USD 1.3 billion, constituting a noteworthy 76% of the total interim close values reported for the entire year of 2022. Overall, the metrics for 2023 indicate that 2024 is poised for increased stability and modest growth.

In light of these trends, fundraising strategies underwent an intriguing shift, with investors displaying a heightened interest in private debt funds. Looking ahead to 2024, it is anticipated that the demand for private debt will continue to rise, despite the limited number of private debt funds available. Notably, in 2023, private funds raised 3.2 times more funds compared to the preceding year, while growth capital funds experienced a decline of 65%.

Sector Focus

In H1 2023, the financial sector retained its position as the most sought-after investment sector in Africa, capturing a significant share of both deal volume (20%) and deal value (31%). Despite its prominence, the financial sector faced a substantial setback, experiencing a 63% decline in both deal volume and value compared to the previous year.

A detailed examination of the financial sector highlights that the predominant investment activity centred around venture capital deals, with Fintechs securing a substantial 75% of the total volume. Traditional financial institutions, including banks, investments, and insurance firms, accounted for the remaining 25%.

While most other sectors displayed dismal performances in 2023, the Consumer Staples Sector witnessed a remarkable 2.7x increase in the value of investments. This sector, encompassing investments in food and beverages, stood out as a noteworthy exception to the overall downturn in investment trends.

Deal and Exit Activity

Over the past year, African private capital exit volumes fell to 25 from 82 exits in 2022. This is a sharp decline of 73% compared to 2022. This drop was catalysed by a gross decline in sales to trade buyers and sales to PE firms and other financial buyers which barely reached 14 and 8 in 2023, compared to 39 and 29, respectively in 2022. Nonetheless, sales to trade buyers and other PE firms continued to attract the largest shares of exit volumes as the most popular exit routes. For example, in Q3, AfricInvest exited from InstaDeep, a leading global technology company. BioNTech and Verod Capital Management also exited from CSCS plc, a financial infrastructure platform to trade buyers FMDQ Group.

Whereas it is indisputable that the pace of dealmaking across the whole continent slowed down, deal activity in West Africa faced a 59% drop YoY in Q3, weighing heavily on the balance of activity held on a continental scale. This is a result of a decline in Venture capital investments leading to a 50% and 59% decrease in the total deal volume and the total deal value respectively over the same period in 2022.

Capital allocations towards portfolio companies supporting financial services have dried up. However, this slowdown is merely a reflection of the macroeconomic tide in 2023 and the region nevertheless managed to attract the largest share of the total volume of venture capital deals in Q3 2023.

Peering into 2024

A favourable macroeconomic environment: Analysts have forecasted a much more optimistic 2024. From low-interest rates to reduced inflation rates and renewed investor confidence in the African continent, the Private Capital industry is expected to post significant progress during 2024. Towards the tail-end of 2023, Kenya, a big market player in the Private Capital ecosystem, announced a visa-on-arrival policy. This is expected to appeal to investors who can travel to Kenya without the regulatory burden of processing travel documents and obtaining a visa on arrival.

Retail fundraising & the rise of Private Debt Funds:

Traditionally confined to institutional investors, family offices and the ultra-wealthy, PE has long been out of the reach of everyday investors due to high capital demands and illiquidity. However, a shift is emerging that has the potential to transform how GPs raise capital. For example, creating tailored products such as feeder funds, tokenized blockchain-enabled products and funds of private-funds available to wealth manager channels and through digital platforms can capture growing demand. These products typically have lower minimum investment thresholds and more liquidity than traditional PE funds, opening the door to what was once a purely institutional and high-net-worth market. This trend is likely to be more prominent in 2024. Moreover, this uptick has not only impacted the equity business but also led to the rise of Private Debt Funds because these present a more risk-friendly option compared to private equity investment strategies.

The M&A bell is ringing: 

We expect the M & A markets on the continent to take an upward trajectory with a steady increase in activity as the year progresses. This optimism is fueled by three major factors: first, the upward demand for (and supply of) deals; second, the recent improvement in the financial markets, accelerated by inflation and expected reductions in interest rates; and third, the strategic need for many companies to adapt and transform business models. However, given the uncertain macroeconomic and geopolitical landscape on the continent, only those dealmakers that are in a position to assess risks and plan for different scenarios than those waiting for greater clarity to arrive will have a significant edge over their peers. For example, in January 2024, Convergence Partners acquired Datacentrix Group, a South African-based ICT integration services and solutions firm building digital infrastructure on the continent.  

Headwinds in Infrastructure Private Equity Financing:

The most attractive element about infrastructure as an asset class is that it provides consistent cash flows extending over many decades. More specifically, energy infrastructure remains a bright spot for investment activity in 2024 as investors are betting on the relevance of the energy transition on the African continent achieving its net zero goals. Later in December 2023, Africa50 Group, the pan-African infrastructure investment platform, announced the successful first close of the Africa50 Infrastructure Acceleration Fund (Africa50 – IAF) securing $222.5 million in commitments. Fast forward to 2024, we expect that infrastructure will expand exponentially as an asset class, creating investment opportunities, particularly in infrastructure development. This includes areas such as energy storage, the electrification of transportation, alternative fuels for aviation and marine industries, and digital infrastructure such as data centres.

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