Private equity investment could hold the key to accelerating African growth

More than a decade on from the publication of a McKinsey report into the wealth of opportunity and potential in Africa, and that promise has failed to materialise with the gusto it heralded.

That report was entitled ‘Lions on the Move’ and yet at the recent SuperReturn Africa event, held in Cape Town in late 2023, there was much questioning of where those lions might have wandered.

Of course, that is not to say that the continent isn’t still primed for growth - but the hard truth is that investment remains largely focussed on only five out of 54 countries.

However, a burgeoning working age population and increased urbanisation still make for a positive backdrop to investment opportunities in a region ripe for greater digitalisation, service provision and infrastructure.

And in this respect, private equity could provide the deep pockets needed to advance such critical projects and ultimately accelerate the dial towards the greater progress Africa as a whole both needs and deserves.

Private equity

In fact, a key takeaway at SuperReturn in December was the lack of private equity investment the continent has seen, which alongside the obvious funding, would also bring much-needed experience and expertise to the table.

The current economic and geopolitical backdrop has, of course, led to a stalling of the private equity sector more broadly; Preqin figures show that both the volume and value of activity in the sector were down year-on-year in 2023, with 5,438 private equity deals completed in the first nine months of 2023, with an aggregate value of US$618bn. This represents only 60.3% of total deal flow in 2022 by volume and only 48.5% of the value (Alternatives in 2024, Preqin).

And while clearly there has been a general retrenchment in private equity, particularly those in new or emerging sectors, the impact to African investment has been further exacerbated by the perception of risk and the increase in the cost of capital – both of which have reduced appetite for investment into the continent.

Prospect of prosperity

What is important is that there are still plenty of opportunities – especially for those willing to take a multi-faceted, longer-term approach.

The stabilising of interest rates and an improvement in the strength of currencies on the continent will likely brighten the picture. There are also signs that those countries wishing to attract investment are looking to instil greater investor confidence by committing to – and demonstrating – higher corporate governance standards.

Meanwhile, an unprecedented US$2.59trn of dry powder in the global private equity pot – according to S&P Global Market Intelligence and Preqin data – representing an 8% increase on the previous year, could offer much potential where there is desire to allocate capital to new deals.

In this environment, general partners will need to be innovative in their approach and provide de-risking as well as defined exit and liquidity strategies to be attractive to limited partners.

And, while development finance institution financing still comprises more than 80% of private equity funding in Africa, this is no replacement for commercial capital – which if bolstered at a local level initially, will clear a pathway for external investment to follow.

Balancing the nuance of investing in less developed markets with the requirements of investors will be key as Africa looks to get back on track and find those lions. Those managers who can strike the right note, while maintaining an innovative mindset, can look forward to extremely worthwhile rewards, while also contributing to the realisation of Africa’s potential.