The energy transition takes centre stage
Private equity investors are no strangers to investing with environmental, social and corporate governance issues in mind, with this approach having gained significant traction in private markets over the past few years, writes Hannah Roberts. However, when it comes to the energy transition, the bulk of investment into the African continent has been led by infrastructure funds, aimed at building up critical resources that will help African countries to move from the use of fossil fuels to renewables.
Combined with the fact that its population is expected to nearly double to reach 2.5 billion people by 2050, per McKinsey & Company data, as well as the continent’s wealth of natural resources, Africa offers a ripe opportunity for private equity firms to engage with the continent’s energy transition targets.
Indeed, the private equity industry itself has an opportunity to work in tandem with infrastructure funds investing on the continent by backing companies that enable the energy transition, such as sustainability software, distribution or maintenance services, or other such ancillary services.
A recent report by the International Energy Agency showed that 43 percent of Africa’s population does not have access to electricity, mostly those living in sub-Saharan Africa. But to meet Africa’s energy and climate goals by 2030, $190 billion of investment will be needed every year, with two-thirds of that figure going towards clean energy efforts. With just seven years left to hit the United Nations’ Sustainable Development Goal of universal electricity access, the clock is ticking for the global PE industry to make the most of the opportunities thrown up by Africa’s energy transition.
“Private equity firms play an important role in terms of services and technology,” says Saad Ul Islam, investment director for infrastructure equity at British International Investment, the UK’s development finance institution, adding that green hydrogen and e-mobility services are also interesting sectors for investors.
William Barry, head of energy strategy at ARCH Emerging Markets Partners, says: “In the renewable energy sector, we expect to see continued growth in the off-grid sector, and increased appetite from PE investors, as what is now a relatively fragmented market continues to consolidate.”
Barry adds that ARCH generally prefers to invest in platforms in the renewable energy market, rather than single-asset power projects. Platform deals are quicker to close, he says, and “provide a natural diversification that mitigates single-jurisdiction political and currency risks”.
The exit factor
In a survey published by the African Private Equity and Venture Capital Association in 2021, 71 percent of LPs reported that the weak exit climate and unpredictable exit window was the biggest challenge for investing in African private funds.
While the number of African PE exits hit new heights in 2022 amid challenging macroeconomic headwinds, AVCA’s CEO, Abi Mustapha-Maduakor, says this phenomenon may have been caused by managers wanting to complete exits that had been delayed by covid-19, alongside a desire to dispose of assets ahead of a predicted market downturn.
“There is no denying that exits have been a source of difficulty for investors operating within the African private capital landscape,” says Mustapha-Maduakor. Historically, exits have been inhibited by local currency fluctuations, a limited pool of strategic and secondary buyers, and wider geopolitical uncertainty.
So far in 2023, high-profile African exits have been few and far between, mirroring a global trend.
“The factors that contributed to the surge in exits in 2022 are unlikely to have a multi-year impact,” says Michael Preston, a partner at law firm Cleary Gottlieb Steen & Hamilton. “The reality and perception of the exit environment remains one of the key challenges for PE investment on the continent.”
However, that’s not to say that managers who are well-versed in the nuances of African private investment are deterred from further activity in the region.
“An important characteristic all investors in Africa must possess is flexibility,” says Babacar Ka, a partner at Africa-focused PE firm Development Partners International. “With some of the obstacles faced in certain African markets, our team takes an adaptable approach to strategic exits, considering all options available whether that be a strategic sale or secondaries sales, or an IPO.”
Preston adds that, over the longer term, private equity firms in Africa could benefit from macroeconomic tailwinds as they look for exit routes. “There are many other factors that could lead to a sustained increase in exits, including rising interest in energy transition, Africa playing a key part in the search for energy security in Europe and globally, and the ever-more vibrant and exciting tech sector that continues to prosper across the continent.”
Gender-lens investing gets magnified
“Private equity in Africa seems to have embraced gender-lens investing as a strategic approach,” says Evelyne Dioh, executive director at WIC Capital, adding that firms are “recognising the importance of advancing gender equality and empowerment in the continent’s economic landscape”. WIC was founded in 2019 and invests in women-led companies
in the francophone West African region.
Several gender-focused funds have sprung up across the continent in recent years, while initiatives such as the 2X Challenge – launched by the G7 in 2018 to drive investment in projects that empower and are led by women – have also moved the needle on investments in this area.
Gender-lens investing is, as such, becoming more intentional, according to Sonia Jordan-Kirwan, head of gender and diversity finance at British International Investment. “Historically – before the adoption of gender-lens investing practices – investments that achieved gender impact often did so by accident. Investors may have inadvertently had a positive impact on women by virtue of investing in certain sectors, but this wasn’t necessarily intentional.
“Now, the investment community is taking a much more deliberate approach to considering gender dynamics in investment decision-making. The next step for investors is to ensure we are gender-smart not only in the way we source and assess deals, but also in the way we support investee companies post-investment.”
However, there is still a long way to go before gender-lens investing is adopted across wider African investments. “One of the biggest obstacles is a lack of access to equity capital both at the fund manager level and company level,” says Joanne Yoo, a partner at Africa-focused private equity firm Development Partners International. “There is not enough institutional capital flowing to female-led funds and companies, despite strong track records and experience.”
“Rightsizing available capital to capital needs is an ongoing challenge,” adds BII’s Jordan-Kirwan. “The sorts of ticket sizes women-led and women-owned businesses are looking for often fall below the typical range for a [development finance institution]. Biases within the wider investment ecosystem are also still highly pervasive. These two things represent material barriers to increasing women’s access to financing.”