Last year was a record-breaker for private capital dealflow in Africa. The African Private Equity and Venture Capital Association (AVCA) recorded investments amounting to $7.4 billion.

“I think we’re probably going to see sustained momentum in deal activity over the next couple of years at least,” says Abi Mustapha-Maduakor, AVCA’s chief executive. Although the fundraising environment has taken a hit from the global economic downturn, private equity funds are sitting on large volumes of dry powder. “This capital is going to have to be deployed over the next four to five years,” she adds. 

Meanwhile, the decline in valuations, particularly among tech-focused firms, is not necessarily a bad thing for those funds yet to deploy capital. 

“We’ve heard a lot of managers saying that they walked away from deals that were just too pricey,” says Clarisa De Franco, head of private equity funds at UK development finance institution British International Investment. “But in the [recent weeks and months,] those sponsors are coming back to say, ‘Let’s renegotiate.’”

Another trend is the rise in sector-specific funds, which accounted for 59 percent of fundraising in 2021 – up from a historical average of 52 percent, per AVCA data. Here, we look into five sectors – fintech, healthcare, telecoms, agriculture and energy – that will lay the foundation for private equity in Africa over the next 12 months.


A revolution in access to capital
Private equity and venture capital investors have become increasingly enamoured with African financial services providers – particularly fintech companies – in recent years. The finance sector accounted for just 7 percent of the value of private capital deals in Africa in 2016-18, according to AVCA data. In 2021, that figure surged to 39 percent.

Fintech’s growth in Africa rests upon companies that have pioneered technology to reach populations left behind by traditional sources of finance. Wayne Hennessy-Barrett, founder and CEO of 4G Capital, a fintech company that provides microloans to small businesses in East Africa, says his firm was able to reach borrowers that were “perceived to be high risk because they’re low income”.

“Actually, our experience is they are really, really potent and responsible and excellent businesspeople,” he says. “Credit responsibly delivered as working capital allows them to boost their sales, repay the loan, and then pocket a significant uplift in disposable income.”

DFIs have been keen to support the growth of Africa’s fintech ecosystem. “The intensity of impact is massive,” says Abhinav Sinha, head of technology and telecoms at British International Investment. “Every dollar invested is going to reach more people than in a more traditional market.  

“It’s harder for us to invest directly in fintech firms given our larger ticket sizes and the valuation inflation that often sets in by the time the equity raise is large,” adds Sinha. “Our preferred strategy is to back funds and then co-invest.”

Given that Africa is not immune to the global correction in tech valuations, the year ahead will likely pose challenges. “Raising capital for everybody is harder than it was before, because the macro picture is very, very different,” warns Hennessy-Barrett. He predicts that some businesses in the sector may struggle in the new reality. “We have placed a premium on profitability and cashflow positivity and sustainability from the outset, while other businesses were focusing on compound annual growth rate,” he says. “Some of those chickens are coming home to roost.”

Victor Wambua, head of East Africa equity operations at DEG, the German DFI, remains optimistic about the potential of the sector. “Despite the increased investment in fintech, we believe the surface is barely scratched, as most offerings currently focus on payments and remittances,” he says. “The next phase will see increased investments in other sub-verticals such as insuretech ([including] life, general and health), asset finance and trade.”


Can PE rise to the challenge?
Covid-19, with its devastating impacts on human life and the global economy, has galvanised attention on the need to strengthen healthcare systems around the world.

“We’ve all just lived through a once-in-a-century pandemic,” says Martin Edlund, executive director of the Health Finance Coalition. “You no longer need to convince people about how fundamental primary care – the ability to combat an infectious disease – is to our livelihoods.” 

In the Africa Health Agenda International Conference Commission’s The State of Universal Health Coverage in Africa report for 2021, a plethora of statistics illustrate the gravity of the continent’s healthcare challenges. Africa has the lowest life expectancy of any continent; it also has the highest rates of infant and maternal mortality. Over 600 million people cannot access essential healthcare services. Family planning is unavailable to half the population.

DFIs are heavily involved in financing initiatives to strengthen the delivery of healthcare services in Africa. “Returns can be measured not only in monetary terms, but also increased productivity and quality of life,” says DEG’s Wambua. He highlights opportunities to use technology to reduce inefficiencies and extend access to coverage, as well as to invest in the localisation of pharmaceutical manufacturing.

Tunis-based BluePeak Private Capital is among the private capital firms to see opportunity in African pharma. Earlier this year, BluePeak invested $15 million in Africure, a company that manufactures medicines in 10 countries in sub-Saharan Africa. BluePeak founder and managing director Walid Cherif says the continent needs to create its own multinational pharma players. “To be able to produce goods at affordable costs, you need scale, you need volumes,” he says. “There’s an opportunity for consolidation in the future – it’s extremely fragmented.”

AVCA figures show that the healthcare and pharma sectors made up just 3 percent of the total value of private capital deals in 2021. Even impact investors are tepid about entering the sector – Edlund laments that only 1.6 percent of global impact capital is spent on healthcare in Africa.

“This is a moment [for which] we need a new approach – one that’s going to position private, return-seeking capital to co-invest with major donors,” he says. The Health Finance Coalition is working with AfricInvest, an impact-focused PE manager, on a blended finance vehicle, the Transform Health Fund. “The catalytic class takes more risk, but they know that they’re able to crowd-in the commercial capital by assuming that risk, and they’re able to drive investment to these truly transformative high-impact projects.” 


Private equity embraces Africa’s connectivity revolution
Africa’s telecoms industry has been one of the continent’s success stories. The number of people in sub-Saharan Africa using mobile internet increased by 180 million between 2014 and 2020, according to industry association GSMA. Even so, around one-fifth of the population is still not covered by a 3G signal. The World Bank estimates that around $100 billion is needed to ensure universal internet access on the continent.

“There’s still a lot of low-hanging fruit,” says British International Investment’s Sinha, noting opportunities to invest in mobile broadband, fibre networks and data centres. BII, like other DFIs, combines direct investing in telecoms assets in Africa with backing for specialist fund managers. “It’s a question of risk,” says Sinha, noting that funds tend to avoid jurisdictions that are perceived as risky, such as Ethiopia. “We go direct at the higher end of risk. If it’s more towards commercial, that’s where specialist funds should be the ones to invest.”

Fund managers need to pay attention to execution risk, says DEG’s Wambua. “Most structures are either buy and build, or greenfield,” he says. “It is important for the PE fund managers to have the ability to monitor the risk to execute the expansion strategy.” 

While many telecoms investments are undertaken by infrastructure managers, firms with a more traditional private equity focus can also find opportunities to invest in the sector, including in companies that provide services to network operators. BluePeak, for example, announced a $20 million investment in ieng, a company that provides engineering services – including supplying power – to telecoms tower operators, in April.


Turning crisis into opportunity
The Russian invasion of Ukraine has severely disrupted exports of grain to Africa, compounding already severe food insecurity. The World Food Programme estimates that an extra 30 million people are facing a crisis in Africa due to the war. There are, as a result, growing signs that investors are waking up to the need to unlock the continent’s agricultural potential.

“We are seeing increased interest in funding agricultural projects in Africa, across the agri value chain,” says Nicole Maske, former managing partner of Namibian PE firm Eos Capital. She adds that “opportunities exist along the value chain to make various parts more efficient, especially through the use of technology”. Indeed, Kenyan start-up Apollo Agriculture, a platform that seeks to use technology to connect farmers with access to financing, insurance and farm inputs, raised $40 million in a Series B funding round in March.

Maske notes that “patient equity impact financing is required” in primary agriculture to ensure food security. However, she adds that investors are wary of the sector
and its myriad risks.

Roman Frenkel, head of food and agriculture equity at British International Investment, agrees. “The universe of investable, high-quality assets in the sector remains somewhat limited,” he warns. “PE investments remain concentrated in the relatively higher-margin downstream segments of the value chain. 

“We expect downstream sectors to continue to attract the bulk of investment in the medium term,” adds Frenkel. “This is likely to be accompanied by more vertical integration in light of the supply chain challenges faced over the last 24 months.”


Powering growth and achieving impact
Africa faces a colossal energy deficit. Around 600 million people on the continent lack access to electricity, according to a UN Economic Commission for Africa study. The International Energy Agency estimates that $25 billion will be needed every year to close the gap by 2030.

Investing in African renewable energy enables firms to satisfy consumer demand for electricity, while achieving both social and environmental impact. The continent loses up to 15 percent of GDP each year to the effects of climate change, according to the African Development Bank.

Utility-scale renewables projects, requiring multibillion-dollar investments in generation or transmission assets, are typically the preserve of dedicated infrastructure funds. But there is still potential for private equity to access the opportunities in the energy sector in Africa. 

CrossBoundary Energy, which has a portfolio of renewable energy assets across 14 African countries, received a $40 million investment from Norfund and KLP in July. The PE fund manager ARCH Emerging Markets Partners also invested $40 million in 2020. 

“Given the cost competitiveness of renewable energy generation [and the] rapid pace of development in energy storage technologies, we see a huge opportunity to provide Africa with the means to grow and industrialise using clean and affordable energy sources,” says Pieter Joubert, CrossBoundary’s president and chief investment officer. 

“We believe the most catalytic opportunities in the near term are in the distributed renewable energy sector,” Joubert adds, specifically highlighting “the provision of financed renewable solutions to the commercial and industrial sector, and providing financing for off-grid, rural electrification using renewable energy mini-grids”.