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Outlook for private equity and venture capital in Africa

According to the World Investment Report 2013, Africa bucked the trend of declining global foreign direct investment (FDI) inflows, which fell by 18% globally, and posted a 5% increase to US$50bn over 2012. The report stated that while this growth was driven partly by FDI in extractive industries, investment in consumer-oriented manufacturing and service industries is also expanding across the continent.

The market for private equity and venture capital investment in Africa is likewise growing and investor interest is increasingly coming from all corners of the globe. An expanding number of fund of funds managers are looking at opportunities in Africa and bringing new investors, development finance institutions are increasingly co-investing and making direct investments, and a new crop of Africa funds are launching almost daily. With strong fundraising targets already announced and met from the likes of the Carlyle Group and DPI, we are definitely seeing an increase in commercial capital coming into Africa and we’re confident this will continue.

So far this year deal-making has been strong; we have seen 77 deals (as of November) made across a wide range of sectors. Increasingly, bigger deal sizes are projected as a result of economic growth and greater regional trade across Africa, building bigger businesses and fueling mergers and acquisitions. This increase in activity may also be coupled with a purchase price multiple rerating as the larger general partners and investors compete in this space.

On exits in Africa

In April this year the African Private Equity & Venture Capital Association and EY addressed the issue of whether exits can be successfully executed by private equity in Africa with the launch of Harvesting Growth, the inaugural report of an annual research study on exits. While we showed that a healthy exit market really does exist in Africa (with shining examples detailed from the likes of Africinvest, Abraaj, African Capital Alliance, Cauris, Emerging Capital Partners and Unique Venture Capital, just to name a few), we will be watching other well-known industry players closely for further examples throughout 2014.

2014 outlook

Despite the challenges involved in executing transformational growth via investments in the small-to-medium enterprise (SME) space, SMEs are the growth engine of economies. Private equity and venture capital is increasingly becoming an important funding option for African entrepreneurs as bank financing becomes tougher and they see the strategic management support benefits that private equity and venture capital managers can bring, to take their businesses to the next level.

SMEs and startups can also provide much-needed jobs in those African countries experiencing high population growth rates. We even foresee – based on the rise of technological hubs in West and East Africa, such as Konza Techno City, and the growth of companies like iROKO – that one day the continent will spur the creation of an African Silicon Valley.

Next year will continue to be a period of Africans doing it for themselves. Almost every week we take part in or see investment forums organised by different African countries that are strengthening their own economies through greater transparency, better governance, and the implementation of global best practice – and which is collectively translating into increased FDI flows.

With a continent of 54 countries it is often unhelpful to generalise, but broadly speaking there are many reforms that have been adopted to address the structural and perception issues African nations face, and which are working effectively. Perhaps in 2014 investors will drop the old narratives around what business means in Africa and acknowledge that it is rapidly evolving and not to be missed.

Michelle Kathryn Essomé is CEO of the African Private Equity & Venture Capital Association, the trade body dedicated to catalysing private equity and venture capital across Africa.

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