By Obi EjimofoChief Innovation Officer at Asoko Insight
New sources of investment spell an upbound moment for Africa.
The case for the optimists: Deals data analyzed by Asoko Insight show investors are bullish about Africa, with 861 deals undertaken between 2015 and 2018 and the number of deals growing annually.
- 44% of these transactions have a disclosed value, for a total topping $44bn, a significant injection of cash into Africa’s economies that is expected to continue trending upwards.
- Though global economic headwinds may slow inbound investment from developed economies, inter-African investment has started to pick up the slack as efforts to strengthen regional integration accelerate.
- Private equity (PE) is playing an increasing role in financing Africa’s private-sector growth, with equity stakes rising from just over half of the deals in 2015 to two-thirds in 2018. The local economy is expected to benefit both from the added capital and the improved governance and management expertise that accompanies PE involvement.
Where’s the money going?
South Africa and Mauritius have historically been the entry points for capital into Africa, and indeed South Africa was the destination for nearly a quarter of the deals over the four-year period. Looking on a year-on-year basis, however, the dominance of Africa’s most-developed economy has been falling as other sub-Saharan markets evolve.
- Increasing confidence to operate capital directly from growth markets has seen a number of markets in East Africa especially experiencing rising levels of inbound deals.
- Sectors attracting the most investment are those that are driving growth across the continent, with financial services consistently topping the market, followed by power and utilities, where private investment should help to reduce the shortfall in grid connectivity.
- But industrial manufacturing has seen its share of deals fall over the period, from just over 5% of the total to roughly 2%, suggesting persistent challenges remain to the value-addition agenda of many of the continent’s governments.
Size matters: Though the total number of deals has been increasing over the past four years the average size of disclosed deals fell by 66% over the period to $58m in 2018. This may reflect an increasing level of pragmatism with an emphasis on mid-sized tickets. In line with this trend, two East African-based funds, Catalyst Principal Partners and Ascent Capital Africa, are setting aside funds to direct towards mid-sized companies.
- Given the prominence of SMEs in the African business landscape, this should have significant ripple effects across the wider economy.
What to watch: Though much is made of external investment into the continent, inter-Africa investment represents nearly half of the deal environment.
- South Africa is the single largest source of deal financing at 23.6% of outbound investment to the continent, topping the US and the UK combined, which together account for roughly 20% of deals.
- From North Africa, Morocco has increasingly been looking to its southern neighbours as growth markets. Financial services firms are among those to be most active in terms of continental expansion, alongside the state’s telecoms provider and phosphate company OCP, which is present in a dozen African nations and has recently announced significant expansion plans.
Bottom-line: As regional economies develop and private-sector players look to scale beyond their borders, this trend represents a widening opportunity for growth.