Exit Strategy: private equity sphere

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Africa’s private equity landscape continues to attract investment. The operating environment, albeit still turbulent, continues to improve. Granted, the pace of improvement is higher in some countries than others, but overall there is a promise of a conducive climate for business. 

The enabling environment, coupled with the accelerated digital infrastructure growth, inspires momentum in the private sector contributing to the growing middle class. This will, in turn, lead to improved employment opportunities.

Growing investments in Africa

Private equity investment on the continent remains sturdy, despite a brief lull in activity owing to the Covid-19 pandemic. According to the African Venture Capital Association (AVCA), in the period from 2014 to 2019, over 600 venture capital (VC) deals took place, bringing the value of deals to US$3.9 billion. 2019 alone recorded deals to the value of US$1.4 billion covering 139 deals, the highest of the six-year period. 

According to the report, deals and the value thereof doubled over the period to 2019. The improvement in deals is an indication of the significant traction that the private equity landscape is gathering.

The digital space, inclusive of the fintech and IT sectors, took up much of the funding that went to African start-ups with a combined 38% dominance on the total volume of deals recorded during that period. Other industries that received VC funding in this period include industrial manufacturing, health, and communication.  

Geographically, Southern Africa received 25% of the deals structured during the period, making it the highest in terms of volume. The East African bloc secured 23% of deals while West Africa received 21%.

These figures highlight the fact that the different regions of Africa have proved more or less equally attractive to investors. The implication here is that bringing the regional blocs under AfCFTA can significantly impact the way business is done, hence improving the attractiveness of African startups. The increased market opportunity is potentially large enough to generate significant revenue sufficient to attract investment.

“Africa’s venture capital industry continues to grow from strength to strength, and we expect 2020 to be another strong year despite global macroeconomic headwinds. The continent’s venture capital ecosystem showcases the best of African innovation and entrepreneurship, which has the potential to be a key source of solutions to Africa’s intractable problems and a game-changer for the continent’s development trajectory. AVCA remains committed to supporting the venture capital industry by charting its growth and providing authoritative research on the asset’s fundraising, deal, and exit activities,” noted Tokunboh Ishmael, AVCA Board Chair in AVCA report, Venture Capital in Africa: Mapping Africa’s Start-up Investment Landscape, June 2020.

Finding the way out

While the African venture capital landscape continues to the vibrant, there is scope and demand for more activity within this sector. However, one of the major deterrents for capital reaching the continent has been the risk associated with exit strategies. 

On the continent, capital markets are severely underdeveloped with weak infrastructure and poor liquidity, among a myriad of other infrastructural weaknesses. The capital markets create a situation where investors are wary of entering the continent on the back of the apparent failure to find a way out.

According to an AVCA/PWC report, private equity exits through IPOs amounted to only 16% of volume. This is attributable to the lack of depth and breadth of stock exchanges. The Johannesburg Stock Exchange recorded the highest private equity IPOs, followed by North African exchanges. The rest recorded very little IPO activity; this speaks to the need to develop African capital markets.

Indeed capital markets remain undeveloped. The lack of IPOs continues to haunt African stock exchanges. But be that as it may, the exit environment has shown resilience under these circumstances. 

According to a 2018 study by AVCA in conjunction with Ernst & Young (EY), 403 exits were recorded in the period between 2008 and 2018. 2016 recorded the most exits, counting 50 recorded exits for the year compared to the 2007 figure of 24. This shows the growing scale of the exit environment. The resilience of the exit environment continues to shine through. The report highlights a slight drop in activity in 2018 to 49 deals despite the global financial crises, further highlighting the resilience of the exit environment.

The South African market led the exit environment with over 43% of exits recorded. 

The study says that a prominent trend in exits is that secondary buyouts were the most used exit route during the period in question. 37% of exit activity recorded in 2017 was through a sale to other private equity firms (secondary buyouts). This figure was a leap from the 2008 figure of 8%. The secondary buyouts environment is expected to continue on a similar trajectory, with more secondary buyouts focused firms entering the market. 

Management buyouts (MBOs) and private sales provide an additional exit option. According to the AVCA/EY report, 2017 exits by way of MBOs were at 20%, an increase from the 2% figure in 2016.

Another notable strategy was through trade buyers looking to buy into existing, now established businesses with growth potential. The AVCA/EY report showed that about 39% of exits in 2018 were through trade buyers. 

As the continent continues to expand economically and improve the scope of the business, reform the operating environment and push an agenda towards a vibrant economic landscape, there is a high probability that an increase in trade buyouts will occur. This is because as the operating environment improves, businesses will become more and more attractive. 

The ease of exit underpins the growth of the private equity landscape. As such, there is a need to address the underdevelopment of capital markets. However, the alternative exit options available to investors present venture and private equity investors with a way out. With the private equity market’s growth, more of these exit opportunities will continue to be spruced as investors find avenues for private equity portfolio diversification. 

The key to attracting more capital is the improvement in the operating environment. There is scope to improve the ease of doing business scales to position the continent as an attractive investment destination. Further, the continued investment in digital infrastructure will create additional traction to accelerate the tech-based startups that attract the bulk of the investment. 

Also, Read : Companies Vie For Honors In Private Equity Awards Africa 

Evelyn is a finance and business content writer with a passion for business news in Africa. Her expertise is in analyzing African equities and telling the truth when it comes to doing business on the continent!

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