What is the outlook for private equity investment in Africa in 2023?

By Bryan Turner, partner, Spear Capital

Far from the return to normal that many thought it would be, 2022 presented a whole host of new geopolitical and economic challenges that completely upended the investment landscape. Supply chain issues – already a problem during the Covid-19 pandemic – were aggravated by the war in Ukraine and ongoing tensions between China and the West. Those issues helped exacerbate the kind of inflation not seen for decades. In a bid to curb inflation, central banks around the world have dramatically increased interest rates, effectively bringing to an end to the era of “free money” that followed the 2008 financial crisis.

At a global level, those headwinds have affected most classes of investors, including private equity. While deal activity was strong in the first half of the year, by Q3 there were signs that things might not be so rosy in the coming months. According to EY, fundraising activity fell 13% on the previous quarter while private equity exits were down 67% year-on-year.

But what effect, if any, will those global circumstances have on African private equity in 2023? Moreover, where should the private equity investors who are committed to the continent focus their efforts?

Room for optimism

While the current global geopolitical and economic uncertainties (coupled with domestic ones in a few major markets) are undoubtedly impacting ordinary Africans, there is still room for optimism, particularly when it comes to private funding.

Even as many developed markets saw significant investment declines in the first half the year, Africa witnessed 133% year-on-year growth. Additionally, African economies returned to growth after falling into recession during the pandemic. Indeed, at one point, sub-Saharan Africa as a whole was expected to see growth rates in excess of 3.7% for the second half of the year. While that isn’t exactly the kind of double-digit growth that characterised much of the region in the 2010s, it does suggest that it’s back on the right path.

Taken together, that persistent investor confidence and economic growth suggest that the African private equity sector has cause for optimism. The case for that optimism is only strengthened when you remember that many of the positive factors that make Africa a tenable investment destination – most notably, a young and growing population who are increasingly well-educated and connected – are in greater abundance now than they were in the halcyon days of the 2010s.

Opportunity abounds

It’s also worth bearing in mind that, even in so-called “bad economies”, there are abundant opportunities for investors across the region. There are good companies that, with suitable investment and backing, can expand and contribute to economic growth and job creation. We know this because we’ve seen it first-hand with some of the companies we invest in.

The end of “easy money” may also play into those opportunities. Some investors may, of course, return to supposedly safer traditional investment vehicles in the wake of higher interest rates. Others will, however, shift from the speculative investments that characterised the last decade and a half to ones that demonstrate real value and the potential for sustainable growth.

In fact, there may be moves in that direction already. While the region’s fintech boom has dominated investments for a good few years now, there are signs that deals in the consumer discretionary, industrial, and information technology sectors are starting to catch up.

Another significant potential growth area is in companies that aim to reduce the impact of climate change or improve climate resilience. The appetite and need for this kind of investment is growing. Indeed, many African countries are now looking to public-private partnerships to address climate resilience amidst growing frustration with developed countries. And given that the continent is receiving just 12% of the financing needed to adapt to climate change, demand for that kind of financing will only grow.

Known risks remain

It is, of course, also true that the risks present in Africa aren’t going to disappear in 2023. In fact, if the global geopolitical and economic headwinds that dominated headlines in 2022 persist, then those risks may well be magnified. Unchecked inflation in particular can be dangerous, leading to societal unrest.

For the most part, however, seasoned investment partners who understand the region and its various business environments can mitigate the effect of those risks while still helping businesses grow.

For investors who trust those partners and are prepared to take a longer-term approach, there are still significant rewards to be had.

Keep moving forward

Ultimately, the past couple of years should’ve taught us that there is no returning to some kind of mythical pre-pandemic normal. Too much has changed and, in 2023, that change isn’t going to slow down. So, rather than waiting for an ideal time to back African companies, private equity investors should focus on ensuring that they have partners who understand the risks present on the continent while helping them make the most of the many available opportunities.