Private Equity in Africa: Opportunities, Challenges, and Success Stories

Private equity (PE) is stock in a private company that does not offer stock to the general public. Private equity is offered instead to specialized investment funds and limited partnerships that take an active role in the management and structuring of the companies. In casual usage, “private equity” can refer to these investment firms rather than the companies that they invest in.

Private equity capital is invested into a target company either by an investment management company (private equity firm), a venture capital fund, or an angel investor; each category of investor has specific financial goals, management preferences, and investment strategies for profiting from their investments. Each category of investor provides working capital to the target company to finance the expansion of the company with the development of new products and services, the restructuring of operations, management, and formal control and ownership of the company.

Private equity has become an increasingly prominent investment strategy worldwide, including in Africa. The continent, with its vast resources, growing consumer markets, and emerging middle class, has attracted significant attention from private equity investors. This article explores the opportunities, challenges, and success stories of private equity in Africa, shedding light on the dynamics of this evolving investment landscape.

1. Opportunities in African Private Equity

• Economic Growth and Demographics: Africa’s population is one of the fastest-growing in the world, with a burgeoning middle class. This demographic trend has led to increased consumer demand, making the continent an attractive destination for private equity investments. As African economies grow, private equity investors can participate in sectors such as consumer goods, healthcare, education, and financial services.
• Untapped Markets: Many African countries still have untapped markets in various sectors. Agriculture, natural resources, technology, and infrastructure offer significant investment opportunities. The continent’s abundant natural resources, including minerals, oil, and gas, are particularly appealing for private equity investors looking to tap into these markets.
• Infrastructure Development: The need for infrastructure development in Africa is immense. Roads, bridges, ports, and power generation facilities are crucial for economic growth. Private equity can play a pivotal role in funding and managing infrastructure projects, providing opportunities for solid returns on investments.
• Emerging Technologies: Africa is experiencing rapid technological advancements, and private equity firms are keen to invest in startups and tech companies across the continent. Fintech, e-commerce, and health tech are areas of interest, as they address critical challenges and have the potential to scale across multiple countries.

2. Challenges Facing Private Equity in Africa

• Political and Regulatory Risks: Political instability and regulatory uncertainty can pose significant risks for private equity investments in Africa. Frequent changes in government policies, corruption, and inadequate legal frameworks can make it difficult for investors to secure their investments and navigate business environments.
• Currency Volatility: Africa has a diverse range of currencies, and fluctuations in exchange rates can impact the value of investments. Managing currency risk is essential for private equity investors, especially when dealing with cross-border investments.
• Due Diligence: Conducting thorough due diligence in African markets can be challenging due to limited access to reliable data and information. Investors must rely on local expertise and networks to gain a deep understanding of the market and assess potential risks.
• Exit Strategies: Finding viable exit strategies can be challenging in African markets. The lack of developed capital markets and the limited number of strategic buyers can make it difficult to sell investments at the desired returns.

3. Success Stories in African Private Equity  

1. Helios Investment Partners

Helios Investment Partners is a private equity and venture capital firm specializing in buyouts of going concerns, recapitalization, mezzanine, growth capital for private enterprises, restructurings joint ventures, startups; either green-field or brownfield; and the majority or blocking-minority structured investments in listed entities. It seeks to invest in the telecommunications, media, financial services, power, utilities, travel, leisure, distribution, fast-moving consumer goods, logistics, and Agro-allied sectors.

The firm prefers to invest in Africa with a focus on Nigeria, South Africa, and Kenya. It seeks to invest between $15 million and $200 million in an individual transaction. The firm prefers to have a board seat in its portfolio companies. Helios Investment Partners LLP was founded in 2004 and is based in London, United Kingdom.

2. The Abraaj Group

Founded in 2002 by Founder and Chief Executive Arif Naqvi, they have pioneered the private equity industry in many of the markets where they operate. Their journey has been one of innovation and entrepreneurial drive.

Finding, growing, and monetizing investments is what they do, and how they do this matters. They believe in the power of partnership capital to grow sustainable businesses and communities. They are not just investors, they are business builders.

They have developed a purpose-built approach for investing in growth markets. Some of the world’s most demanding institutions have entrusted them to manage capital on their behalf. They currently manage US$ 13.6 billion in assets and are focused on investment strategies across private equity, private credit, impact investing, and real estate. By combining deep local reach, a global platform, and underwriting standards, with extensive operating capabilities, they generate industry-leading returns and create value in market-leading companies.

They have a dedicated team of operating professionals who work hand-in-hand with investment teams to actively drive value creation in partner companies, helping them institutionalize and grow. Environmental, social, and governance (ESG) factors are deeply embedded in their investment process, and a proven value driver in their partner companies. Responsible investing that enhances financial returns is at the core of our philosophy. They aim to leave a positive footprint in their markets and are signatories to the UN-backed Principles for Responsible Investment and the United Nations Global Compact.

3. Actis

Actis has been named ‘Most impactful private equity firm in Nigeria’ by The Lagos Chamber of Commerce and Industry. The award honors the most innovative public and private corporations operating in the country. Actis won the award for ‘positively impacting the Nigerian economy and changing the status quo, by developing the Nigerian private sector’

Through its legacy, Actis has been successfully investing in Africa for over six decades. The firm currently has $3 billion invested in 23 countries across the continent. Nigeria is a highly attractive investment destination for Actis due to its favorable demographics, GDP growth, and consumer opportunity; Actis has invested over $300m in the country to date. 

4. Case Study: Private Equity in Nigerian Agriculture

The Fund for Agricultural Finance in Nigeria (“FAFIN”) is an innovative agribusiness-focused private equity fund that provides tailored investment capital and technical assistance to high-growth, commercially attractive agricultural SMEs across all regions in Nigeria using quasi-equity, equity, and structured debt instruments. 

FAFIN was established to address a portion of the estimated US$5 billion funding gap in long-term, growth-oriented finance for agribusiness SMEs in Nigeria while ensuring sustainable development impact within the sector. FAFIN’s investors include the African Development Bank, British International Investment, Dutch Good Growth Fund (managed by Triple Jump), KfW Development Bank, the Nigerian Federal Government (via the Federal Ministry of Agriculture and Rural Development and the Federal Ministry of Finance), and the Nigeria Sovereign Investment Authority.

• Case Study 1: Sahel Capital

Sahel Capital is a private equity firm that has invested in the Nigerian agricultural value chain. They have successfully supported companies like Crest Agro and Kereksuk Rice Farm, contributing to the development of a more sustainable and productive agricultural sector.

Sahel Capital is a private investment firm focused on the food and agriculture sector in sub-Saharan Africa. Sahel Capital has a depth of experience across a broad range of crop and livestock value chains; integrated processing operations; branded packaged foods; and related services. It is the vision to be recognized as the foremost food and agriculture private investment firm in Africa. Central to their ethos is their mission to: Provide Capital; Leverage Knowledge; Build Companies; Generate Returns; and Impact Lives.

• Case Study 2: ZOLA Electric

ZOLA’s roots began in and around the Serengeti in Tanzania, where their founders observed that both off-grid and on-grid communities rely on dirty, expensive, and hard-to-manage forms of energy including diesel, kerosene, and lead acid batteries. No primary, integrated power source existed; it was purely inefficient backup systems, an impediment to these communities achieving their full social and economic potential. Their mission to solve one of the world’s great problems, energy inequality, one that afflicts over 2 billion people and hundreds of millions of businesses globally was born.

Over a decade ago they started by installing smart, connected devices (lithium-ion batteries and solar) that powered basic energy needs such as lighting for rural communities. Their theory that thousands of networked, connected devices will drive the energy transition in emerging markets holds today.

5. Future Trends in African Private Equity

• Impact Investing

Impact investing can help solve major social and environmental problems in West Africa, leveraging new sources of capital in places that lack sufficient government resources and development aid to address development challenges. A recent report by 

The Rockefeller Foundation and JP Morgan (2010) suggest that impact investments are emerging as an alternative asset class that could grow to represent a global market of US$ 500 billion in five to ten years. The implications for West Africa are exciting. Now is the time to deepen our understanding, increase awareness, and foster dialogue on impact investing in the region.

Impact investing—making investments to generate positive impact beyond financial return—is not new to West Africa. However, few investors in the region identify themselves as impact investors or are familiar with the concept in those terms. This lack of awareness, coupled with other substantive challenges, could slow the development of the impact investment industry in the region. 

This report is the first comprehensive analysis ever conducted on the impact investing industry in West Africa. It aims to: (1) map the landscape of impact investing supply and demand in West Africa; (2) identify the substantive challenges that hamper the growth of the industry and recommend solutions for overcoming them; and (3) serve as a starting point for regional dialogue and local network development activities among impact investors.

• Regional Integration

The AfCFTA is the world’s largest free trade area bringing together the 55 countries of the African Union (AU) and eight (8) Regional Economic Communities (RECs). The overall mandate of the AfCFTA is to create a single continental market with a population of about 1.3 billion people and a combined GDP of approximately US$ 3.4 trillion. The AfCFTA is one of the flagship projects of Agenda 2063: The Africa We Want, the African Union’s long-term development strategy for transforming the continent into a global powerhouse.

As part of its mandate, the AfCFTA is to eliminate trade barriers and boost intra-Africa trade. In particular, it is to advance trade in value-added production across all service sectors of the African Economy. The AfCFTA will contribute to establishing regional value chains in Africa, enabling investment and job creation. The practical implementation of the AfCFTA has the potential to foster industrialization, job creation, and investment, thus enhancing the competitiveness of Africa in the medium to long term.

• Technology and Innovation

Africa has a rapidly growing startup ecosystem, with over 600 active tech hubs, incubators, and accelerators, according to a report by the GSM Association (GSMA). These hubs are spread across the continent, with the majority located in Nigeria, South Africa, Kenya, and Egypt. 

Nigeria and South Africa are the most advanced ecosystems, boasting over 85 and 80 active tech hubs respectively. The report found that the number of tech hubs in Africa has more than doubled since 2016, indicating a growing interest in technology and entrepreneurship across the continent.

One of the key drivers of the growth of the startup ecosystem in Africa has been the increase in mobile phone penetration. According to a report by the Pew Research Center, mobile phone ownership in sub-Saharan Africa has increased from 8% in 2002 to 45% in 2018.

Conclusion

Private equity in Africa presents numerous opportunities and challenges. The continent’s economic growth, emerging markets, and demographic dividend make it an attractive destination for investors. However, political and regulatory risks, infrastructure deficits, and exit strategy challenges require careful consideration. 

Success stories from firms like Helios Investment Partners, Abraaj Group, Actis, and Emerging Capital Partners illustrate the potential of private equity in Africa but also highlight the importance of local knowledge, patient capital, and adaptability in navigating the complex African investment landscape. As Africa continues to evolve and develop, private equity will likely play a vital role in shaping its economic future.