THOUGHT LEADERSHIP — AFRICAN PRIVATE EQUITY
Private Equity’s Role and Focus in Africa
By Benjamin Shaw, Associate at EXEO Capital
$7.4bn
invested in private capital across Africa in 2021 (AVCA)
~8%
returns to investors over a ten-year period
25%
of Sub-Saharan Africa’s GDP comes from agriculture
27
transactions completed by EXEO across 8 countries since 2008
Positioning Private Equity in Africa
Private equity is an asset class that has been gaining significant traction across Africa in recent years. Investment into companies that are not publicly traded is the tailwind behind operational and geographic expansion, product penetration and innovation, and has returned close to 8% to investors over a ten-year period. The African Private Capital Association (AVCA) reported that $7.4bn was invested in private capital across Africa in 2021 alone.
One of the primary benefits of private equity across Africa is its ability to stimulate economic growth. Small and Medium Enterprises (SMEs), defined here as businesses with less than USD 15 million turnover per annum, have the potential to create jobs and transform incumbents’ ways of doing business, which often contributes to improved efficiencies and boosts the development of local economies. The World Bank estimates that more than 50% of jobs are created by SMEs globally.
Private equity investors such as EXEO Capital typically look for companies that have the potential for significant growth but lack an input that specialist investors can provide. These strategic advantages often translate into expertise and experience on boards, in hiring processes, strict quality control, striving to operate to international performance standards, and in systems and brand best practice — all of which drive improvement in the operations of the companies invested in.
EXEO Capital at a Glance
EXEO Capital has extensive experience accumulated over 15 years of business building in Sub-Saharan Africa and has identified key drivers for long-term value on the continent, helping it identify where best to add value to its investments.
- 15 years operating in Sub-Saharan Africa
- 8 countries, 15 sectors, 27 transactions since 2008
- Primary focus: food and agriculture
- Manages Agri-Vie Fund I and Agri-Vie Fund II
PPTL, Tanzania — specialist digital ERP implementation supported by EXEO Capital
Bringing Skill and Expertise
Africa can be a tough place to do business. Companies struggle to generate economies of scale given relatively smaller consumer bases within countries, and high friction costs reduce willingness to transact. Great private equity deals unlock sales volume and forge new distribution channels to market, expanding revenue streams and diversifying product bases.
Coupled to this, businesses that outperform have identified how best to embed switching costs into their products and services, and importantly, to reduce their own costs through targeted resource efficiency — re-using water, generating own power, recycling, and more. Loyalty programmes, such as what EXEO has worked on with Maia’s Wellness Warehouse, and data-driven manufacturing processes such as the specialist digital ERP implementation developed at PPTL in Tanzania, disincentivise customers from finding competitive alternatives.
Investing into, protecting and expanding cornered resources is another successful private equity strategy in Africa, as the continent has several coveted, uncommon assets that the global market desires — financial service licences, specific regulatory approvals, fishing, and port berths among them.
“Beyond the attractive returns, the need to invest into Africa for positive socio-economic impact is increasingly clear. Not only is Africa the fastest growing continent, but it is demographically the youngest.”
Doing Good and Generating Attractive Returns
EXEO, like many private equity investors, prioritises investments in local entrepreneurs and businesses. This focus on local support promotes sustainability and an inclusive economy, as it develops talent, guides on meeting international performance standards, and provides mentorship. This extends beyond purely business advice; EXEO approaches Environmental, Social and Governance (ESG) and sustainability as core to its purpose — creating value consciously so that companies and people may thrive. This manifests in systematic guidance to investees, focused on those SDGs that intersect with their businesses. Read more about EXEO’s approach to sustainability and ESG.
African businesses often trade in small niches, and local founders or businessmen are best positioned to take advantage of this. It is the investor’s responsibility to equip, support and partner with them to build competency, sustainability, and ultimately, stakeholder value.
Access to finance is often the most significant challenge for SMEs across Africa, as traditional lending institutions can be reluctant to provide local-currency funding due to the perception of relative risk. Private equity steps in to provide alternative sources of financing that fill this funding gap, willing to explore a variety of opportunities to enable these businesses to expand and flourish.
Private equity investments in Africa have historically delivered attractive returns to investors and compare favourably to certain other emerging market regions. There is real need for investment into development, and Africa’s demographic profile makes that need more pressing every year.
Key Market Sectors
Despite its wealth of natural resources, Africa’s investment needs span several critical sectors
Despite its wealth of natural resources, Africa’s investment needs include agriculture, dealing with the effects of climate change, infrastructure, and education to support its burgeoning population. This has informed EXEO’s primary investment focus into food and agriculture.
Agriculture is a vital sector of the African economy, accounting for close to 25% of Sub-Saharan Africa’s GDP, and responsible for more than 60% of the population’s daily activities. However, the sector faces several challenges, including limited access to finance, poor infrastructure, and a lack of technology and expertise, often resulting in land degradation. Identifying and plugging these gaps are critical to successful private equity investments.
As Africa expects continued growth, the role of experienced, local private equity practitioners remains of critical importance: providing partnerships, sharing expertise, and bringing sustainable business practices to growing companies across the continent.
EXEO Capital has built up core competencies across the continent and partners with operational service providers able to advise on growth, digitisation, human resources, regulation, margin protection, and conferring positive impacts to people and the environment.
Explore EXEO Capital’s portfolio of investments or learn more about our team.
Sources: Riscura-SAVCA Private Equity Performance Report, 31 March 2022; AVCA Africa: Private Capital Flows into Africa more than doubled, 25 April 2022; World Bank Blogs: Quest to better understand the relationship between SME finance and job creation, 14 June 2022; INSEAD: How Africa could astonish the world, 29 June 2021; McKinsey: Winning in Africa’s agricultural market, 15 February 2019.
