Investment uncertainty as private capital dries up
African economies braved through yet another challenging macroeconomic environment in the first half of 2024, a global trend that has been persistent in recent years. Shutterstock
Fund managers abandon large-sized deals on the continent as they grapple with declining funds
Africa is grappling with an unprecedented slump in new investments as a result of tight market conditions and heightened investor uncertainty, which have caused fund managers to abandon large-sized deals in the face of declining availability of private capital, new study shows.
The study by the African Private Equity and Venture Capital Association (AVCA) on the state of ‘private capital activity in Africa’ during the half-year ended June 30 shows that large deals of $100 million and above have been heavily hit by the on-going capital squeeze in the continent, with the financial sector that is usually the darling of investors being a major casualty of the collapsing funding market.
“The current tight market conditions in Africa and heightened investor uncertainty continue to affect the availability of capital for Africa focused fund managers, ultimately impacting deal volume and value in H1 2024,” says report.
“For the second consecutive year, deal values on either side of the $100 million threshold contracted. However, deals above $100 million felt the greatest pinch of the ongoing capital squeeze as they plummeted by 91 percent year-on-year.
"To keep the deal wheel moving, fund managers shifted focus to smaller deals, significantly increasing their share of total deal values.”
During the period under review (January-June) a massive 88 per cent of the value of investments in Africa was funneled into deals below $50 million, according to the study, the first time since 2018 that deals below $50 million have accounted for more than 50 per cent of total deal values in the continent.
African economies braved through yet another challenging macroeconomic environment in the first half of 2024, a global trend that has been persistent in recent years.
Despite inflation stabilising in major economies such as Kenya and South Africa, the period (H1 2024) failed to live up to the projections of economic growth and recovery, according to the study.
The private capital industry in the continent suffered major headwinds recording 182 deals with a cumulative value of $900 million, representing a 17 percent year-on-year decline in volume and a 66 percent year-on-year decline in value.
The study notes that the financial sector continued to dominate investments on the continent attracting 24 percent of the volume and 39 percent of the value of investments during the period under review the deal volumes within the sector declining by four percent year-on-year while deal values plunged by 64 percent .
The decline in deal volumes and values in the financial sector was triggered by a decline in venture capital funding that primarily affected the financial technology (Fintech) industry in Africa.
“Since 2023 the venture capital industry has been experiencing a slowdown, marked by the scarcity of capital and a wave of startup closures. While investor interest in Financials remains strong, the ongoing venture capital funding winter has set a deep chill within the sector,” the study says.
“This downturn is however not unique to Africa and reflects the volatility currently facing the venture capital industry globally.”
In the sluggish investment environment in the continent East Africa and West Africa demonstrated notable resilience.
East Africa maintained a similar volume of deals (45) to H1 2023 despite a continent-wide year-over-year decline in deal volumes surpassing the region’s five-year H1 average of 35 deals.
This performance resulted in the region attracting the largest share (25 percent) of deal volume alongside West Africa, with the two regions similarly attracting the highest share (30 percent) of deal values each.
Amidst the funding decline which affected other regions, West Africa was the only region to register an increase in deal values albeit modest at three percent year-on-year.
The study shows that for the third consecutive year, Africa focused fund managers raised approximately $1 billion in closed funds in the first half of the year.
However, during the period under review fundraising strategies of the fund managers shrunk to cover venture capital and buyout which each attracted a nearly half of the fundraising pie.
Interim funding raising on the other hand struggled to stay afloat, securing only $300 million in commitments which represented an 80 percent decline year-on-year decline
“The first six months of 2024 were particularly challenging for First-time fund managers pursuing a final close. In contrast to trends observed in H1 2023 where funds raised by First-time fund managers represented 11 percent of final closes, these managers failed to achieve a final close in H1 2024,” the study says.
“As Capital continues to be scarce and investors increasingly exercise caution in their investment strategies, it remains to be seen if any First-time fund managers will close funds in the second half of 2024”
The study notes that amidst the ongoing slump in investments in Africa, the volume of exits in first half of the year (H1 2024) managed to surpass that of the similar period in 2023.
In response to the current market dynamics, Africa focused fund managers continued to rely on exit strategies which have been tried and tested to capitalize on investments which hit their maturity wall.
