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EXCLUSIVE: Nigeria accounts for 58% of total PE funding allocated to West Africa in last 5 years – AVCA boss

Abiola Odutola

Nigeria, Africa’s most populous nation with over 200 million people has in the past five years, attracted more than half of the Private Equity (PE) funding allotted to the West African sub-region, largely owing to the potentials that lie in the nation’s teeming population.

This was disclosed to Nairametrics in an exclusive interview with Abi Mustapha-Maduakor, Chief Executive Officer, African Private Equity and Venture Capital Association (AVCA). The African Private Equity and Venture Capital Association is the pan-African industry body that promotes and enables private investment in Africa.

Mustapha-Maduakor also explained that investor interest in Africa, especially Nigeria, over the last five years has been strong, albeit with significant cross-regional variation. According to her, the continent has seen an upward trend in PE activity over the past decade,  with executed deals climbing from 189 in 2015 to 255 in 2020.

Excerpts:

Investor interest in Africa over the last five years has been strong, albeit with significant cross-regional variations. We have seen an upward trend in PE activity over the past decade,  with executed deals climbing from 189 in 2015 to 255 in 2020. Although the value of PE deals has fluctuated somewhat in the last five years, with a high of $4.2 billion in 2017 and a low of $3.3 billion in 2020, the overall picture is one of promise.

General patterns of investment activity prior to the Covid-19 healthcare crisis were stable, signifying the attractiveness of and enthusiasm for private investment in Africa.  Looking more closely at the distribution of PE funding across the continent, AVCA’s 2020 Annual Private Equity Data Tracker shows that Southern Africa recorded the largest number of PE deals in Africa between 2015 and 2020, at 364 deals. However, by deal value, West Africa received the largest proportion of PE funding in Africa between 2015 and 2020, at $5.4 billion.

At the country level, Nigeria accounted for 58% of the total PE volume and 54% of the total value of PE funding allocated to West Africa between 2015 and 2020, followed by Ghana with 17% (volume) and 26% (value). Kenya leads in East Africa, having received 61% of the total volume and 58% of the total value of PE deals in the region between 2015 and 2020.

However, following sustained economic growth averaging 9.4% annually between 2010-2019, Ethiopia is also gaining momentum for PE investment in East Africa. In North Africa, Egypt has gradually established itself as a rising innovation hub, attracting more than half (58%) of the total number of PE deals reported in North Africa between 2015 and 2019, up from 47% between 2014 and 2019. Morocco follows in close second, receiving close to a third of both PE deal volume and value in North Africa. Finally, in a longstanding trend, South Africa continues to receive a significant majority of PE funding in Southern Africa, accounting for 69% of the total volume and 64% of the total value of PE deals in the region between 2015 and 2020.

Venture Capital

Venture capital investment in Africa has grown significantly, outpacing earlier predictions with a record year in 2020 in terms of the number of VC deals.  AVCA’s second Venture Capital in Africa report showcases the evolution of the industry, climbing from a few hundred million dollars in 2014 to over a billion dollars in 2020. There was a 13% YoY increase in deal volume between 2017 and 2018, and a 23% increase between 2018 and 2019. This surge in deal activity was buoyed by above-average economic growth on the continent, a favourable macroeconomic outlook, the magnitude of the market and a growing middle class consumer base. Given these long-term growth fundamentals remain unchanged despite the momentary economic disruption caused by the Covid-19 pandemic, the rise in total VC deals in 2020 represents the continuation of an existing upward trend since 2017.

AVCA principally convenes Africa-focused investment actors and professionals to champion private investment in Africa but does not in itself make capital allocations or direct investments. As such, any advice is given from the position of being an industry advocate, rather than a capital allocator.

Nevertheless, access to the right networks is key for entrepreneurs that are looking to raise VC funds, therefore, joining relevant communities, attending industry-specific forums and networking events, remains an excellent way to increase exposure in the start-up community and attract capital.

There are multiple channels of capital aside from VC investors, so the entrepreneur first has to decide which capital source is most suited to their business at that particular point of evolution. For example, start-up programmes are another avenue to access supportive networks and alternative financing channels. There are several home-grown accelerators, incubators and start-up programmes specifically supporting start-ups across the continent. There are over 600 tech hubs supporting Africa’s innovators, as well as several business incubation programmes that aim to help African SMEs navigate the fragile stages of growth, bridge the funding gap, develop their human capital and increase their long-term chances of success.

For businesses seeking VC investment, clarity on the value addition they require from investors is also key to ensuring a symbiotic relationship. Additionally, they should be aware of the following, which represent key metrics VC investors look at when determining the quality and investability of a start-up:

1.  The skills and expertise of a start-up’s management team. This is a crucial determiner of a start-up’s likelihood to secure venture financing. Given that start-ups rarely have a significant market share when seeking early-stage financing, VC investors tend to evaluate the organisation’s management team and make calculated judgements on the team’s ability to execute their business plan. VC investors are more likely to back seasoned managers and experienced executives that they perceive as capable of navigating a start-up’s fragile early stages of growth.

2.  The need for skilled leadership. VC investors prefer to partner with experienced leaders with demonstrable track records, particularly when investing in markets with a high degree of volatility relative to other parts of the world. As such, talent acquisition and proficiency (where the start-up team has a thorough knowledge of and experience with navigating the unique and varied requirements of doing business in their chosen industry) should be a key focus for entrepreneurs and businesses seeking VC funding.

Sourcing and securing venture capital is inherently a game of trial and error. However, having an awareness of what VC investors are searching for, and keeping these considerations in mind when designing a pitch deck, increases the likelihood of entrepreneurs avoiding the “bitter taste” of venture capital.

Currently, there are very few providers that deliver training and other capacity-building programmes targeted at African PE and VC stakeholders. This is critical to ensure the development and sustainability of the industry which is the premise upon which the AVCA Academy was developed.

A first-of-its-kind in the African PE & VC industry, the AVCA Training Academy is AVCA’s solution to the increasing need for a platform supporting first-time fund managers through the fundraising and investment lifecycle as well as to support seasoned managers through some of the pain points, they are grappling with. Currently sponsored by FSD Africa, the e-learning component of the AVCA Academy provides an agile and innovative learning platform tailored to Africa’s dynamic and diverse market.

The AVCA academy aims to bolster economic and social growth in Africa by curating a specialised learning platform for private investment professionals interested in Africa. By providing relevant and insightful learning and professional development opportunities, the AVCA Academy plugs the knowledge gap in the industry, deepening the capacity of African institutional investors to navigate investing in private equity, venture capital and private credit.

The Academy is essentially a resource for a wide group of stakeholders engaged in or looking to enter the African PE and VC industry as it provides foundational theoretical learning supplemented with practical cases, workshops and resources to support fund managers, institutional investors, advisors and entrepreneurs.

Education is instrumental for the maturation and sustainability of Africa’s PE & VC industry and, therefore, its ability to support the birth and development of African SMEs.  Education and capacity building allow us to provide foundational knowledge for new entrants into the industry, thereby feeding the pipeline of fund managers and thereby increasing the availability of capital that can be invested in SMEs.

The AVCA Academy will provide bespoke content through an immersive and blended learning approach for both remote and classroom-based participants, involving subject matter and industry experts from across Africa. Participants will be equipped with tools to discover the opportunities and manage the challenges involved in investing in Africa, through real-life, practical case studies. The Academy’s synchronised learning platform will also provide participants with detailed resources to support independent learning. In the long-term, this educational opportunity for private investment professionals supports the growth and development of Africa’s SMEs by equipping private investment professionals with the tools to establish a fund, deploy capital and invest in the myriad of investable opportunities available on the continent.

Beginning with opportunities within the Private Equity industry, Financials remains a prominent sector, attracting significant interest from investors active on the continent. It was the most active sector by PE deal volume in Africa between 2015 and 2020, and consistently attracts a significant proportion of the value of PE funding channelled to the continent. Within financials, financial technology deals accounted for 70% of the total number of deals between 2015 and 2020. In Nigeria specifically, the FinTech industry made several gains in 2020, attracting investment from a wide range of domestic and international (United States, United Kingdom, Japan, Singapore, Ghana, and Morocco) investors.

Turning to opportunities within the Venture Capital industry, the three most active sectors attracting private investment in Nigeria between 2015 and 2020, by share VC volume, were Financials (36%), Consumer Discretionary (16%) and Industrials (14%) – accounting for 66% of VC activity. In the more recent years from 2018-2020, there have been notable rises in the share of deal volume for Industrials in Nigeria, which commanded 17% of the total volume of VC deals in the country between 2018-2020, compared to just 11% between 2015-2017. Examples of deals within the Industrials sector in Nigeria include the US7.5mn Series A round for motorcycle transit start-up MAX.ng in June 2019, as well as the $20million Series A round for freight logistics start-up Kobo360 in August 2019. Given the rise of verticals such as MobilityTech and HRTech in Nigeria’s VC ecosystem, we can expect the Industrials sector to continue gaining momentum going forward.

Healthcare is another rising sector in Nigeria: investments in the Healthcare sector comprised just 6% of the total volume of VC deals in the country between 2015-2017but climbed to 11% between 2018-2020. Recent examples of VC deals within the Healthcare sector include the US$15mn Series A round for genomics start-ups 54Gene in April 2020, and the US$10mn Series A round for HealthTech start-up Helium Health in May 2020. Healthcare & Life Sciences was selected by the largest proportions of LPs and GPs alike as an attractive sector for PE investment in Africa over the next three years in AVCA’s 2021 Annual Private Equity Industry Survey, and as such it is likely that investor interest in opportunities in the Healthcare sector, both in Nigeria and across the continent, will persist in the future.

When asked about the developments they perceived would develop Africa’s PE industry, more than half of the limited partners (58%) and general partners (56%) that participated in AVCA’s 2021 Annual Private Equity Industry Survey maintained that local capital would catalyse the PE industry. As the industry body enabling private investment in Africa, we fully concur with this notion. Looking across Africa, allocation by pension funds, as an example, to PE and VC is less than 0.5% of AUM per geography which is in stark contrast to the fact that a number of pension fund regulations allow managers to invest between 5-15% in alternative assets (including private equity) on average. Therefore, imagine if the current allocation increased even if by another 0.5% this would unlock hundreds of millions of dollars in capital for fund managers.

AVCA is therefore supporting pension funds and other African institutional investors on their investment journey by providing foundational capacity building programmes on PE and VC to de-risk the asset class and by facilitatingknowledge exchange between new entrants and seasoned African PE and VC investors in Africa. In Nigeria specifically, we have partnered with the Pension Fund Operators Association of Nigeria (PenOp) to further catalyse pension fund investment in PE and VC. The partnership focuses on training and networking to facilitate collaboration opportunities for key stakeholders within the Nigerian PE ecosystem and hopes to enlighten Nigerian pension funds on the opportunities for portfolio diversification that the asset class offers.

In conclusion…

To conclude her interview with Nairametrics, AVCA’s Chief Executive Officer, Abi Mustapha-Maduakor told Nairametrics that her organisation’s efforts to understand the needs of domestic capital allocators and promote collaboration between the custodians of domestic capital sources and Africa’s investment community is its contribution to unlocking the vital capital that has the power to double Africa’s Private Equity industry.

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