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At the beginning of 2020, some believed that the growth which had fueled the ‘Africa Rising’ narrative since 2011 was stalling and that the continent was no longer the shining investment beacon it had been at the beginning of the decade. In fact, as far back as 2017, commentators were suggesting that Africa was “no longer rising” or that the narrative had been based on “faulty logic” in the first place.
As Covid-19 wreaked havoc with economies around the globe, Africa was hit particularly hard, seemingly making the case for the Africa sceptics
According to the World Bank, the pandemic and its associated lockdowns saw the continent experience its first recession in 25 years. Additionally, as NKC’s Risk-Reward Index points out, there are already signs that Africa will be disproportionately hit as risk-averse investors withdraw from frontier markets.
That’s hardly surprising. South Africa appears to have bungled its vaccine response, Uganda’s recent presidential election was characterised by violence and the result is widely thought to be illegitimate, and Ethiopia — until recently presented as a model for economic development — is mired in an escalating civil war. One exception to the flurry of bad news was the commitment made by UK Prime Minister Boris Johnson at the recent Africa Investment Conference for his country “to be Africa’s investment partner”.
Even within that context, however, it would be a mistake for investors to withdraw from Africa entirely. In the private equity (PE) and venture capital (VC) spaces, in particular, there will be significant opportunities for investors on the continent.
Economics set to drive uncertainty and unrest
According to ControlRisk’s 2021 Riskmap, the economic struggles brought on by the pandemic are likely to result in additional civil unrest throughout Africa. It sees election violence, more cycles of protests in urban areas experiencing lockdown fatigue, and rural insurgencies as a result of economic exclusion, becoming more common in the coming months. It also predicts an increase in crime rates and countries struggling to meet their debt obligations.
All of these factors mean that the case for traditional investment vehicles across the continent is unlikely to improve in the short term.
But with interest rates unable to sink any lower in many developed market countries and equity markets volatile and expensive, there is still a case to be made for exploring alternative investment vehicles in Africa.
As SPEAR Capital’s Shaw Mabuto notes, many of the risks faced by investors looking at Africa are familiar and shouldn’t stop them from looking at individual companies, particularly with the guidance of an established PE fund.
“While there are undoubtedly risks in Africa,” he says, “they are well known and understood. Investors can therefore mitigate for them.
“Having worked extensively on the continent, we at Spear Capital can attest to the opportunities available. This is especially the case for investors looking to find good companies where growth capital is needed and which offer good prospects for positive impacts in the ESG space. There are many businesses that have been able to thrive despite the prevailing environment and lack of government support,” Mabuto adds. “With the right backing, companies across the continent can grow successfully while at the same time making the world a better place and providing returns to their investors.”
Innovation and experimentation
It’s also worth noting that the continent’s unique circumstances make it a hot-bed of innovation.
“I fully believe that Africa is a most interesting laboratory to test out ideas that will change the world,” says Philani Sangweni, managing partner at VC firm Entrepreneurs for Entrepreneurs (E4E) Africa. “You can test out products aimed at urban and rural users as well as at the very rich and very poor.”
He also points out that startup-wise, the continent has everything required to compete internationally.
“Countries such as South Africa, Kenya, and Nigeria don’t just have entrepreneurs capable of competing at a global level,” he adds. “They also have world-class technical, marketing, and operational talent.”
And, as ControlRisk points out, increasing connectivity, internet, and mobile phone penetration, social media and data traffic helped facilitate the emergence of tech solutions in everything from agriculture to education. The success of these locally-driven solutions will likely inspire a new wave of entrepreneurs capable of building startups that can scale globally.
There is no doubt that COVID-19 has exacerbated the many challenges Africa had to overcome. In some instances, it’s set countries and sectors back a decade or more. But amidst those challenges, there will be companies that stand out.
And with help from the right VCs and PE specialists, these companies can meet challenges head-on, expand, and net significant returns for investors willing to take the risk.
This article was written by Shaw Mabuto from SPEAR Capital and Philani Sangweni, managing partner at VC firm Entrepreneurs for Entrepreneurs (E4E) Africa.
Featured image: Philani Sangweni, managing partner at VC firm Entrepreneurs for Entrepreneurs (E4E) Africa (Supplied)