Regulatory Bottlenecks are Slowing Private Equity and Venture Capital in Africa

Africa is a continent of boundless potential tethered by systemic constraints.

Its youthful demographic, surging digital economies, and vast untapped sectors like healthcare and agriculture beckon private equity (PE) and venture capital (VC) investors. Yet, a labyrinth of regulatory hurdles—fragmented policies, currency controls, bureaucratic delays—chokes the flow of capital, slowing Africa’s economic rise.

By 2050, Africa’s population will hit 2.5 billion, with over half under 25, fuelling demand for fintech, education, and renewable energy solutions. The African Continental Free Trade Area (AfCFTA), launched in 2021, aims to forge these into a $3.4 trillion market, amplifying cross-border opportunities.

In 2022, African private capital markets recorded 626 deals, with VC driving 74% of deal volume, a testament to investor enthusiasm despite global headwinds.

But these numbers mask a harsher reality. According to the African Venture Capital Association, investment values cratered 53% to $1.9 billion in the first three quarters of 2024 compared to 2023, underscoring the regulatory barriers investors face.

The Regulatory Quagmire: Key Obstacles

From inconsistent policies to currency volatility, these bottlenecks are dimming Africa’s shine:

1. •Fragmented and Inconsistent Frameworks

Africa’s 54 nations form a regulatory patchwork. Each country imposes unique rules on foreign investment, taxation, and governance, creating uncertainty for multi-jurisdictional investors. In Kenya, the Capital Markets Authority regulates VC firms accessing public funds, but enforcement wavers, leaving investors in limbo. Nigeria’s complex approval processes and capital controls can delay deals by months.

Cross-border investments, vital to AfCFTA’s goals, suffer most as investors navigate disparate tax regimes and repatriation limits, hiking costs. South Africa has eased exchange controls for PE funds, allowing investments beyond the common monetary area without deal-by-deal approvals. Yet, in countries such as Ethiopia, restrictive foreign ownership rules curb VC in sectors like fintech.

1. •Currency Risks and Capital Controls

Currency volatility is a persistent threat. Weak currencies in Nigeria and Zimbabwe, coupled with inflation, eroded VC inflows by 31% to $4.5 billion in 2023, according to AVCA estimates.

Capital controls, meant to stabilize economies, often trap profits. Nigeria’s dollar shortages have delayed repatriation, deterring investors who value liquidity.

Startups bear the brunt. A Ghanaian agritech venture raising $5 million might struggle to convert cedis to dollars for global expansion, stalling growth. Such risks push capital to more predictable markets.

1. •Mergers and Acquisitions Roadblocks

Merger clearance processes are growing more complex. South Africa and Kenya now scrutinize acquisitions for public interest—job preservation, inclusion of marginalized groups—delaying deals. In 2023, South Africa blocked high-profile mergers, unsettling PE firms.

For VC-backed startups, M&A rules choke exits. Trade sales and IPOs, which drove nearly half of exits in 2022, face varied regulatory hurdles. Smaller markets like Senegal lack robust capital markets, prolonging investment cycles.

1. •Taxation and Incentive Gaps

Opaque tax regimes deter investment. Limited double taxation treaties force investors to jurisdictions like Mauritius, a hub for Africa-focused funds due to its low-tax environment. Ghana’s high corporate taxes, by contrast, stifle startups.

Targeted incentives are scarce. South Africa’s 2023 Pension Funds Act reforms boosted VC by allowing pension funds to allocate more to startups. Most African nations, however, lack such measures, leaving entrepreneurs dependent on volatile foreign capital.

1. •Bureaucracy and Corruption

Bureaucratic delays—business registrations, licensing—plague investors. Somalia and Eritrea rank among the lowest for ease of doing business, with approvals dragging on for years. Corruption exacerbates delays, with unofficial payments often required to expedite processes .

Startups and PE firms alike suffer. A $50 million infrastructure deal in West Africa might stall over land permits unless “fees” are paid, inflating risks.

The Impact on Investment Ecosystems

Regulatory bottlenecks reshape Africa’s PE and VC landscapes:

• •Shrinking Capital Pools: PE deal volume fell 11% and VC inflows dropped 31% in 2023, driven by regulatory uncertainty, according to AVCA data. North American investors, accounting for 50% of the retreat, cite these risks as dealbreakers.
• •Shift to Smaller Deals: Large buyouts, tangled in red tape, are losing ground. Deals under $10 million grew from $35 million to $55 million in value in 2024, favoring early-stage ventures. Scale-ups needing $50 million-plus rounds, however, face funding droughts.
• •Startup Survival Mode: Regulatory barriers widen funding gaps, forcing startups to prioritize efficiency over growth. In 2024, many African ventures cut costs rather than expanded, a reaction to capital scarcity.
• •Exit Gridlock: Regulatory delays slow exits, locking up capital. The 2.3-fold exit surge in 2022 faded by 2024 as approvals lagged.

A Live Example: Flutterwave’s Nigerian Hurdle

Flutterwave, a Nigerian fintech unicorn valued at $3 billion in 2022, illustrates the toll of regulatory bottlenecks. In 2023, the company raised $100 million from U.S. and European VCs to expand its payment infrastructure across Africa.

But Nigeria’s Central Bank, grappling with dollar shortages, tightened capital controls, delaying Flutterwave’s ability to convert naira revenues into dollars for regional growth. The process, typically weeks, stretched to six months, forcing Flutterwave to pause plans to enter Ghana and Kenya.

Investors, expecting swift scaling, grew cautious, and follow-on funding rounds faced valuation pressure.

This case highlights how currency controls and bureaucratic delays can hobble even Africa’s brightest stars, eroding investor trust and slowing capital flows.

Pathways to Reform

Unlocking Africa’s PE and VC potential requires bold reforms:

1. •Harmonize Regional Rules

Regional blocs like the East African Community and ECOWAS can standardize investment frameworks, starting with tax treaties. AfCFTA could pilot rules for fintech and green energy, slashing cross-border costs.

1. •Ease Currency Controls

Transparent forex markets and gradual relaxation of controls, as in South Africa, can stabilize currencies and reassure investors. Dedicated repatriation channels for VC profits would boost liquidity.

1. •Streamline M&A and Exits

Clear timelines for merger approvals, balancing public interest and investor needs, are critical. Liquid capital markets, like Nigeria’s NGX Growth Board, can spur IPOs.

1. •Introduce Tax Incentives

Tax breaks for PE and VC, as in Rwanda’s capital gains exemptions, can draw capital . Clear tax guidelines would minimize disputes.

1. •Curb Bureaucracy and Corruption

Digital platforms, like Kenya’s eCitizen, can cut delays . Transparent procurement and whistleblower protections are vital to combat corruption.

Bright Spots and Success Stories

Progress glimmers. Kenya’s 2022 Startup Bill, offering tax breaks and incubation, fueled $1.9 billion in startup funding from 2019 to 2022.

South Africa’s SAVCA drives policy reforms, managing R213 billion in assets. Firms like Verod Capital navigate Nigeria’s rules to fund education ventures with ESG focus. Prosper Africa’s delegations are also shifting risk perceptions, linking U.S. funds to African ventures.

The Road Forward

Africa’s PE and VC sectors stand at a tipping point. Regulatory barriers, though daunting, are not intractable. Harmonized policies, freer capital flows, and transparent systems can unleash a torrent of investment. With consumer spending projected to hit $2.1 trillion by 2025 and returns outpacing other emerging markets, the stakes are colossal .

Investors must adapt, building local alliances and leveraging AfCFTA. Flutterwave’s struggle is a warning, but not the full story. If Africa dismantles its regulatory chains, it could redefine global investment, proving its future is one of opportunity, not obstruction.

Raghwendra Verma is a Partner at Amadi, a boutique Pan-African advisory and special situations firm.