Over the past decade, African venture capital (VC) and private equity (PE) have significantly underperformed compared to other emerging markets such as China and India.
Between 2014 and 2024, African VC/PE achieved average net internal rates of return (IRRs) of around 4–5%, considerably lower than China’s and India’s approximate 12% annual returns and the US ~15%.
There are several political and macro-economic factors have profoundly impacted investor returns across the continent. Several countries – Ghana, Zambia, Mozambique had to restructure debt or seek IMF bailouts.
Political events have also hurt growth e.g Nigeria’s oil production was disrupted by militant attacks; Ethiopia’s reasonably high growth was interrupted by war in 2020; and political instability or an “economic pause” in election years in countries like Kenya or Ivory Coast have impacted overall growth.
Further, African currencies have significantly depreciated against the US dollar. This makes it challenging for businesses to outgrow the pace of annual currency depreciation materially, especially in some of the markets where the average annual depreciation is north of 15%.
Table1: Select major African markets – currency depreciation
Overall pace of economic growth and growth in household/individual incomes affecting demand drivers
Africa’s economic growth averaged around 3–4% annually, weaker compared to India’s (~7%) and China’s (~6–7%). Further, while broadly in Africa GDP per capita growth has been flat over a decade, in contrast, it has grown from USD 1500 to USD 2500 in India and from USD 7,500 to USD 12, 500 per annum in China, reflecting an annual growth of 5-6% in both countries.
This implies that businesses that have a ‘consumption thesis’ have had a much better chance of success due to their inherent growth profile in markets such as India and China vis a vis in Africa.
Market size and complexity
Often, in our comparisons to markets such as India and China, we seem to forget that we are comparing a continent of 54 countries to single, very large, diverse markets.
Market size and complexities vary tremendously. Some examples include:
- •Of the 54 countries there are only 2 economies that are greater than USD300bn in GDP – South Africa and Egypt. Nigeria, Algeria and Ethiopia were closer to this mark but have fallen much lower due to rapid currency depreciation. This implies that for most businesses, a single market may not be enough to achieve growth ambitions that typical VC and PE investors look for.
- •There are ~2500 native languages spoken in Africa vs ~400 in India vs in China 1-2 dialects of Mandarin accounting for 90%+ of the population. This makes understanding consumer context a lot more complex in Africa.
- •The economic model in countries across Africa is quite varied – some being heavily oil and mineral dependent, while others depending on Agriculture and forestry. Both Business and Consumer demand vary dramatically in each country. In China, 40%+ of the GDP is manufacturing dependent and India is 55%+ dependent on service sector contribution.
- •Each country in Africa has its own currency, laws, regulations surrounding customs, transfer of goods and services, local ownership requirements etc making it several times more complex especially if a business wants to grow and expand in more than one country.
Another critical area is the availability and the cost of debt finance. Debt is needed for both expansion of underlying portfolio companies and sometimes also used to enable acquisitions.
Acquisition finance is used by PE and Buyout funds to reduce their overall cost of capital. In Africa, while there is a large pool of banks, availability of debt is poor – with little or no “cash flow” based financing available and there being an over-reliance on “asset based” financing. This makes it challenging even for the top end of mid-sized businesses to access debt. Where debt is available, it is extremely expensive – typically ranging from 18-30% annual interest in local currency terms.
There are select structured debt providers but most provide this in dollars at about 11-15% annual interest cost. Borrowing in dollars can be even worse than local currency especially given some of the currency depreciation that has been witnessed.
Most DFIs, while claiming to be supporting developmental needs, continue to largely lend in dollars in Africa, making it nearly impossible to access for majority of the businesses.
Ease of doing business, rule of law and governance
African countries have lagged significantly behind their peers in emerging markets on ease of doing business metrics. While the average country in Africa is ranked 130-140 there are a few notable exceptions such as Morocco, Rwanda, Kenya, South Africa and Mauritius. This makes it challenging for businesses to expand rapidly across the continent.
Second, rule of law and particularly the speed of the justice systems makes it challenging to enforce contracts, with lack of proper investor protection rights also posing a significant issue.
Finally, there is a weaker focus on corporate governance, higher levels of corruption and regulatory unpredictability in Africa that have also impacted the cost and ease of doing business. Ultimately, private sector operators pass on these costs to end consumers, making goods and services on the continent more expensive and often further limiting the size of the market that can be tapped.
Fund size, Focus, and Limited Exit Opportunities
On average most African VC funds manage significantly smaller Assets Under Management (AUM), with most being less than USD 40-50mn. At these levels and with a 2% management fee, the resources these funds have are limited to investing into deal sourcing, deal execution and portfolio management compared to their peers in India and China.
This implies generalist investment approaches, herd mentality and concentration of investment in the top 3-4 markets. Often, this inflates entry valuations and leaves potential true winners on the sidelines.
The lack of robust local capital markets severely restricts exits, prolonging investment periods to over seven years on average. Unlike China and India, where substantial IPOs and significant acquisitions frequently occur, Africa has had limited major exits, primarily through smaller trade sales.
Some recent examples include Nigeria’s Paystack, acquired by Stripe ($200 million), and Interswitch which received a US$ 200million investment from Visa. However, such exits pale in comparison to multi-billion-dollar exits commonly seen in Asia.
Akshay Grover is a Partner at Amadi, a boutique Pan-African advisory and special situations firm.
