Africa’s private capital market slips to $5.9bn in 2023 as deal value sinks 22%

Business a.m.

The African private capital market experienced a downturn in 2023, bucking a years-long trend of growth since 2016, with total deal volume falling to 450 deals at a value of $5.9 billion in 2023. This represents a 28 per cent decline in deal volume and a 22 per cent decline in value year-on-year.

The African Private Capital Association (AVCA) made the disclosure in a recent report on private capital activity in Africa, which noted that dealmaking on the continent was not immune to the global slowdown. While Africa’s performance was more robust than other regions, such as North and Latin America, there was still a decline in investment activity. 

The 2023 AVCA annual report provides a comprehensive overview of Africa’s private capital landscape, including dealmaking, fundraising, and exits. Although the report showed a reduction in the number of transactions, Africa’s overall resilience was highlighted, demonstrating a return to the steady growth trajectory seen prior to 2022. This return to pre-pandemic growth is attributed to the deployment of capital reserves that were previously unallocated during the pandemic.

According to the AVCA’s annual report, the number of private capital deals in Africa in 2023 was the second-highest since records began, only behind the number of deals made in 2022. When compared to the average number of deals made each year over the past decade, the number of deals made in 2023 surpassed the annual average of 264 deals from 2012 to 2022 and the average of 387 deals from 2019 to 2022.

Venture Capital and Infrastructure drive investor appetite

In keeping with established trends, venture capital remained the preferred route for investors seeking to back promising African businesses with innovative tech-enabled solutions. VC accounted for 68% of the total private capital investment volume on the continent in 2023, marking a four-year streak as the leading asset class. 

According to the African Private Capital Association, infrastructure was a standout asset class in 2023, with capital raising and deployment increasing significantly. Infrastructure deal values rose to US$1.8 billion, a threefold increase from the previous year. 

One of the key drivers of the increase in infrastructure investment was the growing focus on renewable energy. With Africa’s abundant solar, hydro, biomass, and wind potential, investors are increasingly recognizing the continent’s potential to accelerate the global transition to clean energy. 

Shifting trends and familiar pattern

The sub-region of Southern Africa experienced a surge in private capital investment in 2023, outpacing all other regions in terms of volume and value of deals. This is in stark contrast to previous years, when Southern Africa lagged behind other regions in terms of capital flows. The sub-region attracted 119 capital investments at US$2.6 billion, the highest volume (together with West Africa) and the value of deals across the continent.

The report found that South Africa was the primary driver of private capital investment in Southern Africa, accounting for 81 per cent of all deals in the sub-region. This is due in part to growth in the IT and industrial sectors, as well as an increase in venture capital investment in software and services, logistics, and transportation.

Final close funds show a modest decline and interim fundraising surges

Despite a nine per cent decline in the number of closed funds, investors showed a strong appetite for private debt and venture capital funds, with capital raised increasing by double digits. In addition, the number of interim closings for Africa-focused funds reached a record high 0f 40 interim closes, suggesting growing interest in Africa as an investment destination.

The increase in interest in private debt is particularly notable, as it demonstrates the need for alternative sources of financing in a rising interest rate environment. The ability of private debt funds to provide flexible and tailored financing solutions is a key advantage for businesses and investors alike.

Exit market resets to pre-2022 averages 

Although the volume of private equity exits in Africa declined by 48 per cent in 2023 compared to the previous year, it was still in line with pre-pandemic levels. All sub-regions of Africa experienced a year-on-year decline in exits.

The COVID-19 pandemic had a significant impact on the African economy, leading to a backlog of mature portfolio companies that were ready for exit. In 2022, fund managers rushed to exit these companies, but the economic challenges caused by the pandemic became even more severe in 2023. 

Commenting on the report, Abi Mustapha-Maduakor, chief executive officer, AVCA,said:”Despite global economic headwinds, we are pleased to see Africa-focused investors’ ongoing commitment to the continent, particularly in venture capital – the continent’s leading asset class.”

Mustapha-Maduakor noted that although investment activity dipped in many asset classes, infrastructure investment was an exception, with funding increasing during the year. He projected that this trend will continue in the coming year, as investors remain committed to investment opportunities that leverage disruptive technologies in Africa.