African private equity investors take to online retail, education and communications

Private equity investors in Africa are showing strong interest in internet and direct marketing retail, education and communication services according to a new research report, Bright Africa 2020 – Private Equity in Africa - from purpose-driven investment firm RisCura.

Consumer products have always been a focus of private equity investors in Africa, due to the opportunities presented by the continent's growing middle-class. However, this new focus on online retail and services could indicate a shift from focusing on a broader target market with lower income to targeting a smaller market, but with higher income.

The Bright Africa 2020 research shows that internet and direct marketing retail companies are classified within the consumer discretionary sector, which has enjoyed a growth of 45%.  Investment into the consumer discretionary sector overall increased from 14% of total transactions as of June 2019 to 18% as at June 2020.

“Given recent events because of the global pandemic, the shift to online retail has been accelerated globally and could present substantial opportunities in Africa, driven by the continent’s large and growing, young population,” says Gilbert Anyetei, senior associate, Alternative Investment Services at RisCura.

According to the United Nations Conference on Trade and Development’s Business-to-Consumers e-commerce index of 2019, Mauritius, South Africa, and Nigeria are the top three most prepared African economies to support online retail.

Despite the positive drivers for online retail and services, however, several factors limit the expansion of e-commerce throughout the continent. These include high broadband costs, low bank card penetration, and limited e-commerce payment options.

“Ironically, these factors also present opportunities to invest in innovative infrastructure solutions that enable e-commerce in Africa,” Anyetei says.

Investment activity in the IT sector (ex-internet and direct marketing retail companies) experienced growth of only 2 per cent from June 2019 to June 2020. In Africa, investment in this sector is mostly into internet software and services, application software, data processing and outsourced service companies. South Africa, Nigeria, Egypt, and Kenya attract the highest level of investment into the IT sector on the continent.

Bain & Company's Global Private Equity 2020 report found that technology companies in general, and software companies outpace other industries when it comes to generating value through EBITDA growth. Competition for deals will therefore continue to rise as capital aimed at the sector grows. Globally, several large tech specialists raised significant new funds in late 2018 and 2019, including Vista's USD 16bn Fund VII and Thoma Bravo's USD12.6 billion Fund XIII. Other large firms have launched specialist tech funds, including Advent and Bain Capital (Bain & Company, 2020).

The other two traditionally large sectors for investment on the continent, financials and industrials, have attracted similar levels of investment in the current year when compared to the prior year. Industrials includes the construction, engineering, transport, logistics, equipment, and machinery industries. Investment is mostly in the light industrial sector with a focus on import substitution. Financials and industrials have contributed a total of 10 per cent and 14 per cent respectively of the total investment activity as of June 2020.

Deloitte's Private equity and the post-Covid-19 economic recovery in Sub-Saharan Africa 2020 report predicts investment opportunities in West Africa into resilient sectors such as fintech (including mobile money and e-commerce), healthcare and healthcare-related support, as well as Fast Moving Consumer Goods (FMCG) in Nigeria.

The report also highlights a renewed policy focus on regional agriculture and agri-processing production and trade. 

“An opportunity arises to break the reliance on food imports from outside of the continent and to become more self-sufficient in food production at a regional level – shortening supply chains and boosting intra-regional trade,” Anyetei says.  

Although the private equity industry rarely invests in primary agriculture, agri-processing and logistics could offer significant investment opportunities. From 2019 to 2020 period, investment across all major African regions in agricultural-related industries has doubled.