Investing in Africa: The new generation of LPs

There has been a lot of debate recently about LP appetite for investing in Africa. Some question whether Africa is still as big of a story and if it will continue to whet investors’ appetite.

Yes, there are certain risks associated with investing in Africa, such as currency issues, price volatility, challenging macro-economic environment and political instability. But, in reality, is it really that different from the other emerging markets? There is always a certain level of risk linked to doing business in emerging markets as opposed to more established economies. And do these risks really detract from the potential and abundance of investment opportunities the continent has to present?

"It is estimated that there are currently over 50 DFIs actively investing in Africa-focused private equity funds"

In reality, Africa-focused private capital funds are securing capital from an increasingly diverse set of investors. Of course, DFIs still remain the primary source of funding (it is estimated that there are currently over 50 DFIs actively investing in Africa-focused private equity funds), but we can also see traditional fund investors such as sovereign wealth funds, insurers and pension funds coming into the picture. This is a sure sign that a more diverse group of investors is emerging, local as well as international.

DFIs, as original market players, have set the scene for newcomers. They were the first supporters of Africa-focused funds when others consider it to be too much of a “risky business”. Now DFIs are evolving and making room for new commercial investors. These new types of investors are especially drawn to opportunities in infrastructure, healthcare and natural resources sectors.

Consequently, fund managers are responding to this trend by establishing more sector-specific funds that have a wide African footprint. Although the number and diversity of investors backing Africa-focused funds is growing significantly, DFIs are still an integral part of African private equity. Despite the new wave of commercial investors, it’s not plain sailing for fund managers. Negotiating fund terms to strike the right balance in order to attract both types of investors can proof tricky. Both DFIs and more traditional LPs are likely to have different development agendas, and it may be challenging to harmonise investor expectations for investment terms, exit strategies or the type and scope of investments, making the fundraising processes more complicated.

Fund managers need to be prepared to compromise and accommodate the needs of both type of investors. When it comes to investing in Africa, the risk is certainly there, but so are the opportunities. Let’s hope the African market continues to evolve and the new generation of investors bring positive changes to the global outlook on the continent.